Progress Illinois

The manner with which mortgage companies peddled subprime loans to low-income people of color has been called reverse redlining, an inversion of the racially discriminatory real estate practices prevalent in urban America through the better part of the 1960s. And just like 40 years ago, an organization of community groups is charging that financial institutions violated civil rights in their quest to generate wealth. This time, the target is two bond rating agencies that assuaged investor concerns about the tenuous mortgages bundled and sold around the world as mortgage-backed securities. Via the Los Angeles Times:

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.

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 complaint seems to have merit. Because black and Latino communities were shut out of the traditional banking system for so long, lenders found eager customers when they provided a glut of credit in the form subprime mortgages. According to a 2007 study titled “Paying More for the American Dream: A Multistate Analysis of Higher Cost Home Purchase Lending,” African-American borrowers were 3.8 times more likely to receive a higher-cost home loan than were white borrowers. Latinos were 3.6 times more likely. The numbers from Chicago are particularly disparate:

Chicago had the highest share of higher-cost home loans to African-American borrowers than to white borrowers at 64.2 percent, while Boston had the highest share to Latino borrowers at 54.5 percent.

The worst disparity for any individual lending group was observed in Chicago, where African-American borrowers were 14 times more likely to receive a higher-cost home purchase loan from Wells Fargo than were white borrowers (35.3 percent vs. 2.5 percent).

As we now know, these mortgage loans were inherently unaffordable, stacked with upfront teaser rates and expensive reset payment adjustments. Potential borrowers didn’t even need to disclose their income or assets when applying. Not surprisingly, many defaulted and lost their homes and savings in the process. According to the Times, in one of the studies cited in the complaint, “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.”

Not only did the rating agencies make a killing by assuring investors these packaged loans were safe -- Moody’s stock increased six-fold in value and its earnings grew by 900 percent after going public -- but they were paid by the very banks whose products they rated. The New York Times’ Richard Lowenstein documented this problem in April.

We will keep you posted on the status of the civil suit.