Wells Fargo Targeted "Mud People" with "Ghetto Loans"

The NYT's published an interesting article over the weekend about how Wells Fargo deliberately targeted black communities in Baltimore and used shady business practices to push subprime loans, even for people who could qualify for conventional loans.

Wells Fargo, Ms. Jacobson said in an interview, saw the black community as fertile ground for subprime mortgages, as working-class blacks were hungry to be a part of the nation’s home-owning mania. Loan officers, she said, pushed customers who could have qualified for prime loans into subprime mortgages. Another loan officer stated in an affidavit filed last week that employees had referred to blacks as “mud people” and to subprime lending as “ghetto loans.”

...

Loan officers employed other methods to steer clients into subprime loans, according to the affidavits. Some officers told the underwriting department that their clients, even those with good credit scores, had not wanted to provide income documentation.

“By doing this, the loan flipped from prime to subprime,” Ms. Jacobson said. “But there was no need for that; many of these clients had W2 forms.”

Other times, she said, loan officers cut and pasted credit reports from one applicant onto the application of another customer.

These practices took a great toll on customers. For a homeowner taking out a $165,000 mortgage, a difference of three percentage points in the loan rate — a typical spread between conventional and subprime loans — adds more than $100,000 in interest payments.

The practice has also had a significant impact on the city in terms of foreclosures: half the properties Wells Fargo made "ghetto loans" for are now vacant.

Besides the blatant racism, what really bothers me is that it was Wells Fargo's established business practices that got it into trouble. The bank made more than $51 billion in subprime loans between 2005 and 2007 and who knows how much were based on predatory lending practices.

That is absolutely ridiculous, but I can't say I'm surprised.

Interesting tidbit from the article:

These loans, Baltimore officials have claimed in a federal lawsuit against Wells Fargo, tipped hundreds of homeowners into foreclosure and cost the city tens of millions of dollars in taxes and city services.

...

The toll taken by such policies, Baltimore officials argue, is terrible. Data released by the city as part of the suit last week show that more than half the properties subject to foreclosure on a Wells Fargo loan from 2005 to 2008 now stand vacant. And 71 percent of those are in predominantly black neighborhoods.

Judge Benson E. Legg of Federal District Court had asked the city to file the additional paperwork and has not decided whether the lawsuit can go forward.

It will be interesting to see how that plays out. I'm not aware of other examples of government agencies suing private organizations to recoup lost taxes and services for providing legal (albeit predatory) services.

Having friends and acquaintances in the mortgage industry, I'm not surprised at all.

I wouldn't get too wrapped up in the racial issue. Those people could be brown, white, pink or fuchsia. The only color the average broker would see is green.

By federal law, grand theft of multiple millions can be punished by death. Look, I am only suggesting here.

KingGorilla wrote:

By federal law, grand theft of multiple millions can be punished by death. Look, I am only suggesting here.

It's not theft if you can afford a good enough lawyer and a power suit.

I know that's totally true in San Francisco - the percentage of the city's residents who are black is now about 5-10% last time I saw, and loads are being forced not just out of the South of San Francisco, but out of the area all together. Everyone's getting foreclosed. NOT surprised at this at all. Banks make waaay more money out of people foreclosing than people that behave and earn well and can afford their mortgage.

Banks make waaay more money out of people foreclosing than people that behave and earn well and can afford their mortgage.

This is only true when the government gives them trillions to float the bad loans. In any kind of reasonable banking environment, loans that bad would have put them out of business.

Malor wrote:
Banks make waaay more money out of people foreclosing than people that behave and earn well and can afford their mortgage.

This is only true when the government gives them trillions to float the bad loans. In any kind of reasonable banking environment, loans that bad would have put them out of business.

I'm not sure that banks are making money off of foreclosed properties. Mortgages generate income. Foreclosed properties that sit empty for months and then get sold for a fraction of what they did a year a go don't.

I forget what podcast I was listening to, but they were making the argument the real problem is that banks are acting in their own, short-term interest and it's messing up everyone else. The banks are unwilling to adjust the mortgages because they would have to lower the book value of the property, resulting in a loss they'd have to account for immediately. If they foreclose on a property, they postpone recording that loss. So they'd rather take a hit later if they can make their quarterly results look better now.

OG_slinger wrote:

The banks are unwilling to adjust the mortgages because they would have to lower the book value of the property, resulting in a loss they'd have to account for immediately. If they foreclose on a property, they postpone recording that loss. So they'd rather take a hit later if they can make their quarterly results look better now.

