Reverse Redlining: Targeting the Poor and the Unsophisticated for High Risk Mortgages

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see https://www.aclu.org/sites/default/files/assets/aclumfy_mortgage_report.pdf

At this point it is clear that the banks actually targeted people of color and other demographics where the likelihood of “default” on a loan was extraordinarily high. The ACLU in its latest report on the mortgage crisis proves this to any remaining doubters. This report also shows that these disadvantaged groups are the least likely to get a modification or other settlement or assistance of the various mortgage issues that we all know now were pandemic throughout the period of 1996-present.

But what they are missing is an answer to the REAL question: Why would anyone target a demographic where “defaults” could be claimed in much higher proportion to the history in the general population? Why did they want the loans to fail, because “failure” of the loan was a basic assumption to anyone who understands the various iterations of highly complex and sophisticated loan products — a number which climbed from 5 in the 1970’s to 450 in 2008. Imagine that 450 different loan options offered to the poor, the people who don’t speak or understand English very well and the people who are poor enough that eventually when payments reset they will not pay and they won’t be able to fight for their house. The tragedy here, let me remind everyone, is that most of these were refinancing of existing home ownership — that’s right, most of the homes were in the family for generations.

The Banks targeted homes where the home values were low. Then they drove the prices up to many items the actual value by filling the bathtub with money and selling “payments” instead of principal or interest rate. They offered teaser payments that the homeowner could afford — but which changed to a monthly payment that was higher (sometimes a multiple) than the entire household income. Somehow the Banks have convinced courts to think that the disclosures were sufficient. They were not. And in my opinion if the courts would scrutinize these so-called loans the way they did before securitization none of the loans would survive any fair interpretation of disclosures required under Federal laws (TILA) and state laws, including common law.

Banks do economic analysis every day employing thousands of analysts. Those analysts knew that the prices were being driven above the value of the property, knew that the endgame was the drop of prices to resume relationship with values, and thus knew — because they rigged the game — that if they bet the mortgages would fail, they would make a lot of money. The trick was to lose somebody else’s money not their own. and that is what they did.

If the ACLU wants to do something that produces actual results, they should analyze the economics of the alleged securitization of these loans. What they will find is a note that cannot be enforced and a mortgage that was void from the start. They will find fraud with aggravating circumstances. the banks needed really “bad” loans in order to accomplish their goals. By using investor funds instead of their own, they could claim ownership of the loans when they reported their assets and liabilities to regulatory authorities; but they would assign the losses to investors, borrowers, insurers, guarantors, FDIC loss sharing, and credit default swap counterparties and take the proceeds for themselves — even though they had no losses.

The ACLU should bring actions on behalf of the demographics hit hardest by this Ponzi scheme. They should state the obvious — that the true source of funds had no idea how their money was being used, the banks that did know were intentionally creating bloated loan documents based upon fraudulent appraisals, and the real creditors were deprived of any protection for their investment while the borrowers were signing documents that recited fraudulent information as to the identity of the lender and the real cost of the loan.

The attack on enforceability of the mortgages is easiest simply because it is now fairly easy to show unclean hands. Where a loan is statutorily defined as “predatory per se” it is hard to argue for the banks that it isn’t subject to “unclean hands per se” and therefore cannot be enforced because it is against public policy.

In a court where rules of equity are applied, there is no enforcement of a deal that was, from the start, violation of Federal and State law, was “predatory per se” (Regulation Z) and was part of a fraudulent scheme. This scheme only works for the banks if the loan is secured by a mortgage on the property. That mortgage is mostly unenforceable and probably void, ab initio. True creditors can prove they lost money on the deal have an opportunity to sue and collect on money due them — (1)  from the borrower up to perhaps the amount that should have been the principal, and (2) from the banks for the rest of the money that was skimmed off the top. The amount skimmed in many cases especially in the disadvantaged demographics, was frequently more than the loan itself.

Tags: ACLU, predatory per se, Regulation Z, reverse red-lining, table funded loans, TILA
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