Kevin Funnell at Bank Lawyers Blog is a bit cynical about the Department of Justice’s headline-ready threats of enforcement action:
[The DOJ claims] appear to be based upon consumer advocates’ claims that the bank takes better care of foreclosed-upon real estate it owns in neighborhoods where white people live than it does in areas where minorities live. I suspect that the bank will assert that (a) any rational real estate owner is only going to invest money in a piece of real estate where the owner has a realistic chance of recouping that investment through a higher sales price, (b) that such recoupment decisions are made on a property-by-property basis based upon objective data like recent comparable sales prices and fair market valuations, (c) that the economic reality-driven facts of life are that many more such properties are located in majority-white neighborhoods than in minority neighborhoods, and (d) there has been no intent to discriminate, merely to minimize losses…. As we’ve previously noted, the DOJ is on a jihad against lenders based upon “disparate impact” theories that the DOJ knows, in its heart-of-hearts, are highly fragile when exposed to the light of logic, the kind of logic applied by the US Supreme Court. Justice will likely pursue Wells Fargo and try to squeeze some dough out of it before the highest court eventually shuts down this racket.
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We are buying a Wells Fargo-owned house, and they seem to take better care of their houses than other banks, even within the same neighborhood. I wonder if that relative difference carries over to lower-income neighborhoods.
I would also guess that in lower income neighborhoods (which sadly are often inhabited by minorities) the borrowers left with much more debt relative to the prospective sale price than in more affluent neighborhoods where people are more concerned with their credit and appearances.
Isn’t this “logic” describing how we got into the housing mess to begin with? Long established lending rules were thrown out the window because too many people couldn’t meet them and the DOJ threatened the lenders with that “discrimination” thing. I know “history repeats” but it usually does so over several decades, not a few years.
And just as an aside, I think the housing “bubble” continues to have a big impact on our unemployment stats…you make 50 widgets in a short period of time when only 30 were required (and 10 of those got re-po’d).
As the maintenance levels of various houses differs at the time that the bank acquires them and it makes the most economic sense to spend more money on the properties with the greatest return on investment, what is a bank dto do?. Besides the houses from poorer neighborhoods tend to be less well maintained on average as the previous owners typically have less money that can be budgeted to maintaining them. For example the frequency of re-painting or re-roofing a house probably correlates directly to the income of the owner.
Using disparate impact alone ignores motivation. If I take your wallet, I am a bit richer. If a merchant refuses to sell to a minority, he is poorer by the lost profit. Wells Fargo has a strong economic interest in unloading foreclosed property wherever it is.
If fixing up foreclosed property were profitable, and Wells Fargo did not make the investment, then people would buy the handy-man specials at cut rate prices. Market mechanisms would undo Wells Fargo bad behavior, if it was in fact bad.
Thomas Kuhlman:
You are correct. It’s damned-if-you-lend, damned-if-you-don’t.
Lend, and you’ve been “predatory” and need to be regulated.
Don’t lend, and you’ve been “racist” and need to be regulated.
But nobody’s going to look at this too closely because that would require frank discussions of human behavior. We will not have that. So the crazy continues.
“frank” discussions…no pun intended?
Lending standards were long-standing (20% down, monthly payments not to exceed a % of gross income). So we throw all that out so people could buy houses they could not possibly afford (lest the lenders be accused of “discrimination” by the DOJ…I recall the entire discussion).
So that led the housing industry to build more houses than were needed. Pretty much explains the unemployment situation I think (that industry needs a lot of people when you go up and down the chain).
And of course we have the fallout…huge inventory of unsold houses owned by by people that couldn’t afford them…and now the lending standards have gotten so tight that people that could afford them under the old rules will likely go away empty.
So now we get to the DOJ complaining about maintenance on foreclosed properties built in areas where they never should have had houses (a recent show showed that any copper in them was gone anyway)…
pathetic…