October 15, 2012

ACLU to sue Morgan Stanley for making "predatory" loans to black people.

The NYT reports:
[T]he lawsuit claims, the bank went beyond the traditional role of an investment bank by requiring that the mortgage company churn out the wildly profitable loans that came with “dangerous” characteristics....

Rubbie McCoy, one of the five named plaintiffs in the lawsuit, took out a loan from New Century in 2006 with an adjustable rate starting at 12.14 percent, which could not fall below 10.75 percent. It came with “excessive fees and costs,” the suit said.

Ms. McCoy, a single mother, said she could not afford the payments, but the broker told her to “fudge” her income, the suit says. Now, she is fighting to save the Detroit home that she shares with her four children.

“Having a house was a way to keep my kids grounded,” Ms. McCoy said....

104 comments:

Franklin said...

Are there any real laws in this country anymore or is it all just subject to the way the political winds are blowing. Has it always been that way?

Lyssa said...

I'll never understand why it's considered the lender's responsibility to determine whether or not the borrower can afford the payments, fees, or costs. If I want to buy a fancy sports car, isn't up to me to understand "hey, idiot, you can't afford $1000 per month car payments!"?

AprilApple said...

This is why we need financial and economic education in this country. NOT taught by progressive democrat leftist liberals-- Taught by people who understand economics.

12%.. 10%... - no way I'd sign up for anything with those horrid rates.

MadisonMan said...

I would be embarrassed to bring a suit that essentially says I didn't read a document that I'm signing, and that I was complicit in figuring a way around rules that are there for a reason.

gerry said...

How much of this was encouraged by a federal governement infatuated with the idea of everyone owning their own home?

KJE said...

It is the responsibility of the lender to do due diligence determinations that the borrower is able to make payments. That's fundamental banking basics.

It is also the responsibility of the borrower not to borrow more than he or she can afford to pay back.

The problem with the article is that the borrower admits that she could not afford the payments.

Nonapod said...

You'd think they'd never heard of the Consumer Reinvestment Act.

Nonapod said...

er *Community*

Shouting Thomas said...

The problem here, as I understand, is that the Fed both pressured banks to produce these types of loans (the "Community Reinvestment Act"), and threatened to sue them if they didn't produce them.

In fact, the Fed under Obama is once again suing banks to produce precisely these types of loans.

Scott M said...

Are there any real laws in this country anymore or is it all just subject to the way the political winds are blowing. Has it always been that way?

As important a question is whether there has been an increase in the number of people that will do something they know is wrong if they know they won't get caught.

Chuck said...

What is the ACLU's particular interest in this cause of action?

What civil right is being vindicated in a lawsuit about mortgage lending?

If this is supposedly a serious claim about some form of racial discrimination (lending too much money to too many African-Americans), it will require some considerable explanation. Because there are a lot of other white Americans in similar circumstances.

Naturally, the good thing about this lawsuit is that real evidence will be developed about how little "predatory lending" had anything to do with the financial collapse of 2008-10. But the bad thing about this lawsuit is that its mere existence will allow the ACLU's many friends in the media to talk about that issue as if it were a serious issue.

n.n said...

First, they sued to make the loans. Second, the sue for making the loans. That's quite a racket.

Shouting Thomas:

Community bank finds paranoid a smart bet. FDIC begs to differ, tells bank to lend more

the FDIC slapped East Bridgewater Savings with a rare “needs to improve” rating after evaluating the bank under the Community Reinvestment Act

It's no wonder they have been "unable" to unravel the cause of our crisis. The banks and other financial institutions, including Fannie and Freddie, were either complicit or involuntary participants in causing the crisis.

SomeoneHasToSayIt said...


We've know for a very long time that "A fool and his money are soon parted".

So why does this still surprise us?

Athanasius Kircher said...

The stupid, it burns.

Mitchell said...

It has long been the American Dream to own your own lawsuit.

ricpic said...

Morgan Stanley held a gun to my head!!!

SteveR said...

Damned if you do, damned if you don't. I'm pretty sure we were warned about this happening.

Fr Martin Fox said...

ST:

And there's this: apparently the Feds don't want the banks to make a profit when they provide loans to high-risk borrowers.

Oh, wait! Yes! Make money! But not too much! And do it the right way!

How?

I don't know how, you're the banker, I'm just the virtuous politician. YOU figure it out.

I think there was a scene in Atlas Shrugged along those lines.

Kelly said...

A 12% interest rate?!? does one have to be a financial wizard to understand that is excessive? That the house might be unaffordable? So, she herself fudged the numbers and...wants what now? I bet she thinks she'll be able to keep her house with no more payments.

