Justice Dept settlement with Countrywide yields $2,000 per household

"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.justice.gov/fairhousing

Racial predatory loans fueled U.S. housing crisis: study

(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 interest,' they said in the study.

'By definition, segregation creates minority dominant neighborhoods, which, given the legacy of redlining and institutional discrimination, continue to be underserved by mainstream financial institutions,' the study says.

Redlining is the practice of denying or increasing the cost of services, such as banking and insurance, to residents in specific areas, often based on race.

The U.S. economy is still struggling with the effects of its longest recession since the 1930s, which was triggered in large part by the housing crisis, which was in part triggered by the crash of the subprime loan market.

Subprime lending refers to loans made to consumers with poor credit and others considered higher risk. They tend to have a higher interest rate than traditional loans.

The study, which used data from the 100 largest U.S. metropolitan areas, found that living in a predominantly African-American area, and to a lesser extent Hispanic area, were 'powerful predictors of foreclosures' in the nation.

Even African-Americans with similar credit profiles and down-payment ratios to white borrowers were more likely to receive subprime loans, according to the study.

'As a result, from 1993 to 2000, the share of subprime mortgages going to households in minority neighborhoods rose from 2 to 18 percent,' Massey and Rugh said.

They said the U.S. Civil Rights Act should be amended to create mechanisms that would uncover discrimination and penalize those who discriminated against minority borrowers.

The study is published in the October issue of the journal."

See: http://twisri.blogspot.com/2009/04/commercial-and-investment-banks-used.html and http://twisri.blogspot.com/2008/11/what-we-said.html for our take on the matter.

Professor compares subprime borrowers to e-coli

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 be apt.

I think we know what the good professor is really saying. A bigoted and biased statement, to say the least, with the added flaw of being untrue.

Sounds like something you might have heard in Germany in 1937.

Wells Fargo sued for racially biased lending, again..

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."

Black neighborhoods, churches targeted for "ghetto loans."

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, the loan officer would receive a bonus.' "

Why the market failed

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 to buy a house they couldn’t afford,” (Eisman) says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans."

From The End by Michael Lewis, Portfolio Magazine. December, 2008 issue.

One part of the puzzle. This is, actually, a positive sign, meaning we may start to work our way out of this mess. Here is, also, what this means: blaming the crisis on CRA or subprime lending is flat out wrong. Others are (finally) beginning to see the problem in full light: there simply were not enough subprime borrowers to cause a catastrophe of this magnitude. For that, you needed greed-induced leverage, a complete lack of ethics, and a set of parasitic financial institutions.

As we noted in April, 2008:

"With the development of toxic (derivative and subprime lending) financial products, the relationship between investment banks and the economy has turned parasitic."

You also need a compliant (non functioning) regulatory apparatus, something we warned about in 1998:

"“The nature of financial market activities is such that significant dislocations can and do occur quickly, with great force. These dislocations strike across institutional lines. That is, they affect both banks and securities firms. The financial institution regulatory structure is not in place to effectively evaluate these risks, however. Given this, the public is at risk.” WILLIAM MICHAEL CUNNINGHAM, UNITED STATES COURT OF APPEALS (CASE NUMBER 98-1459). OCTOBER, 1998.

Welcome to the solution, fellas...about time you got here.

Lending facility for mortgage servicers

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.

Urban Trust recently abandoned efforts to maintain a banking presence in black neighborhoods of Washington, DC, preferring to concentrate on more profitable suburban Maryland banking markets.

But as we suggested earlier, we believe black and minority neighborhoods would not have been so heavily and negatively impacted by the subprime lending crisis if Urban Trust had moved to head the crisis off at the start, by offering responsible, non-subprime loans in minority communities. At least one black owned bank, Carver Federal, launched a special effort to do so in 2006, 2007 and 2008.

Bottom line: we see this as a likely-to-be-ineffective attempt to profit from troubles in the Black community. We base this statement on our experience in
helping create a refinancing plan for victims of predatory lending in Minneapolis.

Racial Inequities in Sub-Prime Loan Practices

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."

Subprime lender used "significant improper and imprudent financial practices."

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 standards, overruled the judgments of in-house specialists and caved under pressure from corporate executives, the report says."

Racial Divide In Mortgage Mess: Carver Federal on CBS Evening News

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

Treasury Secretary to Subprime Mortgage Victims: "I did not create this problem."

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 especially troubling coming from the Administration's top economic policy official. Some will believe this statement reflective of the prevailing attitude within the Administration: those who are in trouble are, somehow, at fault for falling prey to sophisticated, well designed, well executed, misleading and fraudulent financial market practices.

As we noted on November 9th, 2007, most of the people losing their homes are low to moderate income people of color. Those with new ideas and solutions to the problem were carefully excluded from providing suggestions to help with the problem, due to the same bigotry that gave rise to it.

