Fannie Mae, Freddie Mac, Merrill Lynch and Lehman Bros. may be dominating the financial headlines, but a little-noticed $28 million settlement this month between the Federal Trade Commission and what's left of Bear Stearns symbolizes the housing-boom era 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 their debts while making minimal monthly payments. Bears' subsidiary, EMC Mortgage, serviced hundreds of thousands of these mortgages and had a portfolio in excess of 475,000 loans in 2007, according to the FTC.
But the FTC's complaint and settlement Sept. 9 allege that EMC hit mortgage customers with unauthorized fees, misrepresented how much money they owed, harassed homeowners with debt-collection techniques including "property inspections" 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 out the $28 million to consumers as part of the settlement and change its loan servicing procedures but admitted no wrongdoing. JP Morgan Chase & Co., 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 that 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 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, according to the FTC, acquired loan portfolios from lenders without performing proper due-diligence checks on the accuracy or completeness of the loan account files.
"People already have enough problems with their mortgages," said Lucy Morris, a lead attorney for the FTC in the Bear Stearns-EMC settlement, "so it's all the more important that servicers take appropriate care in handling consumers' billings and collections."