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The bond-market tumult that pushed Treasury yields to 12-month highs might have claimed its first corporate victim last week when a small California mortgage lender suddenly shut its doors.

Without any advance notice, Capitol Commerce Mortgage, a privately owned home lender that operated in a half-dozen western states, announced Friday it was going out of business. The company's sudden closing leaves thousands of mortgage applicants in the lurch.

The company deactivated its Web site over the weekend and phone calls to its Sacramento headquarters weren't returned. The 17-year-old lender had previously boasted: "Year after year, Capitol Commerce Mortgage is there for you in good markets and bad."

Speculation in the industry is that the sharp rise in mortgage rates and bond yields the past two months caught Capitol Commerce by surprise, though there's no definitive proof.

Mortgage lenders that guess wrong on rising rates can lose money fast, especially if they've locked themselves into low-yielding investments. The companies use the interest they earn on investments to help finance their lending operations.

Ever since the yield on the 10-year Treasury began rising, there has been much debate on Wall Street about which mortgage lenders, banks or brokerages would suffer losses for failing to anticipate the sudden rise in rates. Indeed, one of the things that has fueled the rise in bond yields and mortgage rates was a spate of Treasury selling by banks and mortgage lenders that had invested in 10-year notes as a means of hedging themselves against a sudden swing in rates.

But until the folding of Capitol Commerce, there hadn't been any examples of a financial firm taking it in the teeth because of rising rates.

Wall Street traders were unfazed by the Capitol Commerce news. Shares of several big mortgage lenders, including

Wells Fargo



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Countrywide Financial



Washington Mutual



New Century Financial


were largely unchanged.

Most Wall Street analysts still think the damage from rising rates will be limited mainly to smaller enterprises such as Capitol Commerce, as long as the yield on the 10-year Treasury doesn't rise much above 4.5%. (In June, it had been as low as 3.10%.)

"For a certain limited number of mortgage bankers out there that have inadequately hedged, it often can be an ugly situation," said Mike McMahon, a financial services analyst with Sandler O'Neill & Partners. "I would be shocked if this happened to a Wells Fargo, a Washington Mutual or a Countrywide. The larger players are more sophisticated and have the money to employ more sophisticated hedging strategies."