The Baltimore Sun and New York Times recently gave some attention to under-reported social and class aspects of the mortgage crisis with stories on an 825-page amended predatory lending complaint filed by the city of Baltimore, including affidavits from ex-Wells Fargo loan officers.
The complaint is not the first to allege that low-income strivers in black neighborhoods were targeted specifically by lenders to feed Wall Street’s securitization machine, but it’s important to keep track of the muck from the subprime lending frenzy that keeps bubbling to the surface. In this case, we see more evidence of the most noxious aspect of the credit crisis—the wealth transfer from amateur-borrowers with an already-precarious financial foothold to an out-of-control financial-services sector.
Leaving aside the inflammatory language alleged in the complaint (in which bank employees talk about “ghetto loans,” etc.), the important part is where Beth Jacobson, who says she was once the bank’s top subprime producer, alleges that blacks with prime credit were steered as a matter of policy into more expensive subprime products.
“We just went right after them,” said Ms. Jacobson, who is white and said she was once the bank’s top-producing subprime loan officer nationally. “Wells Fargo mortgage had an emerging-markets unit that specifically targeted black churches, because it figured church leaders had a lot of influence and could convince congregants to take out subprime loans.”
Another ex-Wells loan officer speaks to the incentives that attached to loan officers steering even prime borrowers to subprime products, which of course fetched a premium on secondary markets.
“The company put ‘bounties’ on minority borrowers,” Mr. Paschal said. “By this I mean that loan officers received cash incentives to aggressively market subprime loans in minority communities.”
Wells denies the allegations and has moved for the complaint’s dismissal.
What’s new is the specificity of the allegations and the hard evidence that this kind of bamboozling was not accidental but systematic.
This provides some explanation for findings from earlier good reporting that found that—somehow—people with good credit scores kept winding up in toxic subprime products. This excellent Wall Street Journal story, by Rick Brooks and Ruth Simon back in December 2007, pegs the number at more than half during the boom’s peak years of 2005 and 2006:
In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores got more than half — 55% — of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American LoanPerformance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans, the firm’s analysis found.
The Times, in this weekend’s story, cites its own analysis:
The New York Times, in a recent analysis of mortgage lending in New York City, found that black households making more than $68,000 a year were nearly five times as likely to hold high-interest subprime mortgages as whites of similar or even lower incomes. (The disparity was greater for Wells Fargo borrowers, as 2 percent of whites in that income group hold subprime loans and 16.1 percent of blacks.)
This is more evidence of what I call the “boiler room effect.” It’s worth keeping an eye on these two related aspects of the mortgage crisis: evidence of mass deception in mortgage marketing and its socio-economic consequences.