Jan 29 2008
Here Come the Lawsuits on Housing
The City of Cleveland is not going to take the subprime mess lying down.
Cleveland is suing 21 of the nation’s largest banks and financial institutions, accusing them of knowingly plunging the city into a financial crisis by flooding the local housing market with subprime mortgage loans to people who could never repay. City officials hope to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses.
As we suspected would be an issue, municipalities grew accustomed to balancing their budgets by reassessing bubbling home values in order to push revenue via property taxes. In many localities, when a home sells at market, it can effect the tax assessment of all neighbors. So long as housing frothed ever upward, tax revenues followed and the politicians continued to hand out free lunches rather than deal with trimming any fat. In many cases the windfall emboldened them to increase the free lunches. (Isn’t this what happened with cap gains taxes a few years ago during the tech bubble? Who is advising these people???!!)
And Cleveland is not alone. Wells Fargo? Meet the friendly city of Baltimore:
Black neighborhoods in Baltimore were disproportionately affected by the subprime mortgage fallout, according to a federal lawsuit filed Tuesday by the city, which is attempting to recoup the costs of maintaining neighborhoods wracked by foreclosures.
The lawsuit alleges Wells Fargo Bank NA engaged in a pattern of predatory lending practices in Baltimore’s poorest neighborhoods, leading to foreclosure rates nearly double the citywide average.
“When you have foreclosures, the property values drop, and you get less tax revenue. There’s fire and police costs that come from abandoned and boarded-up and vacant properties,” said John P. Relman, a Washington-based attorney who is representing the city in the lawsuit. “It leads to crime and drugs and school problems as the community is being destabilized.”
So adding to the tax revenue issue is the issue of discrimination, a somewhat ironic accusation given that for years city leadership in towns like Baltimore complained that lenders withheld loans from minority areas. True enough, part of the problem mixed into this mess is that Congress pressured lenders — and especially the folks over at the quasi governmental loan institutions, Freddie Mac, Ginnie Mae and Fannie Mae, both of whom are having issues publishing clean accounting as of late; Freddie and Ginnie alone guarantee half the $10 Trillion mortgage market!
Meanwhile, we’ve noticed an increasing number of articles appearing that discuss the question “should you sue your lender?” I’ve seen it in a London paper’s website last week (can’t find the link) as well as on MSN.com. As well, I’m hearing anecdotally about litigators advertising / fishing for clients to sue lenders in towns like Chicago and Cleveland.
Expect the circus to only get more wild. We’re seeing the consequences of con temporary finance having spent far too long a time down the rabbit hole. As the many participants are ejected from the hole back into reality over the coming months, expect a lot of confusion. Old habits die hard, and revelations of false paradigms can leave lots of hard feelings.
Stay Vigilant! Think it through!
