Blacks still were disproportionately steered into subprime loans when their credit scores, income and down payment were equal to those of white homebuyers, he said.Adam has more on the suit.
« Black People, Culture And Poverty | Main | No Mayo. All Awesome-Sauce. » The NAACP Subprime Suit16 Mar 2009 11:00 am
The NAACP is claiming that Wells Fargo and HSBC discriminated against black families, by steering them toward subprime loans. I'm of a two minds on the subprime crisis. I hope that one thing that comes out of it, is that we learn not to sign contracts, which make us liable for hundreds of thousands of dollars, that we don't fully understand. Brokers, who stand to gain from the sale, don't count as independent advisers. That said, I think that the banks will need to explain this:
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Suit sounds like a fishing expedition-- ie, there is no real evidence (yet) that this was happening. But, these credit suits tend to annoy me to begin with in that it sort of pre-supposes that certin groups of people are children and can't make decisions for themselves. The loan market over the past five years has been extremely competitive on the supply side (ie, lots of lenders with lots of money), so, while I know I sound like an unsympathetic a@@hole, the argument that someone was steered into a subprime product when they shouldn't have been doesn't really do it for me when there are lots of lenders and mortgage brokers competing for that business. So even if one does have an unethical Wells Fargo mortgage person, if you are borowing tens or hundreds of thousands of dollars, you need to do some diligence and shop that rate around. A quick Internet search will give you a sense of the rate you should be getting with a certain credit score.
She said the bank promised her a low fixed rate for a $40,000 loan, but at the closing, when reading the fine print, she noticed that the rate was actually 11 percent.
It seems strange that the first time this customer saw the rate was at closing. Not my experience, but I'm wondering if this varies by state? I recall getting a document with all of the loan details at least 2 weeks before closing.
My old law firm used to handle cases involving discrimination in auto financing, and the facts were exactly the same. Two families walk into the auto dealership, with no difference between them aside from race, and the black family consistently gets quoted a higher interest rate. It's shameful.
There are good numbers that indicate blacks default at higher rates on student loans and mortgages than whites or Asians controlling for down payment income and even credit score.
DO people just talk to one bank or broker when getting the most expensive product they'll buy in their life? Would any of these consumers walk into a store and buy the first big screen they see without knowing for sure the price, or what they are going for down the street? If at signing for a car the price suddenly changes, do you stay or walk? I live in a very remote small town (30,000), and when I purchased a house four years ago, I still had five banks I could go with locally.
Also, Starting with a car I purchased after saving for 3 years when enlisted, I have paid cash for each of the new cars I've bought. Every time the salesmen have tried to convince me to use the money as a down payment on a more expensive car with the ludicrous idea that I would be better off because said car would have a higher resale value. It is the consumer's job to make sure they get the product they need or want. Unless Wells Fargo was the only game in town, I don't see how they're at fault.
@Joa
If true, that's a pretty explosive assertion. Can you provide a link?
Also, if that were true, Joa, are you suggesting that this is the reason that they were given higher interest rates? I can assure you that brokers do not care one bit whether or not a buy defaults on their mortgage. They share none of the risk, and I can assure you that there is not a 'rate hit' for certain races.
JimS,
Buying a house is far different from buying a car or a big screen tv, if only because the numbers are so much larger, and because of that, many consumers, especially first time buyers, depend on the expertise of the people who deal with this every day, i.e. mortgage brokers and real estate agents. Is this a bad idea? Yeah, probably, but when you have no experience yourself, you tend to gravitate toward anyone who has a semblance of knowledge, and you have no way of knowing if that person is trustworthy or not. Best case situation would be to have a lawyer of your own, but if you're a first-time buyer, do you know that you need that? Maybe not.
In some states, mortgage brokers represent a numbe of lenders, so a person may be dealing with a broker who is going to present a couple of loan offers, but may push the one that pays him/her a better commission.
As for getting screwed by your own bank, there are a lot of older folks who have banked with Wells Fargo, BOA, whoever for years. They got their first mortgage from them, have CDs, checking, auto loans,etc. And when the bank you've been with for 20-30 years says they have the best deal for you, unfortunately, people believe it.
"when there are lots of lenders and mortgage brokers competing for that business."
