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Cleveland sues 21 banks over foreclosures

Published Jan 19, 2008 11:14 AM

Wells Fargo used to be associated with a song in a mindless musical. For today’s workers, however, the name is becoming symbolic of the economic hurricane of home foreclosures. Now, Wells Fargo and 20 other predatory mega-lenders are the subject of an important lawsuit filed under Ohio’s “public nuisance” law by Cleveland’s African-American mayor, Frank Jackson.

The lenders “were living large off the misery and suffering of people,” Jackson stated at a news conference Jan. 11. “They are going to have to pay for it.” The suit seeks hundreds of millions of dollars in damages.

“They” include some of the biggest world players on the chessboard of finance capital. Wells Fargo is second in the number of foreclosure filings in Cuyahoga County—4,000 in the last four years. But the suit also names the number one villain—Deutsche Bank Trust with 4,750 foreclosure filings—as well as Ameriquest Mortgage, Countrywide Financial, HSBC Holdings, JPMorgan Chase, Washington Mutual, Citigroup, Bank of America, Bear Stearns, Goldman-Sachs and others. Altogether, Cleveland suffered 7,500 foreclosures in 2007, compared to 120 in 2002.

How did these huge firms, none of them based in Northeast Ohio, become the major culprits in a scandal threatening some 20,000 homeowners in the Cleveland area alone? The process is known in financial lingo as securitization. The first loans to be securitized were prime loans. By 2006, however, 80 percent of all subprime loans, valued at well over half a trillion dollars, had become securitized.

What does that mean for working class families trying to keep their homes?

Cleveland State University Law Professor Kathleen Engel, an expert on the legal aspects of predatory lending who believes the mayor’s lawsuit has merit, explained securitization as it impacts borrowers who fall victim to subprime lending schemes:

“Securitization is the financial technology that integrates the market for residential mortgages with the capital markets. In securitization, investment banks take pools of home loans, carve up the cash flows from those receivables, and convert the cash flows into bonds that are secured by the mortgages. The bonds are variously known as residential mortgage-backed securities (RMBS) or asset-backed securities (ABS).

“Securitization goes by the moniker ‘structured finance,’ in part because a securitizer structures the transaction to isolate the loan pool from the original lender. This is accomplished by selling the loan pool to a special purpose vehicle, or SPV, that is owned by, but legally distinct from, the lender. The SPV then resells the loan pool to a second SPV, which is also independent of the lender and takes title to the bundle. The second SPV is typically in the form of a trust.

“The vast majority of subprime loans are now securitized, leading to claims that securitization facilitates predatory [lending]. ... Nonetheless, the entities involved in securitization have resisted addressing such concerns and continue to serve as major conduits for predatory loans.

“The resulting cost to borrowers is substantial.”

Substantial also are the costs to cities, as distressed homeowners default on loans. This erodes a city’s tax base, causing neighborhoods to deteriorate, and explains why city governments are getting involved in this struggle.

One of the groups blasting the banks is the East Side Organizing Project. ESOP President Inez Killingsworth, speaking last March before a congressional hearing, charged that “the banking industry would like you to believe they pulled out of the Cleveland communities because of the economy. Ladies and gentlemen, they pulled out because they could make MORE money vis à vis their subprime affiliates.

“For example, in 2002, Argent Mortgage Company—the wholesale lending arm of ACC Holdings which also owns Ameriquest Mortgage company—had no presence in the city of Cleveland. Since 2003, however, despite only offering a subprime loan product, they have been the largest lender in Cleveland. I would suggest to you that Argent’s surge in Cleveland is the result of years of local banks turning their back on low- to moderate-income, often minority residents.”

Ameriquest and Argent now have 1,600 foreclosure filings against Cuyahoga County residents. Killingsworth explained the cost in human terms. “I can’t walk down any street in my neighborhood without seeing a vacant, often unboarded, home. Many of these homes used to belong to my friends. I remember visiting them not that many years ago to celebrate the holidays or have a cookout during the summer. Today, those fond memories have been replaced by the stark reality that the lending industry ripped off my friends and me.”

Since this testimony was given, months before the subprime meltdown made front-page headlines, things have gotten incredibly worse. Now there is speculation that many cities and states will have to follow Mayor Jackson’s lead and take legal action to prevent financial ruin. In fact, the mayor’s lawsuit followed a series of court rulings in Ohio against some of the same predators. Baltimore had sued Wells Fargo days earlier over the same issue.

While all these efforts are helpful and needed, the crisis calls for more drastic measures. The time is now for an immediate moratorium on all home foreclosures.

E-mail: mgrevatt@workers.org