Baltimore, Facing Foreclosure Crisis, Sues Subprime Lender
Citing the extraordinary impact of the subprime lending fiasco on minority households, the City of Baltimore is suing Wells Fargo for lost property tax revenue and the increased costs the city is now facing as a result of mass foreclosures.
"Baltimore’s mayor and City Council are suing Wells Fargo Bank, contending that its lending practices discriminated against black borrowers and led to a wave of foreclosures that has reduced city tax revenues and increased its costs.
The recent surge in homeowner defaults nationwide, generated by lax lending practices during the real estate boom, has officials bracing for a range of problems that often accompany foreclosures. Some municipalities, including Cleveland and Buffalo, are trying to make lenders responsible for abandoned properties to ward off crimes like arson, drug use and prostitution.
But the civil suit that officials in Baltimore are filing in United States District Court may presage another type of litigation against lenders by municipalities facing shortfalls in their budgets.
In the suit, Mayor Sheila Dixon joined with the City Council to ask that the court bar Wells Fargo from charging higher fees to black borrowers. Many of these borrowers paid more under the bank’s subprime lending program, designed for less creditworthy consumers, and are more likely to default on their loans.
In 2006, Wells Fargo made high-cost loans, with an interest rate at least three percentage points above a federal benchmark, to 65 percent of its black customers in Baltimore and to only 15 percent of its white customers in the area, according to the lawsuit. Similarly, refinancings to black borrowers were more likely to be higher cost than to white ones and to carry prepayment penalties.
Now, Baltimore is a city in a foreclosure crisis, according to the complaint. Citing figures from the Maryland Department of Housing and Community Development, the suit said foreclosure-related events in the city, including notices of default, foreclosure sales and lenders’ purchases of foreclosed properties, rose more than five times between the first and second quarters of 2007.
The complaint requests unspecified damages to cover the diminished property tax revenues and higher costs that the city said it had incurred."
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Wells Fargo deserves to be sued.
I purchased a condo in Chicago in September 2006. Wells Fargo was one of the banks I explored for mortgage options. At the time, I had a pre-tax income of $88,000. This is substantial, but not nearly sufficient to cover the $500,000 limit for which Wells Fargo approved me (which, to be clear, I would NEVER think of spending on a house, and was far beyond my budget).
I was stunned. I ask the Wells Fargo mortgage representative, "How exactly did you come up with that number, with my income only $88,000 before taxes?" She answered, "Well, you don't own a car, so you have no auto loan, and you don't have any credit card debt, and you don't have a lot of student loan debt, so we figure you can spend just about all of your income on your house." I can't describe my shock at this "rationale."
I was also advised by Wells Fargo to cash out all of my retirement savings for a larger down payment (yeah genius, I'll get right on that) and pressured to consider all sorts of what I consider wild and irresponsible mortgage options: adjustable rates, balloons, x-year-ARMs. In one breath, I was told to cash out substantial retirement savings for a down payment; in another breath, I was told I didn't even need a down payment and that I could do a lower down payment with "just about no difference in the monthly payment."
I was in the market for a 30-year fixed rate mortgage and nothing else, and was very clear about this. Despite this, I was pressured to examine all kinds of mortgage options I had absolutely no interest in. The 30-year fixed rate they were willing to give me kept changing, and fluctuated from 6.5% to 12%. They could not explain why, given my high credit score.
This particular Wells Fargo representative also made all sorts of wild, "reassuring" predictions when I asked questions: "You can afford this because you'll get a 10% raise in a year" was my personal favorite, given the likelihood of her having any real information on which to base such a claim. I asked her to put that in writing, to say that I would only have to adhere to the loan terms if that 10% raise materialized. The representative laughed it off.
Obviously, I did not choose a mortgage with Wells Fargo, but my credit union, which didn't even offer the kinds of mortgages Wells Fargo did. If I had not been educated (I am) and financially savvy (personal finance is a pet interest of mine), I could have gotten taken to the cleaners. I was not a strong believer in predatory lending practices until that experience, but I am now. The pressure to make unsound decisions based on nothing more than simple hope and optimism was incredible.
WF will get what's coming to it
Wells Fargo is hardly the only player in the great mortgage scam and, like Countrywide before it, will have to face the music in short order. Millions of bad loans were made to people who couldn't afford them and they will all have to be written off. The representative who laughed at you is going to be laughing all the way to the unemployment office. If Wells is lucky, it will be saved by white knight foreign investors, although I don't know if there will be any investors stupid enough to buy them. If not, they will simply vanish, along with a few other major banks and a lot of smaller ones.