I think this is one of the fundamental misconceptions that people who live in the suburbs have about lending. In reality, however, one of the most serious problems facing minority and urban neighborhoods is the severe lack of any banking facilities whatsoever. There are a number of court cases on this very point (for example, the case against Old Kent Financial Corporation in Detroit, MI, or the case against Centier Bank in Gary, IN). There is also a ton of social science research demonstrating how minorities are underbanked (one example would be several recent articles written by Michael S. Barr). Put simply, minority groups don't have the ability to "shop around" for better deals b/c the only choices available to them in their local areas are these subprime banks, including subprime branches of major institutions (e.g., only the subprime arm of Bank of America, called Equicredit, opens up branches in the inner city). The failure to shop around isn't a personal choice, but rather a core part of the entire problem.
TNC, do you have a mortgage? My mortgages have always been about 2 inches thick, and while I look at what I'm signing I do not attempt to read and perfectly comprehend all 200 pages. If there's a subclause on page 287 which translates out of legalese to "bank may seize family pet, barbecue," I don't know it. There is usually a top page that spells out the basic facts, and everyone should read and understand that.
Of those defaulting, there are those who should have known better, those who tried to do the right thing but didn't understand how it worked, and those who were out and out swindled--they went in to sign the "backup paperwork" the next day and were switched into a different mortgage. I agree all 3 groups need work, but not fully understanding how the mortgage worked is sometimes understandable, especially if everyone casually assured the buyer that you just refinance in 2 years, no problem, and the other homeowners they know have successfully done that.
As Stacy says, we delinked the people offering the mortgages from the people who would try to collect the mortgages. The buyers' reasonable assumption that the bank wouldn't be letting them sign this (2 inch thick document) if the bank didn't think they could meet the terms and pay off the loan no longer holds, but people are only just realizing that.
Deborah says:The buyers' reasonable assumption that the bank wouldn't be letting them sign this (2 inch thick document) if the bank didn't think they could meet the terms and pay off the loan no longer holds, but people are only just realizing that.
I recall seeing something in the NYT about a year ago about the fact that many banks were not exercising due diligence when underwriting mortgages. They are required verify application materials, this task is now outsourced, but in many cases the banks were cutting costs by not bothering to have application data verified.
You mean the blacks aren't responsible for the mortgage crisis? It's the BANKS, not the BLACKS. I guess the GOP just got confused.
Many folks (of all races) only see "the law" in adversarial terms: it's used in criminal cases or in civil lawsuits. The law is there to ensure you representation if you get hauled into jail, and it's there if you want to sue somebody.
They never think of "the law" in consultative terms: to use for buying a home, or writing a will, or drawing up a medical decision proxy or directive.
The idea of walking into a lawyer's office - whether "white shoe" or the Legal Aid Society -and saying "my landlord is trying to kick me out" is something folks understand. The idea of walking in and saying "I'm buying this house, please look at this contract/mortgage" isn't something they've been taught to do.
Basic financial acumen and legal acumen are both areas of knowledge that need to be taught in our schools, and sadly aren't.
I think it's interesting that this post is right next to the culture of poverty post, as I believe that this post points out the importance of recognizing how cultures of poverty work, and how different cultures of poverty work differently.
One poster pointed out how his small town has five banks, seeming to imply that others in larger cities must have access to even more banks. However, generally, the rural poor have had more access to financial institutions than the urban poor. That's due to a number of reasons - a history of government sanctioned and required redlining in minority neighborhoods, some continued discrimination in lending, and a tendency for children to bank in the same manner as their parents.
On the other hand, lack of affordable, subsidized housing in rural areas forces more of the rural poor into other types of predatory situations - like "trailer parks" or manufactured housing communities. Similarly to the banking situation, people who have family members in manufactured housing communities will make the decision to buy a home on land they can be evicted from.
It's hard to understand why people would ever consider making these choices without considering the cultures of poverty those people grew up in.
David-- re: your point about certain buyers being unable to shop around doesn't make much sense to me when the result of the lending explosion over the last few years is that borrowers are not tied to local banks anymore (eg, Wells Fargo is not a local bank). The entire reason subprime can exist is because local lenders are not the primary sources of capital anymore. So yes, anyone can (or, could) go to lending tree or some other online broker site and get numerous mortgage quotes.
I handled my entire mortgage transaction over the web and phone, and I always decline to state my race. This was preceded by about two years of research on mortgages, home buying and the finer points of financing. Same thing for purchasing a car, I always secure the financing outside of the dealer before I begin negotiations. Essentially I build an assumption of discrimination into the process and work all my angles to mitigate the risk. Five years later I am still pleased with my interest rates.
That said I still find myself pulling out my mortgage papers on a regular basis as I learn about some of the gotchas built into the contracts and making sure I didn't get taken.
