Debt buries mortgage lender

In April, as he shut down the 300-employee mortgage business he'd built from scratch, Layne Sapp said he hoped to find a buyer who would resuscitate MILA.

Instead, the Mountlake Terrace firm Monday asked the federal bankruptcy court to protect it from its creditors, joining scores of other lenders felled by the subprime-mortgage implosion.

The Chapter 11 bankruptcy petition listed less than $8 million in assets and $174.7 million in liabilities. The company said it has more than 200 creditors and $98.7 million in secured debt.

Some $76 million in unsecured debt was claimed by some of the nation's biggest lenders. Among them are Bear Stearns, with a $21 million claim; GMAC/RFC, $10.5 million; and Goldman Sachs Mortgage, $6.8 million.

Others with multimillion-dollar claims include Wachovia Mortgage, Deutsche Bank, Countrywide Home Loans and Indymac Bank.

All have asked Mortgage Investment Lending Associates (MILA) to buy back mortgages that presumably did not meet their standards.

Sapp founded the firm in 1984, eventually operating in 26 states. In 2005, it funded at least $4.5 billion in mortgages, according to The (Everett) Herald, which placed it among top 30 U.S. subprime lenders.

Subprime loans are aimed at borrowers with impaired financial histories. Their high interest rates make them lucrative for lenders.

Rather than writing loans itself, MILA matched funds from big lenders with the subprime clients of mortgage brokers. Its proprietary online loan-management system was designed to tell in minutes if those clients were good loan risks.

Lenders are saying they were not.

Sapp, 44, was not available for comment Monday. His attorney, James Day of the Seattle firm of Bush Strout & Kornfeld, did not return phone calls.

Although no detail is known about MILA's loan standards, other mortgage firms have run into trouble for failing to accurately report prospective homebuyers' incomes and employment.

This has led to a wave of foreclosures by homeowners who lacked the ability to meet their mortgage payments, and has taken other firms down. One of the biggest was New Century Financial, which filed for Chapter 11 reorganization in April.

"Wall Street has been saying for quite some time on all these subprime lenders that it wants to return the bad loans to the lenders who made them," said Deborah Bortner, director of consumer services for the Washington State Department of Financial Institutions.

But she said it's premature to assume all the claims against MILA are valid. That will be sorted out during the bankruptcy proceeding, which will reorganize the firm's debt.

Bortner said her department looked at MILA and concluded "they went out of business for the same reason as many, many other lenders have gone out of business: The market turned against them. We had no evidence of poor management or any of those things."

Seattle Times researcher David Turim contributed to this report.

Elizabeth Rhodes: erhodes@seattletimes.com