This Week in ESG and Impact Investing

"The Department of Justice only sought less than $2,000 per household in the largest residential fair lending settlement in history to resolve allegations that Countrywide Financial Corporation and its subsidiaries engaged in a widespread pattern or practice of discrimination against qualified African-American and Hispanic borrowers in their mortgage lending from 2004 through 2008.

The settlement provides $335 million in compensation for victims of Countrywide’s discrimination during a period when Countrywide originated millions of residential mortgage loans as one of the nation’s largest single-family mortgage lenders. The settlement would provide an average of $1,675 if each eligible borrower received compensation.

According to the Joint Center for Political Studies, 'In 2006, more than one-half (52.9 percent) of African Americans and nearly half of Hispanics (47.3 percent) who acquired home-purchase loans had subprime loans.'"

For more information, see: http://www.j…

(From the Firm Grasp of the Obvious Department at the American Sociological Review as reported by Reuters....)"Predatory lending aimed at racially segregated minority neighborhoods led to mass foreclosures that fueled the U.S. housing crisis, according to a new study published in the American Sociological Review.Predatory lending typically refers to loans that carry unreasonable fees, interest rates and payment requirements.Poorer minority areas became a focus of these practices in the 1990s with the growth of mortgage-backed securities, which enabled lenders to pool low- and high-risk loans to sell on the secondary market, Professor Douglas Massey of the Woodrow Wilson School of Public and International Affairs at Princeton University and PhD candidate Jacob Rugh, said in their study.The financial institutions likely to be found in minority areas tended to be predatory -- pawn shops, payday lenders and check cashing services that 'charge high fees and usurious rates of inter…

We attended today's Financial Crisis Inquiry Commission (FCIC) hearing earlier today. The Commission brought "experts who have researched the financial crisis for a forum in Washington, DC on February 26-27, 2010 at American University Washington College of Law."

More smoke than light was shed on the cause of the crisis. I was struck, however, by one comparison made. In the last session on Shadow Banking, Gary Gorton, Professor of Finance, School of Management, Yale University, compared subprime borrowers to e-coli, suggesting they had "infected" the home loan market.

According to Wikipedia, "Between 2004-2006 the share of subprime mortgages relative to total originations ranged from 18%-21%, versus less than 10% in 2001-2003 and during 2007. The value of USA subprime mortgages was estimated at $1.3 trillion as of March 2007, [17] with over 7.5 million first-lien subprime mortgages outstanding." That's a lot of e-coli, too much for this analogy to …

As we noted in June, Wells Fargo has a real issue.

Now, they have been sued by the State of Illinois. According to recent news reports,

"Illinois filed a lawsuit on Friday against Wells Fargo & Co. accusing it of discriminating against black and Latino homeowners by employing racially biased lending practices.

San Francisco-based Wells Fargo & Co. allegedly sold high-cost subprime mortgage loans to minorities while white borrowers with similar incomes received lower-cost loans, according to the lawsuit, filed in Cook County Circuit Court by Illinois Attorney General Lisa Madigan.

'As a result of its discriminatory and illegal mortgage-lending practices, Wells Fargo transformed our cities' predominantly African-American and Latino neighborhoods into ground zero for subprime lending,' Madigan said."

According to recent news reports,

"One of the nation's largest banks allegedly set up a special sales office to steer risky subprime loans to residents in Prince George's County, Baltimore city and other predominantly black communities..Wells Fargo Bank employees allege in a lawsuit. According to the sworn statements by two former loan officers filed June 1 in U.S. District Court of Maryland as part of a lawsuit being pursued by the City of Baltimore against Wells Fargo alleging discriminatory and predatory lending, bank employees targeted black neighborhoods and churches for the escalating-interest mortgages, which some in the office called 'ghetto loans.'

Many customers with sufficient income, credit and savings to qualify for fixed, lower-interest mortgages were still urged to take subprime loans..because the higher rates meant bigger profits for the bank: 'If a loan officer referred a borrower who should have qualified for a prime loan to a subprime loan, th…

For those of you wanting more of an explanation, read this.

