Homeowners losing homes is heartbreaking. There's clearly no upside to a market where families and individuals are becoming homeless, and only the callous would disagree with this statement.
But keep reading because the real tragedy seems to be hidden from public view.
This morning, a woman named Rubbie McCoy became another tragic example of the foreclosure pains shaking America. During a conference call held by the American Civil Liberties Union, Rubbie tearfully admitted she understands very little about the mortgage that is causing her so much financial distress.
Rubbie became one of several Detroit area homeowners who are now suing Morgan Stanley [stock MS][/stock] in an ACLU-filed lawsuit. The plaintiffs accuse the investment bank of securitizing New Century loans – like hers – and of violating discriminatory lending laws in the origination of that collateral by pushing high-risk loans on minority neighborhoods.
As Americans, Rubbie's situation should give us pause. Her situation is truly unacceptable. But as people who know something about lending, the dynamics of finance and the plethora of government-induced homeownership incentives, we should wonder if Rubbie is a victim of a much larger plot that involves some of the very politicians and platforms once coming to her aid.
Let me explain. The Consumer Financial Protection Bureau has yet to highlight an integral part of America's lending future—namely the qualified mortgage rule. Under Dodd-Frank, the CFPB is charged with establishing a standard for a qualified mortgage as part of an overarching goal of forcing lenders to determine a borrowers' ability to repay their loans up front. A failure to do so will eventually result in liabilities for lenders, making it essential that the definition of a qualified mortgage exist in clear form for those who originate and buy loans.
But to date, it's unknown if the CFPB will craft clear standards with a safe harbor, or if lenders will be left to determine the fine line between giving a loan to someone who needs it and qualifies for it and one where the unforeseen risks simply become too high to lend in many circumstances.
Why is clarity needed? Because lending itself is a risky business. Even those qualified for their mortgages could eventually become unable to make a payment. This makes the fine line between being predatory and simply aggrieved by changing economics a thin one. And that line gets thinner in downtrodden economic times.
But then we have Rubbie's case, which is being filed as a discriminatory lending case against Morgan Stanley as the securitizer for New Century loans.
The case claims minority neighborhoods like Rubbie's were targeted with high-risk loans because they were simply minority neighborhoods.
Oddly enough, it's still impossible to get a clear definition on what constitutes discriminatory lending in America. For more on that issue, read past HousingWire coverage.
While we see discriminatory lending cases constantly being filed, HUD and attorneys still do not have a clear definition on what type of lending equals discriminatory lending. Is it lending that has a disparate impact on a singular group or is it lending that actually intends to hurt certain communities? For whatever reason, the organizations that sue on discriminatory lending grounds remain somewhat absent from that debate.
But if we flash back to 1996, the ACLU, at the time, was suing PHH Corp for lending discrimination. Unlike today, PHH was not accused of lending too many risky loans. Instead, the civil rights group said PHH was not lending enough in one particular, minority neighborhood in Philadelphia. Granted, the ACLU claimed the discriminatory allegations held up after adjusting for other factors. But no one is in a hurry to make sure the factors making up discriminatory lending are clear to all across the board.
But let's say clear standards are adopted for qualified mortgages. Will the ACLU accept fewer loans in minority neighborhoods in the future if those lenders can justify the move as prudent based on the financial rules governing qualified mortgages as defined by CFPB? Or would clear "ability-to-pay" standards become an inconvenient truth if they become an affirmative defense for lenders who deny risky loans in neighborhoods that the ACLU considers underserved?
During the days of the PHH suit, the President Clinton homeownership era (which lasted through Bush) was in full throttle. The former president is noted as saying in 1995 that "many would-be homebuyers, especially low and moderate-income households, cannot rely solely on conventional mortgage financing to obtain a loan." if you read between the lines, consumer groups and the administration were calling for more room to issue loans in areas where the credit dynamics may have fallen outside banks' more conservative risk guidelines.
Clinton then called on government agencies and nonprofits to help make more lending happen.
I have spoken to many attorneys in this space and one of them summed up the discriminatory lending situation very simply: It is always a problem when a certain neighborhood faces financial headwinds and cannot get loans. And we should all be sympathetic to an individual's distress. But is the solution government confusing the situation with discriminatory lending practices or mass lawsuits? Or should they acknowledge other headwinds without putting their PC-blinders on? Some of those headwinds are clear in many neighborhoods: lack of jobs, changing socioeconomics, lack of education and so on.
Oddly enough, the ACLU's latest complaint comes out of Detroit, where many homeowners — minority and non-minority — are struggling with limited economic growth, high unemployment and foreclosures. So what came first, the distressed borrowers or the distressed communities? It seems in 1995, there was a belief economic issues could be sugarcoated by lending more money to more people. Today, those same loans are being blamed for destroying the economy.
Perhaps, reframing the question is controversial, but someone should push against the status quo. Afterall, Rubbie McCoy's situation is not acceptable. But did the very people now coming to her aid partly encourage the unconventional lending that pulled her away from a more sound financial future?
This is not to say that mortgage origination and servicing issues didn't play a role in the downturn. But it's clear certain organizations are consistently filing suits, and they seem to be in no hurry to establish guidelines to give everyone clarity on where safety and prudence lie in the overall legal scheme.
It seems the next step should be ensuring there is a clear line established between safe lending gone bad and truly discriminatory lending with an intent to inconvenience or hurt a borrower. But who will have the courage to address that issue without worrying about the political headwinds? I don't know. Stay tuned.
In the meantime, the losses of homeowners are a tragedy. But it's important to be honest about the dynamics -- all of the dynamics -- that led to those losses.