Suzanne Sangree
Chief Solicitor, Adm. Division
City of Baltimore Dept. of Law
* * *
Sub-Prime Lending Revisited:
Local Costs, Local Action
Negative Equity – Scale
• US residential negative home equity: approx. $630 billion
• Comparison: Resolution Trust Corporation total assets approx. $395 billion
(inflation adjusted approx. $695 billion)
• Comparison: European sovereign and banking crises
4.9 million
in PLS
• Greek bailout: approx. €245 billion
• Spanish bailout : approx. €100 billion
• Cyprus bailout : approx. €10 billion
Systemically significant financial crisis
2
Negative Equity – Local Costs
* Negative equity: a costly problem even without default
• Approx. $90 billion per year excess interest expense (windfall to hedged
lenders)
• Reduced local spending including lower property maintenance
• Increased social welfare costs including health care
4.9 million
• Additional costs from foreclosures
and short sales
in PLS
• Cost to city, neighbors and borrower up to $43,000 per foreclosure
• Costs of foreclosures to neighbors: approx. $2 trillion to date, over half in
minority neighborhoods
• Indefinite reduction in property tax revenues from lower assessments
• Absentee investor purchases and transient rental neighborhoods
• Increased police, fire, and code enforcement costs
3
• Insert here a slide on negative equity in
Baltimore City
4
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
BALTIMORE DIVISION
____________________________________
)
MAYOR AND CITY COUNCIL
)
OF BALTIMORE,
)
)
Plaintiff,
)
)
v.
)
)
WELLS FARGO BANK, N.A.
)
)
and
)
)
WELLS FARGO FINANCIAL
)
LEASING, INC.,
)
)
Defendants.
)
____________________________________)
No. 1:08-cv-00062-JFM
COMPLAINT
John P. Relman
Glen Schlactus
RELMAN, DANE & COLFAX, PLLC
1225 19th Street NW, Suite 600
Washington, DC 20036
(202) 728-1888
George Nilson, City Solicitor
Suzanne Sangree, Chief Solicitor
City Hall, 100 N. Holliday Street
Baltimore, Maryland 21202
(410) 396-3297
Attorneys for Plaintiff
5
Predatory Lending Targeted Baltimore’s
African-American Neighborhoods
Wells Fargo’s sub-prime loans are
disproportionately concentrated in AfricanAmerican neighborhoods.
• 43% of its African-American mortgage
customers put in subprime loans in Baltimore
in 2007, but only to 9% of white customers.
• In 2006, the respective rates were 65% and
15%; in 2005, they were 54% and 14%; in
2004, they were 31% and 10%.
6
Foreclosures Also Disproportionately
in African-American Neighborhoods
Over 50% Wells Fargo’s Baltimore’s foreclosures from 2005 to 2009
in census tracts that are more than 80% African-American
• 62% were in tracts that are over 60% African-American
• 12% were in tracts that are 20% or less African-American
• The figures were virtually identical for Wells Fargo’s foreclosures
from 2000 to 2004
• Most of Wells Fargo’s mortgage lending in Baltimore was in white
neighborhoods
7
COMPLAINT
8
Wells Fargo Settlements
Baltimore’s case:
• Down payment Grants to Home Purchasers $4.5 million
•
City Foreclosure Fund $3 million
• Wells Fargo Investment Commitment to Qualified Borrowers in City
$425 million home purchase financing over 5 years
$125 million committed to low and moderate income borrowers.
Justice Dept. case:
• Compensation to Wells Fargo borrowers steered to subprime when they
qualified for prime loans--$250 million to compensate borrowers nationwide$15,000 per household. For loans originated between 2004 and 2009.
