September 24, 2008

The sky is falling, the sky is falling! Well, not really.

Wow is about all we can say, and not about the bailout or the hearings or the investigations - it's the way it's being portrayed.

The hysteria over what is going on in Washington and New York seems to be mounting, and the “news” media has stepped in to keep us all breathlessly flipping channels and surfing sites, listening to talk shows and of course – being saturated with advertising.

And a lot of people seem to believe something major is going to change in their loan situation; they’re not sure what it is, but maybe, just maybe the really ugly mortgage they’re in is going to get fixed or that the perpetrators of this mess are going to be punished.

It’s too early to know what the legislation is or isn’t going to let the Department of the Treasury do, but we believe it’s a safe bet that hiring several thousand people to redo troubled loans and provide great customer service isn’t going to be part of it (this is, after all, the home of the IRS). And we really doubt there is going to be a servicing bureau in the Treasury. They’ll probably see no need to change servicers.

Short view – NOTHING CHANGES on your loan. Long view – if you have a really bad loan in a really bad pool of similar loans and it gets bought by the Treasury, it all depends on what powers the Treasury secretary is given to deal with it and who they sell it to when they’re ready.

But still, you better not count on them negotiating a modification with you. Some sources indicate the way the law is currently proposed would allow the Treasury to cancel existing PSAs and auction the servicing rights to the highest bidder. At least one believes they’ll do what is known as a “cram down” where the principal balance will be forced down to the value of the property and the interest rate will be set to some viable fixed rate. We don’t think they’ll be equipped to do that on an individual loan basis.

The lending industry is fighting hard to keep that power out of the hands of bankruptcy courts, but if the Treasury department owns the loan, there apparently isn’t anything stopping them from doing the loan modifications across the board on a pool.

There may be some good news in the future for a certain number of borrowers, but given the fact that it’s a bureaucracy we don’t hold out a lot of hope.

In the mean time, the Fairy Godmother isn’t coming to help most borrowers.

Craig and Dave

September 9, 2008

EMC Mortgage settles with FTC

Bear Stearns and EMC Mortgage to Pay $28 Million to Settle FTC Charges of Unlawful Mortgage Servicing and Debt Collection Practices.

The Bear Stearns Companies, LLC and its subsidiary, EMC Mortgage Corporation, have agreed to pay $28 million to settle Federal Trade Commission charges that they engaged in unlawful practices in servicing consumers’ home mortgage loans. The companies allegedly misrepresented the amounts borrowers owed, charged unauthorized fees, such as late fees, property inspection fees, and loan modification fees, and engaged in unlawful and abusive collection practices. Under the proposed settlement they will stop the alleged illegal practices and institute a data integrity program to ensure the accuracy and completeness of consumers’ loan information.

“Like other companies that send a bill, mortgage servicers must make sure that the amount they say is due really is the amount due,” said Lydia B. Parnes, Director of the FTC’s Bureau of Consumer Protection. “Consumers have the right to expect accuracy from the company that collects their mortgage payments.”

As stated in the FTC’s complaint, Bear Stearns and EMC have played a prominent role in the secondary market for residential mortgage loans. During the explosive growth of the mortgage industry in recent years, they acquired and securitized loans at a rapid pace, but they allegedly paid inadequate attention to the integrity of consumers’ loan information and to sound servicing practices. As a result, in servicing consumers’ loans, they neglected to obtain timely and accurate information on consumers’ loans, made inaccurate claims to consumers, and engaged in unlawful collection and servicing practices. These practices occurred prior to JP Morgan Chase & Co.’s acquisition of Bear Stearns, which became effective on May 30, 2008.

According to the complaint, EMC is the mortgage servicer for many of the loans Bear Stearns and EMC acquired. Many of these loans are subprime or “Alt-A” (less than prime) loans, including nontraditional mortgages such as pay option adjustable rate mortgages (“pick-a-payment” loans), interest-only mortgages, negative amortization loans, and loans made with little or no income or asset documentation. EMC’s loan servicing portfolio has grown significantly in recent years; as of September 2007, it serviced more than 475,000 mortgage loans with a total unpaid balance of about $80 billion.


The complaint charges Bear Stearns and EMC with violating the FTC Act, the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), and the Truth in Lending Act’s (TILA) Regulation Z.

FTC Act Violations: The defendants are charged with unfair and deceptive loan servicing practices in violation of the FTC Act. They allegedly misrepresented the amounts consumers owed; assessed and collected unauthorized fees, such as late fees, property inspection fees, and loan modification fees; and misrepresented that they possessed and relied upon a reasonable basis for their representations about consumers’ loans.

Fair Debt Collection Practices Act Violations: The defendants allegedly violated several provisions of the FDCPA in collecting loans that were in default when they obtained them. They also allegedly made harassing collection calls; falsely represented the character, amount, or legal status of consumers’ debts; and failed to communicate that debts were disputed. In addition, they allegedly used false representations or deceptive means to collect, and failed to send consumers a validation notice containing the amount of the debt and the consumer’s right to dispute the debt and obtain verification of the debt.