Stuff like this burns me to no end. I was forty years old before we bought our first house. My husband was military and I lived in fear that if we were transferred, we'd be up the creek if we couldn't get a house sold. So we lived in crappy military housing or rented up until he retired.

Lying on morgage forms to get a house doesn't "ground" kids, either.

David said...

"Wildly profitable?" Ha. I doubt that. Even at 10-12% interest you lose on a defaulted loan.

10-12% was a very high interest rate for that time. But it's not a usurious rate, just one that no sane person should contract for. If you want usury laws, you should enact usury laws.

Did someone really encourage her to "fudge" her income. Well if so, and if that was a policy at Morgan Stanley to do so, the lawsuit may not be so farfetched. No doubt from time to time some producer encouraged a borrow to be dishonest about income.

I don't think the remedy for such actions should be a borrower lawsuit. Jail would do fine. But if they can make the right factual showings, this lawsuit has a chance of success.

Detroit. What a sad place.

EDH said...

Are the damages sought equal to the excessive interest charges?

If the borrowers indeed qualified for better terms, was the failure to refinance a failure to mitigate?

Fr Martin Fox said...

And before someone offers the usual, pious bleat...

Of course there's greed at work, including in the bankers. Greed--along with all other instantiations of Original Sin--are the constant. Too many liberals have the brass to think they discovered this, and more ominously, that they have found a way to solve it.

Conservatives, on the other hand, say that God alone can solve it, and we in this life try to manage it.

Left Bank of the Charles said...

The monthly payment for a $79,200 loan at 12.14% interest is $823.21 on a 30 year amortization. That compares to $474.84 at 6% interest.

If she made the payments for 6 years, that's $59,270.85. If the bank realizes just half the original value of $39,600 at foreclosure, that's a net profit for the bank of $19,670.85.

With good credit she could refinance her payment to $361.20 a month at today's interest rates. So bad credit is essential.

Fr Martin Fox said...

Kelly:

Our current policies and social ethos amounts to this: following the rules is for suckers.

Pastafarian said...

"Rubby" paid $79,000 (more than that if there was a downpayment) for a house in DETROIT.

If I was going to loan someone money for a house in Detroit, I'd want 50% interest. Because there's little chance I'd get half my money back if I had to foreclose.

Did you know that you can buy decent-looking houses in Detroit for under $10,000? Some as cheap as $1,500?

But then you'd have to live there. And property taxes will be something like $10,000 per year, on your $1,500 house.

Geoff Matthews said...

On the one hand, this lady, if she was told to lie about her income, must have known that she couldn't have afforded this home.
On the other hand, I can easily accept that she was manipulated to take out this loan. I'm okay with her being evicted (yes, I have no heart), but I'm also fine with her suing the mortgage broker who sold her this.
I'd really like to see individual mortgage brokers charged with fraud over these claims, but I know it won't happen.

BarryD said...

Didn't some prominent members of Congress (e.g. Barney Frank) attack banks for NOT making these loans, with the clear implication of a threat?

I mean, it's hard to feel sorry for Morgan Stanley, specifically, but this is a hell of a way to run a country.

Tank said...

Affirmative action litigation on behalf of borrower/"victims" who knowingly lied on their mortgage applications [possibly itself a federal offense].

If the discovery docs show that the victim lied on her mortgage app, is the Judge obligated to refer the matter to the US Attorney.

Chuck Currie said...

I was in the Mortgage/Real Estate business for over 30 years, and I can assure you that "Liar" loans fueled the bubble and burst the bubble.

The areas hardest hit, are the areas with highest concentration of liar loans. Everyone lied, mom, dad, brothers, sisters, aunts, uncles, your grandma and grandpa - everyone. If this was the Kevin Bacon game, the degree of separation is 2 at most, maybe 3 if you live in MN.

For 4 or 5 years, we originated nothing except liar loans and, the majority of those were refinances, cash-out refinances. Ask for any form of income or asset verification (pay stub, w-2, bank statement) and loan walk down the street to the next bank. Basically, we told them where the red flags were in their application and they "fixed" them before applying at the next bank.

I have no tears for the lying borrower in this suit, or any of the other liars who lost their homes. I do have sympathy for those who told the truth, then lost their job(s), then their homes, but not the liars.

When I started in mortgage business, anyone who lied on a loan application was investigated and some were prosecuted. Not anymore. Now it's all the lender's fault.

Lenders, mortgage banks and Wall Street were either stupid or naive, or both, to think Americans wouldn't lie on a loan application in order to keep up with the Jones. I somewhat jokingly tell my wife, it's all HGTV's fault - everyone had to have hardwood and marble floors, granite counter tops and stainless steel appliances - and, they were willing to lie to get them.

