EMC Mortgage is a subsidiary of The Bear Stearns Companies, Inc, the same Bear Stearns that was recently sold to J.P. Morgan Chase Bank in a deep discount deal brokered by the Federal Reserve.

The Federal Reserve, in brokering the sale, was attempting to prevent a domino collapse of hedge fund and investment banks heavily invested in subprime mortgages.

On their official website at: https://www.emcmortgagecorp.com/EMCMORTGAGE/ EMC Mortgage describes itself as “one of the largest purchasers in the country of Scratch & Dent and non-performing residential mortgages.” The site claims that the EMC Mortgage underwriting staff reviews the purchase of non-performing loans thoroughly with regard to “…credit, documentation, litigation, default and servicing related concerns as well as a thorough compliance review with loan level testing.”

The recent fire sale of Bear Stearns tends to make such assertions suspect. While the official EMC Mortgage website points proudly to an above average Standard & Poor’s rating, it is worth noting that Standard & Poor’s gave Enron a decent rating too, only four days before the firm collapsed in one of the greatest corporate scandals in US history.

Ratings agencies are notoriously slow-moving and conservative. EMC’s website does not mention that Moody’s downgraded their rating of EMC Mortgage in September of 2007 due to extreme volatility in the subprime sector and EMC’s exposure to it. (The website does list the current downgraded Moody ratings however.)

EMC Mortgage Corporation asserts that when buying and selling subprime or Scratch and Dent loans, “…we at EMC execute the firm’s value maximization philosophy and company strategy of thinking creatively.” Today it seems clear that it is precisely this kind of ‘creative thinking’ that caused the confusion and extreme volatility that sank eventually Bear Stearns.

The Mortgage Lender Implode-O-Meter, a tongue-in-cheek but fairly accurate watch site for the current subprime lending crisis had this to say about EMC Mortgage in mid-March, right before the announcement of the Bear Stearns fire sale:

…We just heard the EMC division (Correspondent) was given notice. According to the email we received “Some have until May 30th (to work) to receive small severance.” The tipster said “They have roughly 30 people left plus some sales staff”

Since J. P. Morgan Chase does have its own, less troubled mortgage division, it’s difficult to predict the long term future of EMC Mortgage, but it doesn’t look good.

Even more troubling is a pending class action suit brought against EMC Mortgage and their Scratch & Dent subprime mortgage division claiming that EMC Mortgage targeted minorities and used deceptive and unethical practices such as “…force placed insurance, lost and misapplied payments, paid taxes that were in escrow late throwing the borrower in delinquent status etc…” http://ripoffreport.com/reports/0/320/ripoff0320022.htm

In the latter part of 2007, EMC Mortgage did initiate and widely publicize the creation of a 50-employee team they cheerily dubbed the “Mod Squad.” Ostensibly the Mod Squad’s task (if they chose to accept it) was to work with subprime borrowers in default or in danger of imminent foreclosure.

The Mod Squad got lots of good press last summer after its formation was first announced. All that good press no doubt helped the EMC Mortgage Corporation’s image. However some basic math raises doubts about the effectiveness or seriousness of the team.

The EMC Mortgage website itself states that EMC services over 440,000 loans. If 8% of those subprime loans were in default at any given time, a percentage not at all unusual, then each Mod Squad caseworker would have had a case load of 700 or more borrowers. And that is assuming EMC really has 50 employees left.

Given the pending lawsuit against EMC, and the eventual fate in March of 2008 of The Bear Stearns Companies and its subsidiaries, it seems at least possible that the Mod Squad might have been more of a PR gesture than a genuine innovation. Whatever the original intent, it all seems to be a nonissue at this point, as the financial world waits to see what, if anything, survives of Bear Stearns and its subsidiaries.