In what is apparently the first legal action of its kind, an association of community-based organizations has filed a federal civil rights complaint against two of the three largest Wall Street rating firms, charging that their inflated ratings on subprime mortgage bonds disproportionately caused financial harm to African American and Latino home buyers across the country.Minorities got half of the subprime mortgage dollars (home purchase and refinance) in 2004-2007. My guess is that when somebody finally bothers to look, they will account for over half of the unexpected defaulted dollars.
The complaint, filed by the National Community Reinvestment Coalition, alleges that Moody's Investors Service and Fitch Ratings enriched themselves by assigning high ratings to bonds backed by mortgages "that were designed to fail" because of "unfair payment terms and insufficient borrower income levels."
The firms "knew or should have known" that subprime loans disproportionately were marketed to minority consumers -- a process known as "reverse redlining" -- and that those borrowers would ultimately default and go into foreclosure at high rates, according to the coalition's complaint. ...
The filing cites multiple studies that found that African Americans and Latinos received a disproportionate share of subprime loans during the housing boom years. A Federal Reserve study in 2006 estimated that 45% of mortgages extended to Latinos and 55% of loans to African Americans were subprime -- a utilization rate "three to four times that of non-Hispanic whites."
Because the loans themselves often came with terms that increased borrowers' probability of default -- upfront teaser rates followed by unaffordable reset payment adjustments, no required documentation of applicants' incomes or assets, plus hefty prepayment penalties -- African Americans with subprime mortgages are projected to lose $71 billion to $92 billion through foreclosures, while Latinos are projected to lose $75 billion to $98 billion, according to one study cited in the complaint.
"Had subprime loans been distributed equitably," the complaint estimates, "losses for whites would be 44.5% higher and losses for people of color would be about 24% lower."
... The NCRC filed its complaint with the Department of Housing and Urban Development's fair housing and equal opportunity unit. After a review, HUD could either dismiss the allegations or refer the case to the Justice Department of the incoming Obama administration for litigation next year. If HUD fails to respond adequately, the NCRC says it may file a federal civil lawsuit.Of course, HUD saw its mission as getting more mortgage dollars into the hands of minorities, not less. The boilerplate at the end of HUD press releases said:
HUD is the nation’s housing agency committed to increasing homeownership, particularly among minorities, creating affordable housing opportunities for low-income Americans, supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development as well as enforces the nation’s fair housing laws.