Lying liars lie.

Cheers

Revenant said...

McCoy is a disgrace to America.

Shanna said...

The problem is you can't make a loan with a good rate to someone who has no ability to pay it. So if you are forced to make loans to people who are a bad credit risk, you make them at high rates. And then people call you 'predatory'. What a scam.

Obviously anyone who was persuading people to lie on their documents should be in trouble, as should the people who AGREED to lie on their loan documents.

Larry J said...

BarryD said...
Didn't some prominent members of Congress (e.g. Barney Frank) attack banks for NOT making these loans, with the clear implication of a threat?


Yes, and Community Organizer Obama sued banks for the same reason.

Cindy Martin said...

Damned if you do. Damned if you don't.

Michelle Dulak Thomson said...

Pastafarian, that's exactly what I was thinking. Housing in Detroit is now so cheap that they're not maintaining whole neighborhoods, and talking of letting parts of it revert to farmland. At this rate, you'd think the city would soon be paying people to live in some of its vacant housing stock.

Cindy Martin said...

Damned if you do. Damned if you don't.

dbp said...

Which "Civil Liberty" is at stake here?

Michelle Dulak Thomson said...

And ... four kids, single mom. The article says she's getting child support, in an amount artificially inflated by the loan officer. Maybe she's a widow who had three kids by her first husband, remarried after his death, and had a fourth by a second husband who then divorced her and is paying the child support for the youngest of the four. But it seems to me that other scenarios are a bit more likely.

I Callahan said...

This is rich. The same folks who agitated for the CRA, are now agitating to sue the companies who lent the money.

Larry J said...

I Callahan said...
This is rich. The same folks who agitated for the CRA, are now agitating to sue the companies who lent the money.


They're suing the banks for the same reason Willy Sutton robbed them - that's where the money is found.

Alex said...

The problem here, as I understand, is that the Fed both pressured banks to produce these types of loans (the "Community Reinvestment Act"), and threatened to sue them if they didn't produce them.

In fact, the Fed under Obama is once again suing banks to produce precisely these types of loans.


ST - so the Feds made them do these so-called predatory loans at the point of a gun(CRA), then shoot them in the head when it predictably failed.

That's what you get with government.

Alex said...

There was a predatory element. The loan officers were motivated by being on commission. They needed to sell as many loans as possible to make income. They couldn't have cared less about the consequences. They were the equivalent of financial drug dealers.

AJ Lynch said...

Everyone agrees the greedy banks and Wall Street shysters caused the recession.

That is why the Obama administration has prosecuted so many of them [snarc].

Pastafarian said...

Michelle Dulak Thomson -- I actually thought about purchasing a few, the same way you might purchase a penny stock -- a small investment with a possible (albeit unlikely) high rate of return, plus it's a hedge against devalued currency.

Maybe someday the city would offer to purchase the house, for example, for its property tax valuation, so that they can bulldoze it.

But the property taxes were confiscatory -- and higher still if you're not living in the house, and you live outside Michigan (I'm from Ohio.) And you'd have to insure it against damage from squatters or copper-pipe recycling enthusiasts.

I heard about the possibility of the city razing entire neighborhoods so that farmers could plant the ground; but they'd probably have to stick with soybeans, because if they plant corn, their neighbors will probably raid the fields like locusts.

I picture Detroit as eventually looking like the city in 12 Monkeys, with cougars and bears roaming through a vine-covered vacant landscape.

Shanna said...

The loan officers were motivated by being on commission.

Yeah, but Caveat Emptor, right? Don't they teach anyone that anymore?

Alex said...

Yeah, but Caveat Emptor, right? Don't they teach anyone that anymore?

Not 2005 to 2008. It was a free for all, those loan officers were totally amoral.

CWJ said...

Read the linked article in full. It was full of loaded adjectives and verbs, but short on simple facts or explanations.

This won't go to trial. A jury trial would simply be to risky. If not dismissed, this will be settled just like the other settlements mentioned in the article. We will be left with the impression that the bank was guilty, with no information as to the actual facts of the case.

Texan99 said...

Among bankruptcy lawyers in the 1980s, the idea of "predatory lending" was dark humor. I guess it's being taken seriously now.

It's not enough that people get a house to live in for a few months or years that they know they can't afford? Do they have to be allowed to live in it for a lifetime without paying for it, in order for the banks to expiate the sin of lending? Why not just pass a law forcing the banks to buy houses and give them away to the deserving needy?

Michael K said...

"Blogger Shouting Thomas said...

The problem here, as I understand, is that the Fed both pressured banks to produce these types of loans (the "Community Reinvestment Act"), and threatened to sue them if they didn't produce them.