Both: New standards and staff training to prevent racial steering in lending
9
Foreclosure Filing Rates: Baltimore City 2005 - 2013
Calendar
Year
Unduplicated
Total
Filings as a
Unduplicated Residential Percentage
Foreclosure Parcels in of Residential
Filings
City
Lots
2005
3,007
194,825
1.54%
2006
3,020
195,403
1.55%
2007
3,801
195,615
1.94%
2008
3,592
195,911
1.83%
2009
5,902
196,290
3.01%
2010
4,360
195,803
2.23%
2011
1,890
196,491
0.96%
2012
2013*
2,726
5,000
196,719
193,099
1.39%
2.59%
10
Predatory Loans in PLS Trusts
• All subprime mortgages securitized in PLS
• Private Label Mortgage Backed Securities (PLS)
– Not issued by a GSE (Fannie, Freddie)
– Not guaranteed by Ginnie Mae
11
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
Commission File No.: 0-50231
Federal National Mortgage Association
(Exact name of registrant as specified in its charter)
Fannie Mae
Federally chartered corporation 52-0883107
12
Fannie Mae 10Q Loss Projection
• 61.8% of the loans in PLS Trusts will default
• 68.9% of the value of those loans will be lost
• Fannie Mae will lose $12 billion because it is
invested in PLS Trusts
13
PLS Loans
Zip Code
21201
21202
21205
21206
21209
21210
21211
21212
21213
21214
21215
21216
21217
21218
21223
21224
21229
21230
21231
21235
21239
Total PLS
1st loans
110
201
278
1284
254
110
331
513
841
529
1205
817
617
1002
556
1130
1127
924
329
2
684
Total
12844
Baltimore
14
PLS Loans in Baltimore City
Total 12,844
Disaster in the Works
15
PLS Foreclosures To Mirror
Predatory Lending
21206 Cedmont, Cedonia, > 60% African –American
1,284
21213 Belair-Edison
>80% African-American
21215 Park Heights
>80% African-American
1,205
21218 Waverly
>60% African-American
1,002
21224 Patterson Park
27% African- American
1,130
21229 Uplands, Irvington >70% African-American
814
1,127
Hard hit neighborhoods – majority African-American
16
Problem  Mortgage Loans In Private Label Securitizations
• Nationally, millions of loans in securitizations not guaranteed by federal
government
• Toxic loans not conforming to Fannie Mae, Freddie Mac or FHA standards
(option ARMs, interest only, subprime, etc.)
• Not effectively eligible for federal programs created since the housing
4.9 million
crash
in PLS
• Much more likely to be deeply underwater and to default than other loans
• Securitizations forbid loan sales and significantly limit or prohibit
principal reduction
17
Required Response – Principal Write Downs
• Federal Housing Finance Agency: PLS loans are the “crux . . .
of the problem we face in foreclosure prevention. If we are
going to stabilize the housing market, we have to address” PLS
loans.
• Martin Feldstein: “To halt the fall in house prices, the
government should reduce mortgage principal when it
4.9 million
exceeds 110% of the
home value.”
in PLS
• American Action Forum:
“Ultimately, America has a choice: Do we continue to insist that the
people who made bad bets in the housing market get punished . . . or
do we focus on creating policies that have the best chance of ending
our economic malaise?”
Practical and necessary policy for local recovery: principal reduction
18
Need for Government Response
• American Securitization Forum
• seismic economic challenges in housing market too great for private sector
loan modification solutions . . . expanded government programs may be
effective in addressing potential foreclosures that commercial and
contractual arrangements cannot prevent . . . ASF supports TARP purchasing
distressed loans from securitization trusts to give government the unlimited
4.9 million
discretion to modify the
loans
in PLS
• Securities Industry and Financial Markets Association
• disappointed that Treasury is de-emphasizing the asset purchase portion of
TARP . . . based on Resolution Trust experience, a key ingredient of a strong
recovery is price discovery through a transparent purchase program . . . hope
government will comprehensively revisit this important program
19
Lack of Federal Response – Different Interests
• 2008-09: Not in my district, Tea Party, TARP diversion to
national banking system
• Excellent programs but left to industry to implement-- do not
fit PLS loans (FHA short refinance, Hardest Hit Funds, HAMP)
• Local solutions can be
more focused and politically practical
4.9 million
PLS
• Lawrence Summers: in“Surely
there is a strong case for
experimentation, with principal-reduction strategies at the local
level.”
• Hal Varian (Google economist): “it makes sense to write down
mortgages differently based on local default conditions.”
Local costs demand local action
20
• Illinois:
•
•
Emerging State/Local Responses
Buy and Fix Underwater Loans
Mortgage Resolution Fund to use federal Hardest Hit funding to buy local underwater
loans at discounted market values and modify them
Partnering with not for profit groups
• Nevada:
•
•
Proposed Nevada Home Retention Program with same goals
Will use Hardest Hit funds and multistate AG settlement funds
4.9 million
in PLS
• Boston: Boston Community Capital
• Richmond, California:
• Use municipal condemnation power to acquire PLS loans
Buy the loans – not the homes – and fix them yourself
21
Solutions for Baltimore?
7,825
61% of 12,844 PLS mortgages in the City are going to
default and be foreclosed
22