Deborah-- I think that, to me anyway, the point is that someone shouldn't sign mortgage doc that he/she (or that person's lawyer) doesn't understand. If you are borrowing that much money, spend $500-1000 to have a lawyer read the contract. If you don't have the money to pay the lawyer, you probably shouldn't be buyng a house.
"TNC, do you have a mortgage? My mortgages have always been about 2 inches thick, and while I look at what I'm signing I do not attempt to read and perfectly comprehend all 200 pages. If there's a subclause on page 287 which translates out of legalese to "bank may seize family pet, barbecue," I don't know it. There is usually a top page that spells out the basic facts, and everyone should read and understand that."
Nope, I don't. But I wouldn't sign a contract that made me liable for thousands of dollars, without some impartial translator (lawyer?). Your broker is no more impartial than any other salesperson.
I've written many times that I'm opposed to this "poor people caused the financial crisis" argument. But I also think that people should learn from their mistakes. Simply screaming "We wuz robbed" does strike me as particularly reflective.
@Joa
If you're next post doesn't provide a link substantiating your charge. Don't bother posting at all. It will be deleted.
I have a mortgage and have sold a home that was left to me by a grandparent. In both cases -- as the buyer and the seller -- the presence of a lawyer was required by law. I live in NYC. It is my understanding that in NYC, to conduct a mortgage transaction the representation of a lawyer is required. That said, I have heard of situations where buyers have been represented by lawyers (who were either incompentent or fradulent, ie the lawyer was in cahoots with the broker or lender) who did not protect their interests, resulting in their being saddled with high interest rates, etc.
At closing, there are a whole bunch of documents you have to sign, but the actual mortgage isn't all that many pages (at least in the states that I have read mortgages from). There are also now a lot of standardized reporting( I think government mandated) that spell out the terms more clearly than 15 years ago. Shit head brokers can still commit outright fraud and do sneaking things, but it is much harder to pull doublecrosses.
Lawyer is also required for both parties in home purchase in NJ. All loan (and mountain of other) docs had to be available well before closing for legal review.
I think using a lawyer makes sense, and would consider it next time we buy a house. But that's because of what happened recently; something has gotten seriously out of whack when the people loaning you $400,000 are uninterested in whether you can pay back the loan, or whether the house securing the loan is worth that much in a down market. "It's in their interest for me not to default on the loan, so this stuff must be okay" is not a terribly unreasonable assumption for the buyer to make. We're not talking about the lender cleaning up on a few extra hidden fees, the sort of thing that's easily hidden in deep legalese and can come up as a small add on at the closing; we're talking about the lender foreclosing on a house that's not worth the value of the loan it was securing. It's a losing proposition, or should be.
And how do you find a good and honest real estate lawyer, especially if you're moving into the area from away? I suspect that in an up market, all real estate lawyers are going to look like they know their stuff. We had a local person do our wills, which were very straightforward*, and they screwed up. Seriously screwed up. Eventually they got it all correct to my satisfaction--of a one page document! with no obscure regulations for me to consider, just naming the correct guardians!--but how do I double check the lawyer? Take the realtor's recommendation? The mortgage company's? I agree that having everyone represented by a lawyer would help, but not that it would alleviate the problem--just as we had shady lenders, we'd have shady lawyers who "knew how to get this thing through."
*Will, which they managed to seriously screw up twice:
1) I leave everything to my spouse.
2) If (s)he predeceases me, we leave everything to our children. Guardian is A, if A is unable then guardian is B.
3) If we all die, property left to C.
4) Executor is spouse, then A, then B.
Take the realtor's recommendation? The mortgage company's? I agree that having everyone represented by a lawyer would help, but not that it would alleviate the problem
I have a friend who works for a title company, he is very distrustful of just about anything that comes for a realtor. According to him, they tend to have cozy relationships with mortgage brokers, appraisers, and home inspectors and the whole idea is to pick those who help things move along.
For example, they won't want to refer you to an inspector who is going to be too tough and potentially kill the sale.
I wouldn't take a recommendation from anyone with anything who had something to gain from the sale. No lawyers provided by the broker.
The goal is to keep them all seperate. Never use a broker your realtor suggests, unless you've shopped at a number of other places. Although really, the damage is done, you can't even get subprime loans anymore. Now it's all a matter of shopping for the lowest rates, and the fewest points. Nearly all mortgages are now on the up and up, because banks can't afford to be risky. The lenders that were never risky to begin with are the ones that are going to be incredibly profitable coming out of this recession.