In fact, the Fed under Obama is once again suing banks to produce precisely these types of loans."

This will come out in any trial and will finally explain why the financial collapse occurred. Of course, it will be after the election and the election will make this suit go away.

Tank said...

Alex said...

There was a predatory element. The loan officers were motivated by being on commission. They needed to sell as many loans as possible to make income. They couldn't have cared less about the consequences. They were the equivalent of financial drug dealers.

Except for the final hyperbole, this is true as far as it goes, but, life is full of people who want to sell you something.

The minimum we should expect from people is to look at their own income and say - I can't afford this, or, no, I won't lie to induce someone to lend me money.

When you lie on your mortgage app to induce a lender to lend to you on terms you don't really qualify for, you are also a predator.

Michael said...

Could it possibly be that the loans were mostly to black borrowers because Detroit has mostly black residents? Or in the alternative did the white borrowers have better, real, credit? Or are we forced to conclude that blacks cannot make good economic decisions are are more suseptible to being taken advantage of because they are black?

The ACLU is going to find this a hard case to advance.

Tank said...

Michael said...
Could it possibly be that the loans were mostly to black borrowers because Detroit has mostly black residents? Or in the alternative did the white borrowers have better, real, credit? Or are we forced to conclude that blacks cannot make good economic decisions are are more suseptible to being taken advantage of because they are black?

The ACLU is going to find this a hard case to advance.


You would find it hard. The ACLU will not.

Michael K said...

"Did someone really encourage her to "fudge" her income. Well if so, and if that was a policy at Morgan Stanley to do so, the lawsuit may not be so farfetched. No doubt from time to time some producer encouraged a borrow to be dishonest about income. "

Remember that most of these loans at that time were initiated by brokers who did not work for the lender. They existed (very well) on fees and commissions. Their only responsibility was to see that the first two payments were made. After that it was the lender's problem.

The lenders relied on brokers, which turned out to be a bad idea. My ex-wife went to work for Countrywide after our divorce 30 years ago. She concluded they were crooks after a few months and moved on.

This will be a bonanza for her as she now gets her income as an expert witness in bank fraud cases. She worked for the FDIC for years closing failed banks. Before that she worked for the FSLIC closing failed S&Ls.

Bryan C said...

"First, they sued to make the loans. Second, the sue for making the loans. That's quite a racket."

The cargo-cult performed all the proper Rituals Of Prosperity and Blessings Of Homeownership, but the magic still didn't work. At times like this the only solution is to burn some heretics.

Shouting Thomas said...

Lest you think that this madness should only be blamed on Obama, I want to add that Bush played his role.

So did Clinton.

The Community Reinvestment Act was passed in 1977, purportedly to solve the dilemma of "red lining." (I was indoctrinated in this notion back in college in the late 60s. Banks were "discriminating" against blacks without any reason, we were told. No, it couldn't be that blacks were more likely to be uncreditworthy borrowers.)

Successive administrations have done their damnedest to hype up and extend the stupid unintended consequences of this strategy. Everybody's guilty.

Levi Starks said...

The people who told me to lie ripped me off.
Life is trying to teach her a lesson,
The ACLU wants it to be a free lesson.
In which case it would be no lesson at all.

Bryan C said...

I look forward to seeing the ACLU apply this same righteous zeal to college loans. That's the most predatory lending environment I've ever seen.

At least this woman can escape her debt via foreclosure.

PatCA said...

This is why our economy is in slow-mo collapse.

I hope the bank's lawyers cite the CRA and the Fannie and Freddie incentives in their defense.

How can banks survive in the mortgage industry, with government forcing them on one end to make bad loans and activists on the other when those loans inevitably fail?

Texan99 said...

"The cargo-cult performed all the proper Rituals Of Prosperity and Blessings Of Homeownership, but the magic still didn't work. At times like this the only solution is to burn some heretics."

Bingo.

Marshal said...

Why would anyone have signed a mortgage for 12% in 2006? The NYT doesn't say, which likely means there are material facts omitted because their inclusion leads to an entirely different conclusion.

Shanna said...

My ex-wife went to work for Countrywide after our divorce 30 years ago. She concluded they were crooks after a few months and moved on.

I bought my house from countrywide in 2004. The lady I talked to about my forms tried to get me to agree to a loan that wasn't fixed but I told her no and got a normal, fixed loan. It was quickly sold to someone else and I've had no issues at all, but I did think about it when all the controversy came up.

Even if they tried to convince you to take an adjustable loan (or to lie about income), nobody can make you sign those papers. You can always back out. That is your responsibility and your decision.

Paul said...

So they want to sue them cause they made loads that Obama and Barny Frank FORCED them to give to blacks?

