Wednesday, January 23, 2008

Have I fallen down the rabbit hole?

As I recall, some years back, a segment of the political spectrum was accusing banks/mortgage lenders of not extending credit in low income neighborhoods, predominantly African-American and Latino neighborhoods. The banks were accused of so-called "redlining" where they drew red lines around certain low income neighborhoods, and wrote very little business in those neighborhoods. Because many of these neighborhoods were predominantly African-American and Latino, there was a so-called "disparate impact" on the basis of race and ethinicity.

So, the then powers that be cajoled the banks to loosen their lending standards, and the sub-prime business took off like a rocketship. The big boys, Fannie Mae and Freddie Mac, created programs to support this subprime business.

Then, the house of cards began to collapse. And we now have the subprime mortgage fiasco which has resulted in the big boys declaring billions in losses, and now the even bigger boys, the Arabs and the Chinese, buying up substantial stakes in the big American financial institutions at low prices. And, some say we haven't even begun to see the bad news in terms of losses because of the subprime mortgage fiasco, much less the coming predicted disaster in credit default swaps, where the losses could make the subprime fiasco look like a walk in the park.

All of the above, I intellectually understand and am quite concerned that there is no "stimulus package" that is going to forestall more and more bad news here at home, and ripple effects in overseas markets. But, along comes a story that takes my breath away. The mayor and city council of Baltimore have filed suit in federal district court against Wells Fargo Bank alleging "reverse red lining." The theory of this new lawsuit (Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A., Civil No. LO8cv 062(D. Md)) is that Wells Fargo violated the Fair Housing laws by targeting minority neighborhoods and placing borrowers there into loans that they could not afford, leading to racially disproportionate foreclosures. In a forty page complaint the City, arguing that it has standing to sue, articulates this theory. A similar suit was recently filed in Cleveland, predicated on a nuisance theory.

We will continue to follow developments in both the Cleveland and the Baltimore cases.

For more information, see:

Dina ElBoghdady, "Baltimore Sues Subprime Lender Over Race", The Washington Post, January 9, 2008, Financial Section, Pg. D04.
http://www.washingtonpost.com/wp-dyn/content/article/2008/01/08/AR2008010804382.html

Al Lewis, "Cleveland Suit Smells Like a Pig", The Denver Post, January 15, 2008, Business Section, Pg. C-01.
http://www.denverpost.com/search/ci_7971836

Thomas J. Sheeran, "Cleveland Sues Banks Over Foreclosures", available at www.washingtonpost.com/wp-dyn/content/article/2008/01/22/AR2008011102311.html?sub=AR.

Christopher Maag, "Cleveland Sues 21 Lenders Over Subprime Mortgages", available at http://www.nytimes.com/2008/01/12/us/12cleveland.html?_r=1&scp=1&sq=cleveland+sues+21+lenders&st=nyt&oref=slogin.

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