Bear Stearns provided fuel for subprime boom

The sale and collapse of financial institutions may be dominating the headlines, but a little-noticed $28 million settlement earlier this month between the Federal Trade Commission and what's left of Bear Stearns symbolizes the housing-boom products and practices that started a lot of the trouble.

Once the fifth-largest investment bank on Wall Street, Bear Stearns was a major funding source for subprime and exotic mortgages — payment-option plans that allowed borrowers to buy expensive houses and run up debt while making minimal monthly payments, "stated-income" mortgages that required no income or asset verifications, and a variety of other creative concepts.

Bear subsidiary EMC Mortgage serviced hundreds of thousands of these mortgages and had more than 475,000 loans in its portfolio 2007, the FTC said.

But the FTC's complaint and Sept. 9 settlement found that EMC hit mortgage customers with unauthorized fees, misrepresented how much money they owed, harassed homeowners with debt-collection techniques including "property inspections" that were designed to get collectors into houses illegally, and failed to tell national credit-reporting bureaus that borrowers were disputing derogatory reports about them from EMC.

Bear Stearns and EMC agreed to pay the $28 million to consumers and to change its loan-servicing procedures, but it did not admit doing anything wrong.

JP Morgan Chase, which acquired Bear and EMC as part of a federally assisted bailout May 30, was not named in the settlement and had no comment about its terms.

The types of loans Bear Stearns and EMC made their specialty were the jet fuel of the boom, aimed at consumers who often couldn't afford the houses they wanted and didn't understand the payment changes and principal-balance movements associated with the complex mortgage instruments they used.

Borrowers like these depended heavily upon their loan servicers to maintain accurate records and tell them what they owed and when it was due.

Yet EMC, the FTC said, acquired loan portfolios from lenders without checking the accuracy or completeness of the loan files.

"Despite indications that loan data obtained from prior loan servicers ... was likely inaccurate or unverified, EMC nonetheless used that data" to demand principal and interest payments and late fees from customers who didn't actually owe what they were being charged, the FTC's complaint said.

EMC sometimes made late-payment collection calls immediately after acquiring mortgages, without having backup data to be certain of the facts, the FTC said.

In the course of those collection efforts, the commission claimed EMC violated the Fair Debt Collection Practices Act by contacting homeowners by phone for debt amounts they didn't necessarily owe, and even resorted to "false representations" to gain access to borrowers' homes — sending out "property inspectors" who were actually debt collectors seeking to confront borrowers.

The FTC found that EMC violated the Fair Credit Reporting Act by sending delinquency and default reports to the national credit-reporting bureaus without disclosing that borrowers were disputing EMC's charges.

Failure to report disputes can have hurt consumers' overall credit standings and affect their ability to obtain credit elsewhere.

The FTC also said EMC imposed prohibited fees, including late-payment and prepayment penalties and $500 loan-modification fees, among others.

The company charged new customers for property inspections when there was no information in loan files suggesting the house needed a physical examination, the commission said in its complaint.

Compounding the problems inherent in the high-risk mortgage products of the boom years, a key aspect of the Bear Stearns-EMC case is data integrity.

Every month millions of homeowners put their trust in companies they don't really know — loan servicers working for the borrowers' original lenders or companies who bought the servicing rights.

If successive servicers do not accurately track borrowers' loan balances, escrows and payment histories — or worse, as the FTC found in this case, pile on improper charges and violate federal credit, truth-in-lending and debt-collection laws — consumers can find themselves in a deep financial jam.

"People already have enough problems with their mortgages," said Lucy Morris, a lead attorney for the FTC in the Bear Stearns-EMC settlement.

"It's all the more important that servicers take appropriate care in handling consumers' billings and collections."

That's especially true when the consumers involved happen to be saddled with confusing loans they should never have been sold, are stuck with homes that have plummeted in value, and are moving closer to foreclosure every month.

Kenneth R. Harney: kenharney@earthlink.net