No good deed goes unpunished.

edutcher said...

With ACORN defunct, I guess the ACLU is now the enforcer of subprime loans.

Same bunch of Lefty thugs, however.

Justin said...

Even if they tried to convince you to take an adjustable loan (or to lie about income), nobody can make you sign those papers. You can always back out. That is your responsibility and your decision.

That's right, and for that reason her suit should be dismissed.

But I think the flip side is also true -- if the lender encourages the borrower to lie and knows the borrower will likely default, why should the borrower get to enforce a contract that it knew rested on a false premise?

My recollection of this area of law from the last time I encountered it in litigation is that in these circumstances the contract is void because both parties acted with an illegal purpose.

I think the fair result here is this: Borrower refunds lenders payments; lender gets the fuck out of the house.

Abdul Abulbul Amir said...


So Ruby admits to defrauding the bank on her application, but it is their fault! Amazing.

David-2 said...

All the above posts about the CRA are, of course, true, but also remember that this all accelerated once the genius financiers invented monitization/bundling/sharding of mortgages.

Once the banks no longer had to own the mortgages they made, they had no skin in the game. Party on!

Ignorance is Bliss said...

The ACLU is going to find this a hard case to advance.

That would depend a lot on the judge and jury this lands in front of.

Balfegor said...

But I think the flip side is also true -- if the lender encourages the borrower to lie and knows the borrower will likely default, why should the borrower get to enforce a contract that it knew rested on a false premise?

It sounds like Morgan Stanley (or rather, their shareholders) is the victim here. The loans were made by the broker, New Century (now bankrupt), which sold the junk loans to Morgan Stanley which I guess packaged them into mortgage backed securities to sell to investors. I'm guess Morgan Stanley has been left holding the bag on all counts, since they can't recover from the bankrupt mortgage broker or the deadbeat borrowers, but they may also be liable to the investors who purchased their MBS.

Methadras said...

The CRA (community reinvestment act) outlaws the practice of redlining. That is basically the practice of not lending to people who cannot afford loans in minority heavy area. That went on for decades until the fed enforced that law and held bank charters hostage unless lenders turned that around. What did they do? They started lending to minorities regardless of their ability to repay as a means to satisfy the fed and to start new monetary vehicles to repackage loans, sell them on the secondary market as mortage backed securities and conflate the return percentages on each point of sale. You basically had multiple entities buying the same paper multiple times and inflating the cost to the tune of into the trillions of vapid unrealized equities. Guess what happened?

David-2 said...

Let me elaborate a bit on my point above.

As soon as the banks discovered how to get rid of the mortgages they made they were no longer in the long-term risky business of collecting monthly payments on loans, in order to get their capital back.

All that was left was collecting all kinds of fees for making the loan.

It no longer paid to be cautious. They made all their money from making loans, thus they were motivated to make a lot of them.

They directly caused further corruption throughout the industry. The destruction of honest appraisers in favor of those who would validate the amount the loan was for as the "market price" was only one such side effect.

Methadras said...

David-2 said...

All the above posts about the CRA are, of course, true, but also remember that this all accelerated once the genius financiers invented monitization/bundling/sharding of mortgages.

Once the banks no longer had to own the mortgages they made, they had no skin in the game. Party on!


And if the government had simply allowed the status quo to party on, then most likely we wouldn't be here talking about it.

Methadras said...

David-2 said...

Let me elaborate a bit on my point above.

As soon as the banks discovered how to get rid of the mortgages they made they were no longer in the long-term risky business of collecting monthly payments on loans, in order to get their capital back.

All that was left was collecting all kinds of fees for making the loan.

It no longer paid to be cautious. They made all their money from making loans, thus they were motivated to make a lot of them.

They directly caused further corruption throughout the industry. The destruction of honest appraisers in favor of those who would validate the amount the loan was for as the "market price" was only one such side effect.


The government left very little interpretation for the lenders to go by. Their banking charters were basically being used against them unless they made loans to minorities even knowing they could afford them. Then you see new federal programs to aid first time home buys with FHA programs of 3% - 5% down payments and simple income verification and nothing beyond that. You went from a system of 20% down payments to 3% - 5% down payments to people who couldn't afford to own that money much less pay it back. Do this millions of times over and tell me how this doesn't shock you.

Methadras said...

Paul said...

So they want to sue them cause they made loads that Obama and Barny Frank FORCED them to give to blacks?

No good deed goes unpunished.


This is way way way after the fact. There is a video where frank, and all the other looney leftards like Maxine Waters are in a committee meeting excoriating a banking regulator on why Fannie Mae and Freddie Mac are buying these poisonous loans and how there is nothing wrong with regulating either of them.

