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One City's Foreclosure Debacle

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Message Ed Rybczynski
Baltimore, sometimes called "Charm City," isn't all that charming beyond the inner harbor complex that's featured by media when the Ravens or Orioles are playing at home. Sheila Dixon, Baltimore's newly elected mayor, along with the city's council have filed suit against Wells Fargo Bank to recover alleged losses caused by a wave a foreclosures ravaging the city's neighborhoods. The complaint, filed in federal court, seeks damages for municipal expenditures, including fire and police protection and the loss of tax revenue, correlated to a stark escalation in the number of vacant homes.

The New York Times, in a related article written by Gretchen Morgenson, cites a study commissioned by a Minneapolis housing foundation that attributes a cost of $34,199 to local governments for each foreclosure. The long-term, societal costs occasioned by the current foreclosure crises will prove daunting before all is said and done.

The suit reveals disturbing patterns illuminated by Wells Fargo's modus operandi in subprime markets. Predominantly black communities are experiencing the statistical brunt of the onslaught of foreclosures. The bank allegedly charged higher commissions and interest rates than reasonably justified by borrowers' profiles. There's that damn Yield Spread Premium again. The city also maintains that Wells Fargo intentionally relied on relaxed underwriting standards that positioned borrowers for inevitable failure. Between August 2006 and August 2007, the state of Maryland's foreclosure rate increased by 758 percent. That's not a typo. Since 2004, Wells Fargo was one of Baltimore's the most prolific mortgage lenders.

As an aside, a number of studies indicate that predatory lending is not only biased towards races, but gender as well. A study released in 2006 indicates that woman with above average incomes and credit scores almost always paid more for mortgage money than men with with less favorable credit profiles. Households headed by woman, particularly women of color, are unable to realize financial security through the traditional path of homeownership.

Baltimore's case against Wells Fargo is constructed on a slippery mantle of statistical innuendo. While I believe the allegations to be factually accurate, I don't think that they'll stand in a cause brought by a financially beleaguered municipality against a lending behemoth that most likely employed practices that were both legal and generally accepted by the mortgage industry, as disturbing as the truth is. Wells Fargo's attorneys will argue that Baltimore's government was at fault for failing to promulgate ordinances to better advocate the rights of consumers and lobbying, at the same time, for similar statutes at the state level. If Wells Fargo even hints that it might stop making mortgage loans in Baltimore City, the city will dismiss its claims amidst cries of righteous indignation. The case will spark briefly and fade into certain obscurity in spite of any media attention that it might receive.

Some of you might remember the highly publicized massacre of consumer advocacy that transpired during the spring of 2006 in Montgomery County, MD. Lawmakers in the upper scale suburb of DC passed an ordinance requiring mortgage lenders to act only in the best of interest of borrowers. Can you imagine such a scandalous thought? Ideology gave way to practicality when some forty odd subprime lenders threatened to stop funding the gorged pipeline of easy money spilling into the state's most affluent neighborhoods.

The Mayor of Baltimore along with the members of the City Council, past and present, are guilty of convenient blindness for political gain and therefor share culpability with Wells Fargo's executives. Three short years ago, it would have been career suicide for a politician, any politician, to predict the current crises that looms nationally. The tsunami of tax revenue, based on overinflated property values, fueled the rhetorical programs and projects of most, if not all, aspiring elected officials of the past decade. Two short years ago, the average stater home in Baltimore City sold for roughly $290,000. Give me a break! Someone needs to show me the local jobs that supported the incomes needed to purchase these overpriced row homes. The jobs didn't exist; neither did the incomes. Anyone sporting two functional brain cells and a fairly intact cranial cavity could have guessed that the orgasmic subprime frenzy would have to end sometime.

The real story lies in the class action litigation that's certain to follow in the wake of Baltimore's frontal attack on the mortgage industry
. I predict that a broader cause will be brought by consumers against Wells Fargo, and other lenders, along with real estate brokers, real estate agents, title companies, and appraisers.

Could it be that a little publicized and seeming innocuous case filed last week in Baltimore's federal courthouse marks the beginning of a generation of seminal cases that will, in time, redefine the landscape of this nation's real estate industry?

You heard it here: the word "fiduciary" will echo in the hallowed halls of jurisprudence as crusading litigators "test the waters" of judicial interpretation in a perverted quest for deep pockets and social righteousness.

There's no question that malfeasance fueled the real estate boom, the question: who ultimately will pay the price for the bust?
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Ed Rybczynski is a professional speaker who is sometimes mistaken for an aspiring writer. His topics of choice include: the current housing crises, corporate culture as it relates to corruption couched in complacency, and the effects of (more...)
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