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Morgan Stanley and the Costs of Predatory Lending

David Callahan

The Pew Research Center issued a deeply troubling study last year which found that black and hispanic households had suffered a much bigger decline in their net worth as a result of the Great Recession than white households. The net worth of hispanics went down by 66 percent between 2005 and 2009, blacks by 53 percent, and whites by just 16 percent.

Today, the ACLU shed new light on why people of color took such a big hit -- namely, because leading banks like Morgan Stanely systematically preyed on these communities and herded homeowners into subprime loans that drastically increased their risk of foreclosure. In filing a lawsuit against Morgan Stanley, the ACLU explained how the bank worked with the subprime lender New Century to hurt African-American homeowners:

Morgan Stanley systematically disregarded basic guidelines for safe lending and signaled its willingness to purchase loans that placed borrowers at elevated risk of foreclosure. In fact, Morgan Stanley often purchased loans containing multiple high-risk factors, and the bank’s appetite for extremely risky loans incentivized New Century to favor predatory loans – high-cost loans, sometimes made fraudulently, with risky features and unreasonably high chances of foreclosure.

Plaintiffs in the case received loans that were not designed to be economically viable. Rather, those loans extracted short-term fees and costs while diminishing their wealth and exposing them to an elevated risk of foreclosure. Borrowers in the Detroit region were more likely to receive these loans if they were African American or lived in African American neighborhoods.

Of course, we have heard about this kind of behavior before. Earlier this year, Wells Fargo was slapped with a $175 million settlement for pushing minority homeowners into subprime loans -- and even incentivizing mortgage brokers to trap people in higher interest rates; the higher the rate, the bigger the commission for the broker. Sick stuff -- or, as I described it in a post, "capitalism at its worst."

The revelation that the banking and mortgage industry conspired to rip-off the poorest people in America on a grand scale adds a new chapter to the long, sorry history of how this nation has made it extremely difficult for blacks and other people of color to build family wealth and assets -- to the point that the Pew study found that the median net worth of black households in 2009 was just $5,677.

That history goes back to the Civil War, when General Sherman had the idea of giving freed blacks in the South 40 acres and a mule in order to start to live out the promise of freedom. The policy was quickly abandoned and blacks got no wealth in the conquered Confederacy, despite over a century of helping create the South's wealth without compensation. 

In the 20th century, blacks would be excluded from much of the great wealth building associated with the rise of home ownership given that suburbs barred blacks from moving in and many banks wouldn't lend to blacks. For example, all the major suburban towns built by William Levitt, including the famed Levittown on Long Island, explicitly forbade non-Caucasian residents. The Federal Housing Authority, which insured many home loans, actively discriminated against minorities and encouraged the use of covenants that barred reselling homes to blacks. Meanwhile, building wealth through businesses was difficult for blacks given the widespread practice of "redlining" by banks.

The tragedy of large scale predatory lending in recent years is that it decimated what little household wealth blacks and hispanics have managed to build against all odds over recent decades. The ACLU's suit against Morgan Stanley will hopefully result in some kind of financial help for people who lost their homes. Longer term, though, this nation needs to address its long history of stopping key parts of its population from building financial assets.