Just do a you tube search with this and watch the horror: barney frank fannie mae freddie mac

Balfegor said...

Re: David-2:

The destruction of honest appraisers in favor of those who would validate the amount the loan was for as the "market price" was only one such side effect.

I don't think appraisers could have been much of a control. Banks were willing to lend poor credit risks more money, which let them bid up the prices of houses. For residential mortgages, appraisers appraise on the basis of market prices for recent sales of comparable properties. The availability of credit would have led to massive price increases anyhow -- at best, more conservative appraisers might have restrained the rate of price increase slightly.

EMD said...

Basically it also ended up screwing good bets like me. I bought my current home in 2005, and did a 7 year ARM with the idea I'd refi to a 30 year fixed within 3-5 years max. Well, we know what happened. I don't have enough equity to do an 80-20 and they've stopped financing the 80-15-5s and such. So I'm still on a variable rate that goes year to year until I can re-fi.

It's not bad because the rates are still low across the board and aren't going to get too high anytime soon with the glut of real estate still on the market locally.

I wish I had more cash on hand to just do the downpayment on the re-fi. Maybe in 2013.

David-2 said...

Methadras - I totally agree with you. The government forced this situation where the banks were screwed no matter what they did.

But what happened was that the banks were smarter than the government, and worked out a way to make money while playing by the government's rules.

That should be no surprise, of course. The Congress isn't made up of bright people, just gregarious people.

Anyway, that method of making money screwed the country, and the new "homeowners" both.

And yet everyone responsible still wins!

The banks are "too big to fail" so the government will print plenty of "money" to keep them profitable.

And of course, what is Congress for, if not to fix problems? (Even if they are problems that they themselves caused.)

Now, of course, we're headed over the financial waterfall in January when all the new taxes come due, and Congress will do absolutely nothing about it. China can no longer afford our incredible debt and the rest of the world is in even worse shape. Keep the printing presses rolling! We've still got a campaign to run!

Trashhauler said...

One of the gods of the copybook headings: "You cannot cheat an honest man."

Fudge on your income, inevitably the chickens come home to roost.

Trashhauler said...

One of the gods of the copybook headings: "You cannot cheat an honest man."

Fudge on your income, inevitably the chickens come home to roost.

Freeman Hunt said...

So the broker and the borrower are in cahoots to lie to get money out of the lender--and the lender is being sued? Mmkay.

Methadras said...

Balfegor said...

Re: David-2:

The destruction of honest appraisers in favor of those who would validate the amount the loan was for as the "market price" was only one such side effect.

I don't think appraisers could have been much of a control. Banks were willing to lend poor credit risks more money, which let them bid up the prices of houses. For residential mortgages, appraisers appraise on the basis of market prices for recent sales of comparable properties. The availability of credit would have led to massive price increases anyhow -- at best, more conservative appraisers might have restrained the rate of price increase slightly.


Well, once the fix was in, brokers, realtors, lenders, and appraisers on the end saw the massive cash cow that rolled there way, it was a juggernaut that wasn't going to stop anytime soon until it fell over the equity cliff.

Amartel said...

"This is rich. The same folks who agitated for the CRA, are now agitating to sue the companies who lent the money."

This totally unexpected coincidence sponsored by: Trial Lawyers of America.
And yes, they are rich!

Dante said...

The devil is probably in the details. But regarding the redlining complaints, the good thing about profit is it is color blind. There was never a need for the government to get involved.

Here you have another lever for government. Oh, Racism, Racism. That provided the lever to redistribute risky loans. I can almost imagine the loan officer "Well, if this is what government wants us to do," and Goldman Sachs who figured out how to scam "Well, the government makes the rules." And then it's "Everyone's doing it, it has to be OK."

Ironically, I've read that all this meddling has actually hurt the very folks this was meant to help. Some 18/20 of the sub-prime mortgage loaners no longer have those homes.

Pogo said...

In which a fool, raised by unreliable adults and state dependency, learns to expect more free marshmallows, no matter what choices she makes.

She is both a child and a slave.

Big Mike said...

I'm really, really steamed by the premise that predatory loans were only made to Black people. What? No poor whites were cheated? Or does the ACLU simply not care about poor whites?

Or was it because The Bell Curve is true and even the most ignorant white folks knew better than to get a 12% ARM?

There are a great pair of books about who got the housing bubble going, and why, and why it was sustained for so long. The first is Reckles$ Endangerment: How Outsized Ambition, Greed, and Corruption Created the Worst Financial Crisis of Our Time, by Morgenson and Rosner, and the other is The Big Short: Inside the Doomsday Machine by Michael Lewis (who also wrote Liars Poker). Please use the Althouse link if you choose to buy them for yourselves.