It also doesn't matter. Most of the re-negotiated mortgages immediately fail anyway, because the owners couldn't afford what they bought in the first place.

Lovin' this Obama post-racial America! Thank God all of this kind of stuff stopped on November 4, 2008.

There was a study a few years ago centered around the Citigroup umbrella - including it's subprime lending wing Citi - which found essentially this same phenomenon. Citi in North Carolina was charging higher interest even to borrowers who could have qualified for regular loans. As a result, just under 100,000 borrowers, most of whom were black, were coaxed into predatory loans and ended up paying an average of $327 more per month for mortgages than people who were getting loans from a prime lender. On average, that added up to over $110,000 in excess payments over the life of those loans. So essentially people of color who would have qualified for lower interest loans that they would have been able to pay back far more easily were steered to higher cost loans by racist and greedy financial institutions, looking to make a quick buck at their expense.

I wonder if Limbaugh or Neil Cavuto or any of the other right-wing talking heads will admit that their suggestions last year that the financial crisis was the fault of minorities and policies like the Community Reinvestment Act was wrong and apologize. I won't hold my breath.

It sort've makes you wonder the business decision behind this. In general (and even in this thread) people are saying it doesn't matter what color a person's skin is, a mortgage broker will rip you off equally; but the facts don't support that. Here you have a clear example of a sanctioned business department designed to steal money from minorities by lying about their credit score and refusing to tell them about normal loans.

What's the business purpose behind that?

Someone said that banks make a LOT more money on foreclosures than on people who pay their mortgage consistently. This is absolutely untrue (except in the case Malor pointed out); banks actually lose tons and TONS of money on foreclosures. Writing down bad sub prime loans kills anyone who bought those bad loans.

However, it is more profitable to sell a house to a person who regularly pays their mortgage but does it on a loan 4% higher than what they should be paying.

So is the assumption that minorities are, in general, financially stupid and can be more easily manipulated into these types of deals? Do minorities typically trust "knowledgeable people" more than whites? It's got to be something along those lines. There needs to be a tie in where scamming minorites is profitable.

I'm not sure that banks are making money off of foreclosed properties. Mortgages generate income. Foreclosed properties that sit empty for months and then get sold for a fraction of what they did a year a go don't.

My father used to tell me that the Great Depression was the best thing that ever happened for the Bank of America. They had enough cashflow to survive, and were able to pick up huge swaths of real estate at extremely depressed prices. It turned them from a medium-sized, well-run bank into a titan.

Most of the re-negotiated mortgages immediately fail anyway, because the owners couldn't afford what they bought in the first place.

No, it's mostly because the re-negotiations are not actually making big changes in the mortgage. When principle is reduced, success rates are reportedly higher. Fraud is also an issue; I know you are loathe to blame the mortgage companies, but it's become clear that fraud was widespread and pervasive.

Seth wrote:

So is the assumption that minorities are, in general, financially stupid and can be more easily manipulated into these types of deals? Do minorities typically trust "knowledgeable people" more than whites? It's got to be something along those lines. There needs to be a tie in where scamming minorites is profitable.

That's really what it comes down to. Its not just minorities that this applies to, immigrants are really the first in line to get scammed for anything. When you open up a door to someone with the promise of new and shiny things they've never experienced before they'll jump on it no matter the cost because usually they just plain don't know any better. Let the fire burn you before you learn that fire is hot.

I remember years 1-5 of my family's immigration to Chicago, people were trying to rip us off left and right, houses, cars, you name it. Just because of an accent.

Seth wrote:

What's the business purpose behind that?

It's pretty easy. You get low-cost loans from the Federal Reserve. You then put that money to work by lending it out, using fractional-reserve lending to make it go much further than it normally would. You make lots of money, because you can resell most of the loans to Freddie or Fannie (government guaranteed!), or you can securitize them and let other people take the risk of default.

Once you are at that point, there is essentially no risk as long as housing prices keep increasing. Since the market of people who can actually pay is completely saturated, you have to go after people who can't pay. So your job becomes to convince them that they can pay. Since, demographically, blacks tend to be poorer than whites, the majority of the people who can't really pay are minorities.

So is the assumption that minorities are, in general, financially stupid and can be more easily manipulated into these types of deals? Do minorities typically trust "knowledgeable people" more than whites? It's got to be something along those lines. There needs to be a tie in where scamming minorites is profitable.