There is something that people are not considering: Blacks and other minorities in this country are used to crappy banking deals, period. I remember that when I was in Georgia for an internship in the 90s I had a heck of a time opening a stupid checking account. Oh, I could get a check cashing card and pay to cash my check, and pay this fee and that fee, but have a simple account that I was able to have in Wisconsin. No can do. All the other black interns told me "Well, that's just the way it is here."
What the other students told me about interest rates on their car and students was incredible. When I spoke to some south Asian students(In Georgia) it was close to same thing: no steady accounts, high interest rates even credit scores were good, and just overall bad deals.
Then came the rise of credit cards and pay cards- yet another way to make money. The highest interest rates were geared to minorities (Does any anybody remember Russell Sims hawking a card? Or Queen Latifah?)
This is not to say white people were not hurt by subprime banking and marketing- they certainly were, especially out here in the West. But the profits these banks enjoyed during the boom times, the obscene amounts of money, came from defacto racist discrimination. Of course, the nasty thing about it is that there were plenty of brothers and sisters who sold this crap to their communities- all he while these banks wrapped it up as being a service to 'diverse' communities.
Weak.
Folks comfortably with online and non-face to face business activity may see this as a viable tactic. But for novice buyers, without experience or knowing other people who've done the same thing, this take a giant leap of faith. You really think they'd want to do this without being there in person?
Totally agree with others above that we have a terrible problem with basic home and macro economic education in this country. Aside from the basics on contracts, housing markets, and the like everyone should have a really basic understanding of macroeconomics, including how the Fed uses rate setting as a monetary control, and how that affects the availability of credit.
If you don't understand that stuff in the least how the hell would you know that no matter how bad your credit is anyone asking you for interest totally out of whack with the prime rate is trying to screw you? Or that when the prime rate's like 4.0 percent and some dude's telling you not to worry about your loan ballooning because you'll be able to refinance at a better interest rate in 5 years the proper response is to laugh in the fool's face? That kind of basic economics knowledge is a lot more important to most people's real lives than history or algebra, but every public school student in the country either has to learn it from family or on their own initiative after high school or they're stuck being ignorant of it.
According to the NYT a former (now deceased) Governor on the Fed expresses this same concern in urging for regulating subprime. That will bolster the plaintiffs claims.
gwangung-- I bought my first home without ever meeting my mortgage broker (until the closing). If you are incapable of usng the internet to check mortgage rates you shouldn't be borrowing tens of thousands of dollars. Seriously, after about 15 mins with google I knew exactly what rate I should be getting and what closing costs I should be paying. But I certainly do agree that we need to do a much better job at providing people with a basic financial education so they do feel comfortable knowing when they are getting a bad deal.
People don't they are prejudiced. I can easily imagine a honest broker with good intentions steering Blacks and Asians and whathaveyou into subprime credits because he thought he was honestly perceiving poor character.
We dont know how to see others as well as we think we do. We all overestimate the character of the tall and the handsome, and everyone finds the ugly suspicious. Cultural differences only make it worse.
The only solution is to keep track and keep asking why black or gays or women or whathaveyou dont have the same numbers as everyone else.
Basic financial acumen and legal acumen are both areas of knowledge that need to be taught in our schools, and sadly aren't.
I'm a lawyer so I'm going to nitpick for a second. While I agree with what I'm assuming is the spirit of the above comment, i.e. that people need a level of basic education so they won't be completely a fish out of water in certain important real life scenarios, the fact is no school will be able to teach a basic level of legal acumen. You could argue that law schools can't even do that. The law is a vast and intricate beast. Besides what's a basic level of legal acumen? Does it mean you should have an idea of the criminal code, the constitution and evidence law only or do you also need to know some basic corporate, tax, commodities and/or securities law? I'll throw out an example of what I'm trying to say. What percentage of educated Americans do you think are aware that the Supreme Court is not expressly granted the power of judicial review (the right to judge the constitutionality of laws) by the constitution? My good friend didn't, he's a Harvard MBA, a smart guy and knew when to find a lawyer when trying to buy an apartment. Common sense will get you far. Our schools have problems, but I think what you're demanding they provide is a bit unfair.
Not to excuse racism as a cause, but I'm 100% confident that brokers are attemptiing to make as much money as possible off every customer they encounter. Is it possible that, due to the way that wealth and homeownership has gone in this country, that whites have larger network of relatives, friends, etc., that have experience in buying a home? They might have had the advantage that their parents have owned a home and told them what to expect? Just thinking out loud here...
One useful metric to have would be black vs. nonblack subprime default rates. If the banks have been behaving as the lawsuit alleges, then black subprime default rates should be lower than nonblack default rates.