PatCA said...

We should t/4 stop all grants to various housing advisers (and ACORN successors) for the poor as they clearly did not advise their clients correctly.

Peter said...




What's being eroded here is the individual's right to contract. Who (other than government) will lend you money merely because you contract to repay it- knowing that not only may the contracts be modified by the courts, but you may be sued for lending the money?



________________________________________________________________
In any case, I'd blame the school districts of Kenosha, Kimberly, Waukesha, West Allis-West Milwaukee and Whitefish Bay for this debacle.

After all, they borrowed money so they could invest in CDOs (that were supposed to more than pay the debt service on that borrowed money). Ultimately it was this (borrowed) cash that financed mortgages like this ( http://www.jsonline.com/news/education/82965177.html ).

Since investors such as these school districts created the demand for these jury-rigged securities, and since it was this demand that supplied the cash used to finance these 'predatory' loans, obviously ACLU should sue the school districts along with other buyers of these financial products.

Bender said...

It is not unheard of that a lender purposely prays on people that it knows cannot repay and, indeed, is planning on the borrower defaulting.

The lender sets the borrower up to fail. On purpose. Why? To collect exorbitant loan shark fees (which are de facto usurious even if the law no longer cares about usury) and to be able to repossess the property, which the lender, or whoever they sold the paper to, can then resell. Sure foreclosure is a pain for the banks, but property is always good to possess. Mr. Potter is all too happy when you miss even a single payment because then he'll seize your house.

Tank said...

Bender said...

It is not unheard of that a lender purposely prays on people that it knows cannot repay and, indeed, is planning on the borrower defaulting.

The lender sets the borrower up to fail. On purpose. Why? To collect exorbitant loan shark fees (which are de facto usurious even if the law no longer cares about usury) and to be able to repossess the property, which the lender, or whoever they sold the paper to, can then resell. Sure foreclosure is a pain for the banks, but property is always good to possess. Mr. Potter is all too happy when you miss even a single payment because then he'll seize your house.

Basically, everything about this is wrong. The last thing the bank wants is to get most properties back [the ones they get back are the ones they don't want - any property with equity, generally, is sold or refinanced]. What good does it do them to loan $300K, hold the property for several years without getting any payments while the borrower lives thre for free, then get back the property, and sell it for $300K or less, less all the attorneys fees, realtor commissions, insurance costs, etc. Lose, lose, lose, except to the extent that much of this does not apply because Uncle Sammy is bailing water.

12% is not usury. I remember closing loans in the 80's at 14% [just ordinary loans].

Bender said...

What good does it do them to loan $300K . . .

Who are they ultimately making the payment to? Not the lender-buyer, but the seller, more specifically, the seller's lender. In other words, they are paying the money to themselves, or if not themselves, then part of the incestuous relationship that is the financial industry where it all evens out. There is no loss for the banks, except on paper.

Tank said...

Bender

When you loan money to someone to buy a house, the money, real money, goes to the Seller, or to pay off existing mortgages or liens. The lender does not get that real money back. They get a house [in this market] worth less, less all the transaction costs.

To the extent the money goes to pay off existing mortgages, it goes to other lenders (they're not all one big company - yet). The foreclosing lender is out real money.

Seeing Red said...

Morgan Stanley should subpoena Barney & Co. then read the law Congress wrote. Subpoena #43 as well and let him walk down memory lane and throw out the amounts Freddie & Fannie paid.

Bender said...

Borrower's Lender A "loses" money to Seller's Lender B.

Then Lender B loans money, which it "loses" to Lender A.

Ultimately, it is a wash, a wash in an industry of incest. Any "losses" are paper losses, meanwhile, the real flesh and blood people who run these institutions are making millions. The company posts a "loss" and their CEO gets $100 million in bonuses.

Tank said...

OK, I give up.

Michael said...

Bender. You are confused. Very confused.

Shanna said...

Bender, I think the Mr Potter's who want you to default worked back when you could sell a house for more than was loaned, when people had significant equity in a house that they lost, etc.. It doesn't work on these people who put nothing down on a 200k house that's now worth 140.

The only benefit to them might be a tax advantage, but still probably not enough to make up for the loss.

JimB said...

Chuck: I hope I never find myself in a business deal with you. I expect basic honesty from others, as I am honest myself. Some sixty years ago a real estate agent was helping me fill out an application for a loan. He asked me what purchase price I wanted to list. He was incredulous that I insisted on the actual price.

I didn't use him again.

BrianE said...