What some will see as even more troubling is the fundamental lack of understanding of the seriousness of the problem. We did not hear, from any of the witnesses (Federal Reserve Board Chairman Bernanke, Treasury Secretary Paulson and Securities and Exchange Commission Chairman Cox), any statement that would lead anyone to believe they know:

1. How many subprime mortgage loans there are currently;
   
2. The terms of the average subprime mortgage loan (interest rate, maturity, points paid to originator, who originated the loan, who owns the loan...and how it got to its current owner..), and;
   
3. How many subprime mortgage loans might default over the next month, year, five years, etc.
4. Who got paid? What were the total fees paid by subprime borrowers? Who got these fees?
5. Who, and I mean who EXACTLY, owns these subprime mortgages now?
6. How did they come to own them? By what mechanism?
   

..in other words, a complete and stunning lack of relevant information that policymakers need to effectively address the problem.

Now we are worried....

The First Bank Failure of 2008

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 that's beginning to impact smaller institutions mainly through [the slowdown in] consumer spending," Cunningham says.

Douglass is the first bank to fail in 2008 and the fourth since February of last year. Before that, federal regulators hadn't shuttered a bank since June 2004.

But Cunningham expects other small banks—especially those with weak profits and deteriorating capital bases—to follow suit in the coming months, as the slowing economy limits borrowers' ability to repay loans.

Larger banks, such as, say, Bank of America or Citigroup, are far less likely to experience a similar rise in failures. Such banks have more capital to protect against losses and greater access to additional funds should they need them.

But with limited resources, smaller banks simply have fewer options, making them more vulnerable to downturns in the industry and the economy as a whole.

FBI Probing 14 Companies in Subprime Lending Crisis

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, communities, and the finance services industry." All three have been damaged in the subprime lending crisis. Most Council members appear to be industry insiders.

On a more positive note, The Federal Reserve Board on Monday announced the termination of the enforcement action against Black-owned United Bancshares, Inc., Philadelphia, Pennsylvania. Written Agreement dated February 23, 2000. Terminated January 22, 2008. United Bancshares, Inc. owns United Bank of Philadelphia.

A Socially Responsible Economic Stimulus Plan

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 consumption necessities, like disposable diapers and low cost (not greater than $400) computers.

Further, we would include a significant tax credit, up to $5 billion total, for investments in community development banks. (Our reasoning: someone will need to take the place of the lenders who got caught up in the Subprime lending mess.) We might also include a significant rebate for the purchase and use of energy efficient technologies.

We would also implement at full rebate of tuition, books and fees for low to moderate income (80% or lower of area median income for at least the last four years) persons studying at any accredited four year college.

Finally, we would include $20 billion for infrastructure repair projects (vetted, of course, to eliminate all pork) focusing on bridges. We suggest the infrastructure work first target US counties with an unemployment rate at least twice the national average.

Aggressive action by the Federal Reserve should focus on repairing the regulatory safety net that allowed subprime lending to damage the markets. This includes working with States as they seek to uncover subprime lending fraud.

Part of the economic recovery plan should require the Federal Reserve conduct a complete census (not a survey) of all subprime loans and borrowers. This would include collecting information on loan terms and conditions, reported borrower income at the time of closing, property location, and other demographic information on the borrower. We understand that a complete census will not be cheap (we estimate this would cost at least $100 million) but it will allow a better understanding of the exact nature of the problem.

"Framework" to Help Prevent Foreclosures

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 Administration's most optimistic scenario, only 240,000, or 21.8% of homeowners facing foreclosure are eligible for assistance, meaning that 78.2% are not.

On the basis of these numbers, we judge this effort to be ineffective and cynical, giving false hope to those facing one of the most stressful life events possible.

Recent news articles point to the fact that the "Fed Shrugged as Subprime Crisis Spread." The Fed's mantra in 2001, according to a Governor of the Federal Reserve, speaking at a Board meeting of a faith-based pension fund (a speaker, by the way, we suggested) was "subprime good, predatory bad." This was, in hindsight, wrong. This was, also, no accident.

As we noted on November 9th, in 2000 and 2001, most of the people losing their homes were low to moderate income people of color. Those with new ideas and solutions to the problem were carefully excluded from providing suggestions to help with the problem, due to the same bigotry that gave rise to it.

This, too, was no accident.

On Shareholder Proposals: Update

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 strategy of using proxy access to enhance shareholder value has been co-opted by certain hedge funds, now using the practice for selfish, potentially destructive purposes." As above, those with new ideas and solutions to the problem have been carefully excluded from the discussion. Again, this is no accident.

3. Restricting proxy access until something can be done about hedge funds may not be a bad thing, as long as full access is returned to small shareholders at some point.

4. All other concerns (special interest directors, electronic forums, state's rights, 5% ownership thresholds, etc.) are, for the most part, irrelevant.

The problem is the iceberg, not the lifeboats.