The Department of Justice is scouring the country looking for crimes relating to the mortgage crisis. This has resulted in censures and fines that are unfair to major lenders.
During the mid 2000s, encouraged by Congress, banks lowered credit standards to make more loans and earn higher profits. In many cases, these loans were for homes in communities populated by people of color. The banks miscalculated in the same way many individual borrowers did. Home values were not going to increase in perpetuity and be a “second way out” for lenders and for borrowers unable to repay loans. As we now know, the housing market in the aforementioned time period was a huge bubble waiting to burst; and burst it did.
The banks relished lending to disadvantaged neighborhoods because they could justifiably charge higher rates that would more than offset higher expected default rates. The transactions were structured to force sales in the event of non-payment. And, so long as housing prices increased, the banks felt confident they could come out whole.
Exacerbating the situation was the securitization market, which stood ready to buy large blocks of mortgages from banks even if they were classified as sub-prime (or higher risk). The theory was that diversification would somehow counter the poor credit quality of the portfolios. Historically, this was the case, but increasing home prices made that all possible.
The DOJ is, essentially, attacking banks for charging higher rates for more risky loans. I am positive that the bean counters approving loans at banks were not aware of the color of the borrowers. This ploy by the DOJ to play the race card is unprofessional and unfair.
When you have a portfolio of mortgages from a poor community, lending risks will be greater, so banks must increase rates. As an aside, the borrowers need not accept the terms offered by the bank.
Somehow, our society has been convinced into believing that hundreds of billions of dollars of loans were underhanded transactions peddled by snake oil commercial bankers to millions of unsuspecting borrowers. Keep in mind that these mortgages were probably the largest transactions most of these people ever made. To think they would accept any terms without consideration is a little far fetched.
Wells Fargo agreed to pay $175 million to settle a “racist lending practices” suit. Supposedly, “black and brown people were charged higher rates than white people.” If the black and brown people were poorer credit risks than white people, they should be charged more. If the homes were located in risky neighborhoods, from a resale perspective, they should be charged more.
A quote from Assistant Attorney General Perez, “If you were African-American or Latino, you were more likely to be placed in a sub prime loan or pay more for your mortgage loan.” How does this work, I might ask? Does the bank have a black/brown/white designation on the loan application, and those that check black or brown pay a higher rate? No. The borrowers paid more because the loans were riskier.
The article goes on to say that “the bank does not have to admit it did anything wrong.” Why is this? The answer is it is a nuisance suit and neither the DOJ nor Wells Fargo wants to expend the time or the legal fees to litigate. And besides, the fine is a mere pittance to the bank.
Wells Fargo, in its “proposed comment decree” asserts that “it has treated all of its customers fairly” and that no “employee of Wells Fargo discriminated intentionally on the basis of race or national origin.” What Wells Fargo was really saying is that the borrowers deserved a higher rate because the chances of default on their loans were much greater.
I guess this all works out for the best; the DOJ gets a win and $175 million, while the bank gets a slap on the wrist and caps its legal fees. In my opinion, Wells Fargo should have fought to clear itself of the “racist” accusation. That would be worth fighting for.