Fair Credit Reporting Act Violations: The FTC alleges that the defendants furnished information about consumers’ payment status to credit reporting agencies (CRAs). When consumers informed the defendants that they disputed the completeness or accuracy of the reported information, the defendants failed to report the dispute to the CRAs as required by the FCRA.

Truth in Lending Act’s Regulation Z Violations: The complaint also states that the defendants charged borrowers a loan modification fee, typically $500, and automatically added the fee to the modified loan’s principal balance. In doing so, the defendants failed to provide the borrowers with required TILA disclosures.


The proposed settlement requires Bear Stearns and EMC to pay $28 million to redress consumers who have been injured by the illegal practices alleged in the complaint. In addition, the settlement bars the defendants from future law violations and imposes new restrictions and requirements on their business practices. Specifically, the settlement:

bars the defendants from misrepresenting amounts due and any other loan terms;

requires them to possess and rely upon competent and reliable evidence to support claims made to consumers about their loans;

bars them from charging unauthorized fees, and places specific limits on property inspection fees even if they are authorized by the contract;

prohibits them from initiating a foreclosure action, or charging any foreclosure fees, unless they have reviewed all available records to verify that the consumer is in material default, confirmed that the defendants have not subjected the consumer to any illegal practices, and investigated and resolved any consumer disputes; and

prohibits the defendants from violating the FDCPA, FCRA, and TILA.

The proposed settlement further requires Bear Stearns and EMC to establish and maintain a comprehensive data integrity program to ensure the accuracy and completeness of data and other information that they obtain about consumers’ loan accounts, before servicing those accounts. The defendants must obtain an assessment from a qualified, independent, third-party professional within six months and then every two years, for the next eight years, to assure that their data integrity program meets the standards of the order.

The proposed settlement also contains record-keeping and reporting provisions to allow the FTC to monitor compliance with the order.

The Commission vote to authorize staff to file the complaint and proposed stipulated final order was 4-0. The documents were filed in the U.S. District Court for the Eastern District of Texas.

Including the case announced today, the Commission has brought 23 actions in the past decade alleging deceptive or unfair practices by mortgage brokers, lenders, and servicers. Several of these landmark cases have resulted in large monetary judgments that have returned more than $320 million to consumers.

CONSUMER HOTLINE: If the court approves the settlement, consumers who are eligible for redress will be contacted by mail. The Commission’s consumer hotline regarding the settlement is 1-877-787-3941. Consumers who have changed their address recently may provide updated contact information by calling the hotline. Consumers also can find information about the settlement on the FTC’s Web site at

NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendants have actually violated the law. The stipulated final order is for settlement purposes only and does not constitute an admission by the defendants of a law violation. A stipulated final order requires approval by the court and has the force of law when signed by the judge.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC's online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,500 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC's Web site provides free information on a variety of consumer topics.


Frank Dorman,

Office of Public Affairs



Lucy Morris,

Bureau of Consumer Protection


September 3, 2008

Watching train wrecks, part 2.

Five signs of an impending train wreck

Most of the people we hear from or read about have a tendency to either not include enough information about their situation or they do a life history dump and include things that we’d frankly rather not know.

But from some of those, we can tell readers there’s a pattern, and there are several common train-wreck predictors that really shouldn’t be a major surprise to most of us:

Number one is the lack of a reserve. Instead of having 60, 90 or 120 days to respond to whatever situation comes up, in many states at-risk borrowers are usually only a paycheck or two away from not living in their home.

Number two are precipitating events, the most common being a loss of income for any number of reasons, often involving medical factors and combined with job loss. And without the reserve, by the time the income is restored number three has kicked in.

Number three which is often as a result of number two, the at-risk borrowers’ credit is so damaged that they may even have trouble finding a lease or rental property that would allow them to more gracefully exit the property on their own schedule.

Number four includes a propensity to have other consumer debt. We can tell you attorneys in foreclosure mills love to find high-interest auto loans, rent-to-own accounts, high credit-card balances and other default accounts in a borrower’s credit report. No matter what the issue is, the picture is easy to paint that it’s the borrower’s fault, not that of the servicer.

Number five may have been overlooked. Professor Elizabeth Warren pointed this out in her book “The Two Income Trap,” some years ago – you could conclude that children cause bankruptcy. Well, not exactly, but the chances of someone filing bankruptcy increase radically if they have school-aged children. The reason, according to her study is parents have a tendency to take on more home debt than they should to get their children into “better schools.”

So here’s the pattern (it should sound familiar):

  • Parents want to live in a good school district so they go for the house that is really a bit of a stretch beyond even their two-income cushion. Until recently, lenders were more than happy to oblige, even go beyond just encouraging into outright fraud.
  • The too-high house payment puts pressure on other expenses and lifestyle choices don’t adapt to the new conditions quickly enough, hence debt tends to accumulate and there is no chance to accumulate a reserve.
  • Something happens and income is cut or some extraordinary expense comes along. Then the decisions about what will be or won’t be paid get harder.
  • Defaults on one or more things occur, credit scores suffer and they’re trapped. If there is any equity at all they’re the perfect at-risk target for opportunistic collectors and servicers.

We’re surely not alone in seeing this pattern, but we think we’re among the few who see the opportunism at work when the train is nearing the wreck site.

(To be continued)

Craig and Dave