I wouldn't say minorities directly, I would say "poor people", the majority of whom happen to be minorities. Since poor people tend to have less education, it follows that it would be easier to convince them that the math was good. It's not like they were alone in being greedy and/or trusting.

Aetius, you answered my question in a very round-a-bout way -- I had to delete three full replies before I fully understood your post. =)

Targetting minorities for illegal loans is just a numbers game -- more people mathematically uneducated per thousand than in other communities. Makes sense from a business standpoint; it's like selling disc golf discs on a college campus vs a gated community. More dumb tools willing to pay 20 bucks for a slightly smaller piece of plastic than they already have.

Aetius wrote:
Seth? wrote:

So is the assumption that minorities are, in general, financially stupid and can be more easily manipulated into these types of deals? Do minorities typically trust "knowledgeable people" more than whites? It's got to be something along those lines. There needs to be a tie in where scamming minorites is profitable.

I wouldn't say minorities directly, I would say "poor people", the majority of whom happen to be minorities. Since poor people tend to have less education, it follows that it would be easier to convince them that the math was good. It's not like they were alone in being greedy and/or trusting.

Most poor people are white actually. US Census info on poverty (check p26)

I have a really hard time not believing that the people fraudulently altering the loan documents of anyone for their own benefit shouldn't have their heads placed on pikes and left on display where children and old ladies can throw rotten fruit at them. When future historians look back on Western civilization, the precipitous drop in heads on pikes is where they'll say the downfall started.

Am I reading that census correctly in that it says that 24.7% of all black people live in poverty, vs 9% for whites? If so, it's a little misleading to say that most poor people are white. Technically, accurate, true, but a little slanted.

You massage those numbers a bit to exclude rural areas and I bet that Baltimore, one of the cities Well Fargo was doing this, has a significantly higher poor black population (96,927) vs white (26,295).

Seth wrote:

So is the assumption that minorities are, in general, financially stupid and can be more easily manipulated into these types of deals? Do minorities typically trust "knowledgeable people" more than whites? It's got to be something along those lines. There needs to be a tie in where scamming minorites is profitable.

It's the same reason you see more payday loan places and rent-to-own shops in poor neighborhoods. Lack of financial understanding.

From my experience (anecdotal), minorities are much more likely to be first time buyers and trusting of the broker. Whites are more likely to be skeptical going into the process. They can still be scammed, it just takes a slicker Willy. Seniors are particularly vulnerable as well. I could take you through plenty of neighborhoods with lots of foreclosures full of white folks who bought too much house on a crappy loan.

My wife was a title agent for years. Near the end she would come home incredibly frustrated because she had to grit her teeth and walk people through signing documents that were obviously predatory. She always waited for the borrower to start asking questions that she could give loaded but legal answers to. Very few ever asked. They just signed. Plenty of them were middle class whites, some with 700+ credit scores.

If a bank is targeting blacks for predatory loans they are doing it due to a pervasive lack of fiscal and economic understanding in the community, not due to skin color. The same people who call them "ghetto loans" will have terms for trailer parks as well. Hell, they have terms for middle-class white suburbia that are surprisingly derogatory for their bread and butter customers.

They also do it because they never planned on servicing those loans. They roll them up and dump them.

LilCodger wrote:
Seth wrote:

So is the assumption that minorities are, in general, financially stupid and can be more easily manipulated into these types of deals? Do minorities typically trust "knowledgeable people" more than whites? It's got to be something along those lines. There needs to be a tie in where scamming minorites is profitable.

It's the same reason you see more payday loan places and rent-to-own shops in poor neighborhoods. Lack of financial understanding.

From my experience (anecdotal), minorities are much more likely to be first time buyers and trusting of the broker. Whites are more likely to be skeptical going into the process. They can still be scammed, it just takes a slicker Willy. Seniors are particularly vulnerable as well. I could take you through plenty of neighborhoods with lots of foreclosures full of white folks who bought too much house on a crappy loan.

My wife was a title agent for years. Near the end she would come home incredibly frustrated because she had to grit her teeth and walk people through signing documents that were obviously predatory. She always waited for the borrower to start asking questions that she could give loaded but legal answers to. Very few ever asked. They just signed. Plenty of them were middle class whites, some with 700+ credit scores.

If a bank is targeting blacks for predatory loans they are doing it due to a pervasive lack of fiscal and economic understanding in the community, not due to skin color. The same people who call them "ghetto loans" will have terms for trailer parks as well. Hell, they have terms for middle-class white suburbia that are surprisingly derogatory for their bread and butter customers.