"There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used (financial bets) to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when (hedge funds) bought a credit-default swap, (they) enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets (hedge funds) and others made with firms like Goldman Sachs and AIG. (Hedge Funds), in effect, were paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all."

“They weren’t satisfied getting lots of unqualified borrowers to borrow money …

We note that, according to a recent article in Black Enterprise Magazine, "Through Urban Trust Bank (a black-owned bank), (Robert) Johnson created a new entity, Homeowners First Bank. Homeowners First is an advanced lending facility or a bank designed specifically to provide temporary, advance funding to mortgage servicers. Mortgage servicers are the middlemen, who may or may not be the same company as the lender, but who retrieve money from borrowers on behalf of lenders."

We feel this effort may be an attempt to profit, as the Washington Post noted, from the "unprecedented wave of foreclosures, charging distressed homeowners for help negotiating better loan terms -- a service provided for free or for a nominal fee by many nonprofits."

We should remember that Mr. Johnson has a history of not living up to promises made to the black community. Since it is irrelevant to the current discussion, we will ignore historical charges against the man, and focus on the bank.

Ur…

According to NorthStar Asset Management, Inc. and Responsible Wealth, a project of United for a Fair Economy, both based in Boston, Massachusetts:

"According to Federal Reserve data, 53.7% of (Wells Fargo) purchase loans to African-American families were "high-cost" versus 17.7% to white borrowers."

Data reported by Wells Fargo under the Home Mortgage Disclosure Act (HDMA) showed that "African-Americans were 3.69 times, and Latinos were 1.82 times more likely than whites to receive a high cost loan in 2006. A lawsuit filed by the City of Baltimore this year finds 65% of Wells Fargo's African-American borrowers in that city received high-cost loans."

"For the mortgage industry as a whole, racial bias in high-cost loans has been rampant. A report from United for a Fair Economy, in January 2008, detailed racial disparities in expected losses from foreclosure of sub-prime loans made during the past eight years."

According to a report described in the Washington Post, "New Century Financial, the subprime lender that was one of the first casualties of the housing crisis, had a 'brazen obsession' with risky home loans that spurred it to engage in 'significant improper and imprudent' financial practices, according to a report released yesterday.

The long-awaited report examines what went awry at New Century, the second-largest subprime lender before it raced into Chapter 11 bankruptcy protection in April 2007, and says shareholders could recover a small fraction of the billions of dollars they lost in the process by suing companies and individuals who may have exacerbated the debacle.

Michael J. Missal, the lead investigator, acting at the behest of the Justice Department, pointed the finger at audit firm KPMG, which he said contributed to New Century's problems in 'troubling and puzzling' ways. In some cases, KPMG may have recommended departures from accounting st…

Carver Federal Savings Bank was featured on CBS Evening News on Sunday, March 9th at 6:00 PM. They discussed their approach to helping subprime lending victims. To see the video, click below:

Racial Divide In Mortgage Mess

http://www.cbsnews.com/sections/i_video/main500251.shtml?id=3920203n

CBS News Online

We attended today's Senate Banking Committee hearing on the State of the U.S. Economy and were surprised to hear the Secretary of the Treasury of the United States say, in response to a question from Senator Robert P. Casey (D-PA),

"I did not create this problem..."

Not only is this poor customer service (imagine a General telling you "I did not start this war," or your doctor telling you "I did not create the health issue you are having..." or a Chef telling you "I did not grow this corn...") but some will tell you that the statement itself may, in fact, be false. Several market analysts feel that Mr. Paulson may have, at some level, helped create the problem. They point out that the firm he once ran, Goldman Sachs, made millions by facilitating the creation and distribution of subprime-backed investments. We would point out that Goldman has not been implicated in the most egregious subprime mortgage market practices.

