In a potentially groundbreaking lawsuit intended to stem foreclosures in Baltimore, Mayor Sheila Dixon's administration is suing a leading mortgage provider for what the city says has been a pattern of predatory lending in black neighborhoods.
The lawsuit, which the Dixon administration plans to file today in U.S. District Court, alleges that California-based Wells Fargo Bank sold higher-interest subprime mortgages to blacks more frequently than to whites and that the practice, known as reverse redlining, violates federal housing law.
Lenders are increasingly coming under legal attack from borrowers and investors stung by the subprime mortgage crisis, but Baltimore's lawsuit could be the first in the nation in which a city is attempting to recapture costs associated with foreclosed homes that wind up vacant.
If successful, the lawsuit could thrust Baltimore and the Dixon administration into the forefront of the debate over what government can do to address a problem facing cities across the country. The mayor is expected to formally announce the lawsuit this afternoon.
"They knew that the minority community was so desperate to get loans because they had been denied credit for so long," said John Relman, a partner at the Washington law firm Relman & Dane, which the city hired to help litigate the case. "They knew that people were so ready to say yes to anything that they went in there and charged them higher rates."
In a statement, Wells Fargo said race does not play a factor in its pricing.
The National Association for the Advancement of Colored People filed a lawsuit in July in U.S. District Court in Los Angeles alleging that the industry had discriminated against black borrowers. And in 2006, Ameriquest Mortgage Co. settled a lawsuit brought by 49 states that accused the company of violating consumer fraud statutes.
But the lawyers involved in Baltimore's case and several advocates could not name another city that has sued a lender under the federal Fair Housing Act to recover costs incurred from vacant properties.
Eric Halperin, director of the Washington office of the Center for Responsible Lending, said Baltimore's lawsuit is an extension of a long-standing practice in which plaintiffs have used the housing act in attempts to thwart unfair real estate practices.
"The idea of bringing these cases against the lenders is something that is relatively new," Halperin said. "As long as the city can prove that it was harmed and that the harm was the result of the illegal conduct by the lender, it seems to me that is squarely within the fair housing law."
Though Baltimore's lawsuit does not estimate the financial cost of the foreclosure crisis to the city, Solicitor George Nilson, whose department will oversee the suit, said Baltimore has lost tens of millions of dollars - in unrealized property tax revenue, added police and fire protection and legal costs - because of homes abandoned after foreclosure.
"We've identified a predatory lending practice that we feel confident we can prove occurred and that we know for a fact is illegal," said Dixon spokesman Sterling Clifford. "We're going to hold lending institutions responsible."
Since 2000, more than 33,000 Baltimore homes have been subjected to foreclosure filings. Wells Fargo, one of the two largest mortgage providers in the city since 2004, made 1,285 loans a year totaling more than $600 million from 2004 through 2006. City officials say most of the company's loans that resulted in foreclosure were made in black neighborhoods.
In 2005 and 2006, two-thirds of the company's foreclosures were in census tracts where at least 60 percent of the residents were black, according to the lawsuit. The company's foreclosure rate in black neighborhoods is nearly the double its overall average in the city, the lawsuit says.
"Wells Fargo has been, and continues to be, engaged in a pattern or practice of unfair, deceptive and discriminatory lending activity in Baltimore's minority neighborhoods that have the effect and purpose of placing inexperienced and undeserved borrowers in loans they cannot afford," the lawsuit says.
Relman said 70 percent of the loans sold by Wells Fargo that ended in foreclosure had fixed interest rates. Because the rates were fixed, he said, it should have been easier for Wells Fargo to foresee that many of its borrowers did not have the means to pay them back.
Debora Blume, a spokeswoman for Wells Fargo, said in statement that race is not a factor in the way the company makes loans, only credit risk. She said the company does not comment on pending litigation.
"We do not tolerate illegal discrimination against, or unfair treatment of, any consumer," the statement read. "Our loan pricing is based on credit risk. We are committed to serving all customers fairly - our continued growth depends on it."
Nearly 450,000 properties across the country tracked by the Mortgage Bankers Association were in some stage of foreclosure during the third quarter of last year, 30 percent more than in the second quarter, according to the lawsuit.
In Baltimore, the problem has been particularly acute: The number of "foreclosure events" - such as notices of default and foreclosure sales - increased fivefold from the first quarter to the second quarter of 2007.
Joanna Smith-Ramani, co-chair of the Baltimore Homeownership Preservation Coalition, said mortgage foreclosures are a huge problem for families trying to build wealth. The organization is a coalition of about 60 nonprofit groups, city agencies and industry representatives.
"We know there's really a very clear racial dynamic in the lending," she said. "It's ruining families' opportunity for financial opportunities and security."