Baltimore's lawsuit against Wells Fargo for its subprime mortgages has stirred up frustration among industry players, who say they're increasingly taking heat for offering loans in poorer and minority neighborhoods despite being urged for years to do just that.
"What are you supposed to do?" asked Thomas Shaner, executive director of the Maryland Association of Mortgage Brokers, repeating the sentiment he heard this week.
The city's suit, filed Tuesday, alleges that Wells Fargo targeted black neighborhoods for the higher-cost, looser-standards home loans and is responsible for the resulting high foreclosure rates. The lawsuit was followed Thursday by one in Cleveland, which seeks damages from 21 investment banks and lenders -- including Wells Fargo -- that funded subprime loans. Cleveland officials contend that these institutions helped to create a flood of foreclosures that's eroding tax revenue and increasing the city's costs.
The suits have been met with cheers by homeownership advocates, who say too many borrowers of all races were sold ill-designed and unreasonably expensive loans that lenders and their Wall Street funders should have known would fail. Others fear an unintended chilling effect for the less-affluent urban borrowers who were once snubbed by lenders.
"I'm not saying there aren't villains in all this, ... but you do worry about an overreaction that would deter inner-city lending for the next decade," said John Coffee, a specialist in corporate and securities law at Columbia University Law School. "That could be a long-term harm."
Baltimore argues that its suit isn't intended to discourage lending, only predatory loans. After decades without much access to financing, borrowers in minority neighborhoods were eager for mortgages and therefore at high risk to be taken advantage of, the suit says.
"What we don't want is lenders preying on people who historically have been denied credit," said Sterling Clifford, a spokesman for Mayor Sheila Dixon.
The city alleges that Wells Fargo made subprime loans to 65 percent of its black mortgage customers in Baltimore, but just 15 percent of its white customers in 2006. The bank also charged higher interest rates for lower-value loans -- the sort more common in a majority black neighborhood in the city than in white areas -- and is seeing a foreclosure rate in black neighborhoods nearly four times that in white ones, the lawsuit says.
