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Lawsuit Paints Loan Crisis In Black, White and Brown
In what appears to be 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 ratings agencies, charging that their inflated ratings on subprime mortgage bonds disproportionately caused financial harm to African American and Latino home buyers.

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 agencies "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 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 percent of mortgages extended to Latinos and 55 percent of loans to African Americans were subprime -- a rate "three to four times that of non-Hispanic whites."

Because the loans often came with terms that increased borrowers' probability of default -- upfront teaser rates followed by unaffordable payment adjustments, no required documentation of applicants' incomes or assets, 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 says, "losses for whites would be 44.5 percent higher and losses for people of color would be about 24 percent lower." ...

...Critics such as Berenbaum argue that without Wall Street's mass securitizations of high-risk mortgages -- with stamps of approval from the ratings agencies -- far fewer subprime loans would have been made and far fewer minority homebuyers would have ended up in foreclosure.