The ONLY reason there were funky mortgages, is the Democrats forced the banks to give loans to people who didn't have the income to pay them. Maybe they should sue Barney Frank, who didn't believe that the system needed regulation until it collapsed.
Read the full sorry story below:
Civil rights complaint targets Wall Street rating firms
By Kenneth R. Harney
In what is apparently the first legal action of its kind, an association of community-based organizations has filed a federal civil rights complaint against two of the three largest Wall Street rating firms, charging that their inflated ratings on subprime mortgage bonds disproportionately caused financial harm to African American and Latino home buyers across the country.
The complaint, filed by the National Community Reinvestment Coalition, alleges that Moody's Investors Service and Fitch Ratings enriched themselves by assigning high ratings to bonds backed by mortgages "that were designed to fail" because of "unfair payment terms and insufficient borrower income levels."
The firms "knew or should have known" that subprime loans disproportionately were marketed to minority consumers -- a process known as "reverse redlining" -- and that those borrowers would ultimately default and go into foreclosure at high rates, according to the coalition's complaint.
Fitch Managing Director David Weinfurter said the NCRC's filing "is fully without merit, and Fitch intends to defend itself vigorously." Moody's had no immediate comment.
The filing cites multiple studies that found that African Americans and Latinos received a disproportionate share of subprime loans during the housing boom years. A Federal Reserve study in 2006 estimated that 45% of mortgages extended to Latinos and 55% of loans to African Americans were subprime -- a utilization rate "three to four times that of non-Hispanic whites."
Because the loans themselves often came with terms that increased borrowers' probability of default -- upfront teaser rates followed by unaffordable reset payment adjustments, no required documentation of applicants' incomes or assets, plus hefty prepayment penalties -- African Americans with subprime mortgages are projected to lose $71 billion to $92 billion through foreclosures, while Latinos are projected to lose $75 billion to $98 billion, according to one study cited in the complaint.
"Had subprime loans been distributed equitably," the complaint estimates, "losses for whites would be 44.5% higher and losses for people of color would be about 24% lower."
A third rating firm with heavy involvement in the subprime boom, Standard & Poor's Corp., was not named in the complaint but has been "in discussions" with the NCRC, said David Berenbaum, the group's executive vice president. If the discussions with S&P prove "unsatisfactory," he said, the company could be the subject of a separate action.
The NCRC filed its complaint with the Department of Housing and Urban Development's fair housing and equal opportunity unit. After a review, HUD could either dismiss the allegations or refer the case to the Justice Department of the incoming Obama administration for litigation next year. If HUD fails to respond adequately, the NCRC says it may file a federal civil lawsuit.
The civil rights complaint is the latest in a series of lawsuits, regulatory investigations and congressional criticism of the rating firms' roles and conduct during the mortgage bond heyday years of 2003-05. In dollar terms, subprime and so-called Alt-A no-documentation loans accounted for 32% of all mortgage originations in 2005. Their share had been 10% two years before. Virtually all of those high-risk loans were sold to Wall Street firms for inclusion in complex bond structures that were resold, often in bits and pieces, to pension funds and financial institutions.
The traditional function of the rating firms has been that of Wall Street's "gatekeepers," evaluating the risks involved in the collateral backing bonds. Their assignment of investment-grade ratings to securities based on high-risk mortgages -- and their subsequent mass lowering of those ratings as default losses piled up -- has earned them scorching criticism from investors, regulators and Congress.
Much of the criticism focused on the fact that the firms are paid lucrative fees for their ratings by bond issuers themselves -- not investors -- thereby creating potential conflicts of interest. The firms also competed with one another to rate subprime loan securitizations, creating additional pressure to provide the most favorable possible ratings.
The Securities and Exchange Commission investigated the rating firms this year and found "serious shortcomings" at Moody's, Fitch and S&P, including lack of oversight of conflicts of interest. Investigators also turned up evidence that employees apparently knew that some of the mortgage pools they were rating were potentially toxic.
In one instant-message exchange, an analyst reportedly called a deal "ridiculous. . . . We should not be rating it." A colleague responded: "We rate every deal. It could be structured by cows and we would rate it."
Critics such as Berenbaum contend that without mass securitizations of high-risk mortgages -- with stamps of approval from the rating firms -- far fewer subprime loans would have been made, and far fewer minority home buyers would have ended up in foreclosure.
No comments:
Post a Comment