They also do it because they never planned on servicing those loans. They roll them up and dump them.

That actually squares with what I've seen in sales in general. As much as I find this sort of predatory selling disgusting, I don't think it was a racially motivated malicious act.

More often what I've seen is this. Folks know that what they are selling is bad for the client, but also know that the financial motivation for selling it is too good to pass up. Folks generally don't like to think of themselves as sociopathic asshats so, rather than internalize the blame for passing on such a bad package, they blame the client for being unsophisticated. And the more you can dehumanize him/her, the easier it is to continue the practice.

Oddly enough, the area where I have seen this MOST in play has been with military recruiters.

JoeBedurndurn wrote:

Most poor people are white actually. US Census info on poverty (check p26)

Yes, I should have been more specific - I was referring to the group of poor people who have an interest in owning a home.

Seth wrote:

Am I reading that census correctly in that it says that 24.7% of all black people live in poverty, vs 9% for whites? If so, it's a little misleading to say that most poor people are white. Technically, accurate, true, but a little slanted.

You massage those numbers a bit to exclude rural areas and I bet that Baltimore, one of the cities Well Fargo was doing this, has a significantly higher poor black population (96,927) vs white (26,295).

Quite the contrary, it's misleading to say that the majority of people in poverty are minorities if 58% of the people in poverty are white. It's accurate to say that a randomly selected black is more likely to be in poverty than a randomly selected white person, or that the people living in poverty in the US are disproportionately non-white, but those aren't equivalent statements.

And yeah that wouldn't surprise me for Baltimore as the black population is more than twice the size of the white population (vs the overall national ratio of 6.1 white people : 1 black person).

For clarity's sake, I'm not saying that the Wells Fargo people aren't racist or anything like that. "Mud people" and "Ghetto loans" makes that pretty damn clear. Hell I'll even go one farther and say that screwing over people on racist grounds is worse than screwing people over because you're a greedy scumbag.

Yeah Joe I don't even really knew why I derailed it by questioning that. We already have a ton of "how to lie with racial statistics" posts littered around this forum, sorry about that.

I'm in the head->pike camp on this one.

Yeah, the real tragedy of this is how we sit back and take it. And in the next election, people will trot out the same arguments, and vote for the same people.

You massage those numbers a bit to exclude rural areas and I bet that Baltimore, one of the cities Well Fargo was doing this, has a significantly higher poor black population (96,927) vs white (26,295).

Remember the context - it supports your position. Baltimore was at almost 637,000 in 2008. 64% black population (in a state that's 64% white overall). 20% of the population was below poverty level in 2007, and if your breakdown is accurate, that's about 3.5 blacks for every white in poverty in the city. The black/white poverty rate ratio actually exceeds the ratio of blacks to whites.

If you want to rip off uneducated poor minorities, Baltimore is near the top of your list of areas to set up shop.

Great thread title!

Uh... also Wells Fargo are racists, et cetera.

So... what is going to happen to those Wells Fargo employees?

LeapingGnome wrote:

So... what is going to happen to those Wells Fargo employees?

I'm gonna guess "large severance package".

OG_slinger wrote:

I forget what podcast I was listening to, but they were making the argument the real problem is that banks are acting in their own, short-term interest and it's messing up everyone else. The banks are unwilling to adjust the mortgages because they would have to lower the book value of the property, resulting in a loss they'd have to account for immediately. If they foreclose on a property, they postpone recording that loss. So they'd rather take a hit later if they can make their quarterly results look better now.

Was it this one? I used this for a paper I wrote and it was incredibly useful.

Actually, looking at the second half of your paragraph, it probably isn't this one, but if anyone is interested in hearing about the screwiness of those that screwed us, have a listen. The last thing I would add is a small part from the aforementioned paper about Citigroup with regards to the regulation questions brought up Aetius and others.

"The crucial legal economic event of the 1980s was the repealing of the Banking Act of 1933, one of the underpinnings of economic policy in the United States. Getting rid of the Act meant that different banks now able to merge because of the 1980 Act could merge with other banks that had no similar interests to their own. It was during this time that Citigroup was created – one of the “victims” of the 2008 crisis, who then received a combined amount of $45 billion tax payers' dollars and the government promised to back up to $306 billion dollars of bad loans (in other words, loans built on usury) that the bank had on the books. "

(the 1980 act i referenced was the Depository Institutions Deregulation and Monetary Control Act - allowed banks to charge whatever interest rate that pleased them).