NEW YORK (AP) -- A company that insured groups of mortgage loans for a subsidiary of Bear Stearns accused the investment bank in a lawsuit Wednesday of building a ``house of cards'' through fraud and misrepresentations.
Ambac Assurance Corp., based in Manhattan, sued EMC Mortgage Corp., of Lewisville, Texas, in U.S. District Court in Manhattan. EMC was a mortgage unit of Bear Stearns Cos., which JPMorgan acquired in February.
The lawsuit claims Bear Stearns leveraged its reputation and dominance in mortgage finance to entice companies such as Ambac to insure loans plagued by rampant fraud. It seeks unspecified damages to recoup what's projected to be hundreds of millions of dollars in losses.
A telephone message left with a JPMorgan spokesman wasn't immediately returned Wednesday.
In the lawsuit, Ambac said Bear Stearns promised that its mortgage loans originated through proper means and didn't result from fraud, misrepresentations or gross negligence.
Yet, the lawsuit charged, Ambac discovered widespread breaches of representations in almost 80 percent of the documents supporting
695 defaulted loans it studied.
It said EMC refuses except in a handful of cases to follow through on pledges to cure, repurchase or provide substitutes for damaged loans.
Ambac identified ``rampant misrepresentations'' about borrower income, employment, assets and intentions to occupy purchased properties when it randomly studied a sample of 1,486 loans worth about $87 million, the lawsuit said.
It said Ambac discovered that the loans, insured by Ambac between December 2005 and April 2007, were ``plagued by rampant fraud and an abdication of sound mortgage origination and underwriting practices.''
As a result, the lawsuit said, Ambac's capital position, reputation and credit rating have been damaged as Bear Stearns sought to package its risky subprime mortgages to be sold as packages and converted to securities backed up by the cash flow from the loans. The process is called securitization.
``The truth is now apparent,'' the lawsuit said. ``The Bear Stearns securitization machine was a house of cards, supported not by real value and sound practices but by Bear Stearns's appetite for loans and disregard as to the risks those loans presented.''
Ambac charged that the mortgages were extended ``in staggering volume to borrowers who simply could not pay, or had no intention of paying, the amounts due.''
The lawsuit said Bear Stearns sacrificed competent reviews for volume and profit.
``With the collapse of the housing market, the borrowers' inability to pay no longer could be concealed by providing refinancing based on inflated home valuations,'' it said. ``The Bear Stearns engine ground to a halt, and the losses mounted.''
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