I stumbled across an interesting article in the BBC called The US sub-prime crisis in graphics. Following is my annotated version of their lead graphic.
The New Model of Mortgage Lending
Click on chart for sharper image.
Anyone wondering why there was so much fraud happening need only look at the above chart. Poor working class cities like Cleveland, Ohio and states like California where liar loans were an accepted practice were veritable breedings ground for fraud.
How Subprime Lending Affected Cleveland
click on chart for sharper image
From the BBC article …
For many years, Cleveland was the sub-prime capital of America. It was a poor, working class city, hit hard by the decline of manufacturing and sharply divided along racial lines. Mortgage brokers focused their efforts by selling sub-prime mortgages in working class black areas where many people had achieved home ownership.
They told them that they could get cash by refinancing their homes, but often neglected to properly explain that the new sub-prime mortgages would “reset” after 2 years at double the interest rate. The result was a wave of repossessions that blighted neighbourhoods across the city and the inner suburbs.
By late 2007, one in ten homes in Cleveland had been repossessed and Deutsche Bank Trust, acting on behalf of bondholders, was the largest property owner in the city.
After Creative Financing Comes Creative Lawsuits
Given the duration and severity of the housing bust, it is not surprising that lawsuits and legal probes are pouring out everywhere. Here are a few recent ones.
Black neighborhoods in Baltimore were disproportionately affected by the subprime mortgage fallout, according to a federal lawsuit filed Tuesday by the city, which is attempting to recoup the costs of maintaining neighborhoods wracked by foreclosures.
The lawsuit alleges Wells Fargo Bank NA engaged in a pattern of predatory lending practices in Baltimore’s poorest neighborhoods, leading to foreclosure rates nearly double the citywide average.
“When you have foreclosures, the property values drop, and you get less tax revenue. There’s fire and police costs that come from abandoned and boarded-up and vacant properties,” said John P. Relman, a Washington-based attorney who is representing the city in the lawsuit. “It leads to crime and drugs and school problems as the community is being destabilized.”
Cleveland is suing 21 of the nation’s largest banks and financial institutions, accusing them of knowingly plunging the city into a financial crisis by flooding the local housing market with subprime mortgage loans to people who could never repay.
City officials hope to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses.
“To me, this is no different than organized crime or drugs,” Jackson said in an interview with Plain Dealer reporters and editors. “It has the same effect as drug activity in neighborhoods. It’s a form of organized crime that happens to be legal in many respects.”
The Baltimore and Cleveland efforts are believed to be the first attempts by large cities to recover losses blamed on the foreclosure epidemic, which has particularly plagued Ohio.
But Cleveland’s suit is even more unique because the city has based its complaints on a state law that relates to public nuisances. The suit also is far more wide-reaching than Baltimore’s in that it targets the investment banking side of the industry, which feeds off the mortgage market.
[Cleveland Law Director] Triozzi acknowledged the lawsuit, with its unique nature and 21 large defendants, could move slowly. He also expects the banks will request the case be moved to federal court. “I understand fully what we are up against here,” the law director said. “We would not be doing this if we did not believe we had a sound legal argument to stand on.”
Jackson, asked if long litigation would be worth the city’s time and money, replied: “We’re in this for the long haul. I trust Director Triozzi will tell me when to hold them or fold them.”
Judge Corrigan will have to decide “how far up the food chain” to go in determining responsibility, said Cleveland State University Law professor Kathleen Engel, an expert on mortgage-backed securities. She believes the city can make a case against the investment bankers.
Ohio Attorney General Marc Dann also is considering a state lawsuit against investment banks. Dann said he is investigating “some of the very same people” identified in the city’s suit.
Dann said a state filing is months away and probably wouldn’t be submitted as a public-nuisance case. But he commended Jackson and Triozzi’s “creative” approach.
“There’s clearly been a wrong done, and the source is Wall Street,” Dann said in a phone interview. “I’m glad to have some company on my hunt.”
The defendants include Deutsche Bank, Wells Fargo, Ameriquest Mortgage, Countrywide Financial, HSBC Holdings, JPMorgan Chase, Washington Mutual, Citigroup, Bank of America, NovaStar Financial, Bear Stearns, IndyMac Bancorp, Credit Suisse, Fremont General, GMAC-RFC, Goldman Sachs, Greenwich Capital Markets, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Option One Mortgage.
What the lawsuit alleges
The firms are accused of creating a public nuisance by making mortgages available to people who had “no realistic means of keeping up with their loan payments.”
New York and Connecticut are investigating whether Wall Street banks failed to disclose sufficient information about risks involved in investments linked to subprime loans, Connecticut’s attorney general said.
The new focus in existing probes of the mortgage industry is whether banks left out material details in their disclosures about the risks posed by extremely high-risk loans, deceiving credit-rating agencies and investors, Connecticut Attorney General Richard Blumenthal said today in a interview. The states are also investigating lax underwriting standards, he said.
“The point is whether the banks knowingly withheld information so the disclosures may have been deceptive or misleading,” Blumenthal said. “These questions are front and center in an ongoing investigation that has reached no conclusions.”
Fraud and bubbles go hand in hand. Fallout from this will be brewing for years.
Mike “Mish” Shedlock
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