This study from the Boston Federal reserve looked at Massachussetts subprime real estate markets. See Table 3 on p. 30. This would seem to run counter to the plaintiff's allegations.
http://www.bos.frb.org/economic/ppdp/2008/ppdp0806.pdf
And, since I'm being all quantitative tonight, here are some data on student loan default rates, which were raised earlier. It doesn't control for credit scores, which was an assertion made earlier, but the data are striking nonetheless.
http://www.educationsector.org/analysis/analysis_show.htm?doc_id=559757
@AMT:
You want "basic" legal acumen? Here you go: Does the guy down the street know that the Supreme Court is not expressly granted judicial review? Of course not. Does the guy down the street know that if he's arrested, he's gotta be Mirandized? Damn right he does. Does he know that if some guy totals his car and sends him to the hospital, he can sue? Damn right he does.
What is that knowledge if not THE most basic legal acumen? It's knowing what you can use the law (and an attorney) for, not the law itself. How come Americans know they should get a lawyer to defend a suit or represent them in court, but not to buy a house?
As far as your friend goes: the vast majority of Harvard MBAs don't know they need a lawyer because of "common sense." They know because they grew up around middle-class professionals, almost all of whom had college or advanced degrees, some of whom might have been executives and doctors and lawyers themselves, in neighborhoods where people actually had wills and divorce decrees...and mortgages. In that environment, you don't know you need a lawyer because of common sense, you know it through cultural and class osmosis. I watched my dad write a mortgage check every month. Does an inner city kid see that?
And if someone doesn't have the luck to grow up in some middle-class community straight out of The Ice Storm, AMT, the education system is the ONLY place that's going to provide that learning for them.
Oh, and FWIW, I work for a large international firm where a corporate law attorney (who graduated from a top school) once used the terms 'revenue' and 'profit' interchangeably when discussing an M&A deal. And when he was asked which one he meant, replied: "Why? They're the same thing."
How's that for a nice combination of legal and financial acumen?
If you're looking for self-defeating beliefs, you can't do better than believing that blacks are getting worse deals than whites because of racism or racial solidarity among mortgage brokers and realtors. (Or among car salesmen, for a parallel case.) If you are black, and you buy the worldview that this implies, you're setting yourself up to be screwed over.
My wife and I bought a house fairly recently. We're white, as was the mortgage broker, the realtor, the other mortgage guy we checked with at the credit union, and still another mortgage person we'd checked with earlier at the same credit union. I obviously have no idea what kind of terms they'd have offered us, had we been black. But I do know what they offered us as white first-time home buyers. Several times, we had option-ARMs, insanely high payments, and interest-only mortgages with baloon payments in five years offered to us with a certain amount of hard-sell. If we'd accepted any of the first several things we had suggested/offered, we'd be on the road to losing our home and everything else we owned; at best we'd certainly be paying a lot more.
Why didn't we fall for this? I'd like to say it's because of our inherent intelligence and financial acumen, but that would be BS. We had probably a dozen stories from family and friends of ways people we knew had been screwed, or seen people get screwed, buying houses. We'd both lived through lean times as our parents bought houses growing up, and had seen family members get hurt badly when their houses lost value. We knew people who'd gone bankrupt largely because of stupid real-estate speculation. We had a friend who was a realtor in another state, who pretty much went over everything we were offered to make sure we weren't getting screwed over.
My guess is that whites have more family members who've bought houses, and so they've heard more horror stories, and have more trusted people to talk to about what they're doing. Realtors can be really good at building up urgency for you to commit right now to a deal that isn't good for you. Mortgage brokers can and will offer you terms so complex that your head spins, with reassuring words that let you believe they wouldn't screw you over. Having that background of stories and experiences is a useful counterweight. (Though I'm sure we still got screwed in some subtle ways a more informed person wouldn't have.)
If you assume we didn't get screwed because the white realtor and mortgage broker liked our skin color, you're setting yourself up for a screwing-over. Because I can pretty-much promise you that a black realtor and mortgage broker are going to offer you terms that work a lot better for them than for you, if you'll accept them.
The best way to keep yourself from being screwed over, I think, is to become informed. Talk to friends and family that have bought houses--you'll probably have to do more looking than we did, if not too many people in your family have bought houses before. Research the hell out of the market. Go talk to mortgage people at multiple banks, or multiple mortgage brokers. And for God's sake, don't go into a huge financial transaction thinking the other guy is offering you terms based on what he thinks of your skin tone, rather than based on his financial interests. That's like painting a bulls eye on your chest.
I guess with the slow economy, race-guilt hustling is the best growth industry around.