Still, the statement is e…

From US News and World Report:

Bad commercial real estate loans sink a small financial institution in Kansas City
By Luke Mullins
Posted January 28, 2008

A tiny bank in Kansas City, Mo., has become the first bank in the country to fail this year—but it's unlikely to be the last.

Federal regulators on Friday shuttered Douglass National Bank, an African-American-owned bank with $59 million in assets that was named in honor of the 19th-century abolitionist Frederick Douglass. The bank, which has roots stretching back to the 1940s, had struggled of late, losing $1.3 million in 2007 and $4.3 million in 2006.

Although its recent losses were tied to bad commercial real estate loans, not residential mortgages, the bank's problems are nonetheless linked to the global mortgage crisis that has ripped through the financial services industry, says William Michael Cunningham of Creative Investment Research. "It's this secondary and tertiary impact of the crisis in the subprime market tha…

According to Bloomberg, "The Federal Bureau of Investigation is investigating 14 corporations for possible accounting fraud and other crimes related to the subprime lending crisis, officials said.

Neil Power, chief of the FBI's economic crimes unit, wouldn't identify the companies, though he said the cases involve 'valuation-type stuff.'"

We warned about these problems in 1991. In 2001, we worked to create the first investment vehicle designed to address subprime lending problems. Fraudulent valuation is a key component in predatory home mortgage lending.

A key question concerns the lack of early warning from the Federal Reserve Board's Consumer Advisory Council: "The Consumer Advisory Council was established in 1976 at the direction of the Congress to advise the Federal Reserve Board on the exercise of its duties under the Consumer Credit Protection Act and on other consumer-related matters.The council membership represents interests of consumers, comm…

We attended House Budget Committee hearings today.

As the New York Times noted, the Chairman of the Federal Reserve Board, Mr. Bernanke, testified that "A recession is probably not on the horizon, but quick passage of an economic-stimulus package plus aggressive action by the Federal Reserve are the appropriate prescription for the ailing economy.."

Let's hope he is right on the first count. As Fed Chair, he is pledged to political neutrality, so he cannot be specific on the second. We, of course, have no such limitation. Our suggestions follow.

Any economic-stimulus package should target low to moderate income consumers. We suggest implementing a $30 billion dollar increase in food stamp benefits. Given new distribution technology (EBT), this part of the stimulus plan would hit the economy first and quickly and, as an added benefit, would go a long way toward beginning to even the income distribution in the country. Benefits should be expanded to include more and newer con…

We have been attempting to review the Bush Administration's plan to help stop foreclosures. We have not been able to find coherent, consistent documentation, thus we believe there is no plan. There is, however, a public relations effort designed to feign concern.

According to the Jacksonville Business Journal,

"Nationwide, nearly 1.1 million homes entered the foreclosure process so far this year, up 93 percent from the 559,750 foreclosures filed during the same period last year. About 526,936, or more than six out of every 1,000 households in the United States, were repossessed by banks or lenders during the first 11 months of the year, up 41 percent from the same time last year."

HUD notes that the FHA Secure Plan " has helped 33,000 homeowners prevent foreclosure in three months; More than 50,000 to be helped by end of year. " Thus 33,0000/1,100,000 or three percent of homeowners in foreclosure have been helped. That is three out of one hundred. Even under the …

After hearing from a few people, let me clarify:

1. The purpose of the SEC may be to protect investors, but on April 28, 2003, every major US investment bank was found to have aided and abetted efforts to defraud investors. Ethical problems have continued and grown worse: since late 2006, 182 major U.S. lending operations have "imploded" due to subprime lending issues. Most people losing their homes are low to moderate income people of color. This is no accident. Those with new ideas and solutions to the problem have been carefully excluded from the discussion, due to the same bigotry that gave rise to it. This, too, is no accident. We do not mean to sound cynical. We see what is, not what we would like to see.

2. The real issue is Hedge Funds, nothing else. In our comments to the SEC on the matter, we noted: "Any significant concern about proxy access rests with hedge funds, by their nature neither long term investors or sensitive to broader social concerns. The strat…