"Basically, everything about this is wrong. The last thing the bank wants is to get most properties back [the ones they get back are the ones they don't want - any property with equity, generally, is sold or refinanced]. What good does it do them to loan $300K, hold the property for several years without getting any payments while the borrower lives thre for free, then get back the property, and sell it for $300K or less, less all the attorneys fees, realtor commissions, insurance costs, etc. Lose, lose, lose, except to the extent that much of this does not apply because Uncle Sammy is bailing water.

12% is not usury. I remember closing loans in the 80's at 14% [just ordinary loans]."

The lender didn't care if the borrower defaulted. This was being bundled in a MBS with some CDS assuring that the risk was hedged.

I say more power to them. IF the ACLU can prove their case Morgan Stanley should pay dearly for their greed. They thought they had found a whole new class of suckers.

cubanbob said...

Bender if that were true, no bank would go tits up.

Banks are in the business of lending money, they aren't real estate developers or land lords. Tenants and toilets and HOA hassles isn't what they are in to.

The fact that the government implicitly pledged the full faith and credit of the United States for Fredy and Fanny is the ultimate reason this disaster happened. No one in their right mind would have bought all of those MBS without the guarantee.

Yes the CRA is partly responsible and needs to go and lets not overlook HUD Secretary Cuomo's role (current NY governor) under Clinton in this disaster nor the credit induced real-estate bubble created by the Federal Reserve ( to offset the stock market crash resulting from a previous Fed created bubble in the 90's). Nor should the easy don't look to close lending standards allowed by and pushed for by the government.

Remember every chartered bank is regulated by the government and all crap loans were blessed by the government and ultimately guaranteed by the government. The democrats in congress over several decades created the perverse incentives that lead to unintended consequences.

Banks should be required to act like banks and only lend to those than can reasonably be expected (and able) to repay the loans, debtors should have skin in the game (moral hazard)and the government should not be the lender of last resort or ultimate co-guarantor and the Federal Reserve should be tasked with only one mission, the stability of the currency instead of trying to maintain full employment and the stability of the value of the currency. As we are witnessing and have witnessed, the Fed can one or the other but not both.

No one who wasn't legitmately broke would have walked away from a mortgage if they had 20% cash equity in the home. Thats real money. Zero down or 5% down, those aren't mortgages or real purchases. Those are rentals with an option to buy with a couple of months rent as security at best.

With few exceptions I don't feel sory for those who are under water on their loans. Anyone with two firing brain cells from 2005 on in the worst affected areas could have rented for less than buying. How much lounder does the signal have to be to get the message?

Amartel said...

Look at the last line in this post: “Having a house was a way to keep my kids grounded,” Ms. McCoy said...."

Ooooohhhhh, so it's all about good parenting.

Ergo, lying is fine and free houses for everyone.

Jeffrey Levin said...

(1) since when did predatory lending become the purview of the ACLU? Since when did we create the right to a low interest/low fee mortgage?

(2) there was a story run in 2005 or 2006 (sorry can't remember) in the Chicago tribune. There was a plan introduced that would have required certain individuals to take a financial literacy class when they were applying for a home mortgage. The purpose of course was to prevent predatory lending to low income potential homeowners. The determinant for the class was based on zip code. Of course, everyone on the left, including JJ and JJJR at Rainbow, was up in outrage - it was racist. The plan was of course scuttled.

Fast fowrard past 2007 and the housing collapse and do you think there was any soul searching on the part of those who were claiming racism, that maybe, just maybe that the program would have been really beneficial, and that would have outweighed any perceived racial factors? Of course not. Too bad for all of the low income homeowners who have been cashiered out of their homes the past 5 years who did not understand what they were signing.

John Lynch said...

Why does the ACLU care? What civil liberty is at stake here?

Rusty said...

The fedgov.org told bnls to make loans regardless of ability to pay, otherwise they would be audited early and often(See liberty Savings and Loan of Chicago)
The rest is risk avoidance.
The banks make loans through brokers with a nod and a wink. The brokers, practicing their own form of risk avoidance, bundle good and bad loans together hoping to dilute the bad loans or at least forstall the day of reconning. With a nod and a wink.The ratio of bad loans to good loans goes sideways.The bundled loans are sold and resold to an ever decreasing pool of investors. the hope being that eventually fedgov.org will jump in and bail them out.
instead fedgov.org bailed out the UAW.

Roux said...

I worked for a lending company that created a subsidiary specifically to take advantage of the CRA. It was named GMFS or Ginger Mae Financial Services. They went to banks and would encourage them to make the CRA loans and would then buy the paper. It was great for the banks because they got points with the Feds plus an origination fee. GMFS got the loan and collections and then sold the paper to our parent company who bundled the loans and sold them to investors.

The parent company went bankrupt in 2001 but GMFS somehow survived and now specializes in reverse mortgages.

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