What is ‘Reverse Redline Mortgage Discrimination’?

Ok, I admit, I MIGHT have been wrong. It’s happened before (so rarely it’s hard to recognize at times) but this time I think I might be on the wrong side of the debate.

With the Subprime bubble decimating all within the blast range, I’ve never had a lot of sympathy for people that have gotten themselves into loans they couldn’t afford. I was of the opinion that they deserved what they got for not reading the fine print. That opinion is changing recently, since I’ve been hearing about a lending practice that gained popularity in the run-up to the Subprime meltdown.

Redline Discrimination – “Normal” redline discrimination occurs when businesses identify areas where they choose not to do business (either because it would unprofitable, or because other circumstances make doing business there extremely difficult). This happens a lot with inner-city and lower-income areas. Pizza deliveries won’t be made, newspapers aren’t delivered, and many ‘normal’ services are not offered to those areas/residents because of socioeconomic discrimination.

An Example: Insurance companies (before being forced to by the government) would not offer insurance to some parts of Florida, as it is repeatedly hit by storms. It was unprofitable, and they didn’t want to take the much higher risk of covering the people in that area.

The New Discrimination

With Reverse Redlining, a new practice arose of focusing on offering sub-prime mortgages to people in these economically challenged areas. On average, the people in these districts were less wealthy, less economically sophisticated, and were fairly easy prey for the sales pitches of the time, espousing that you could squeeze home equity money out of your home, and still make a profit as the home value went up.

Not to mention that the sub-prime mortgages provided the underwriter with more up-front fees and commissions (read: More MONEY) than a normal prime-rate loan. And as those underwriters planned to bundle and re-sell the mortgages as soon as possible, there was no risk to them that the mortgages would default.

It was VERY profitable, and so, became almost a standard practice throughout the industry. Many people that actually qualified for prime rate mortgages were talked into the more expensive, and more risky sub-prime variety.

Shining a Light on the Problem

Now, as the problem is starting to affect cities and states across the U.S. many state and local governments are seriously moving towards suing the larger banks for “predatory lending” practices, to try to recoup some of the lost tax revenues from these foreclosures. Many, if not all states are seeing projected revenue shortfalls, and the larger states (such as California) are taking actions now to try to deal with the expected lack of funds next year.

So far, cities like Cincinnati, Detroit, and others are putting together lawsuits against banks that used Reverse Redline Discrimination, in an attempt to ‘get back’ some of the money their practices eliminated.

I wish them luck, but I don’t know that it’ll be any time soon before the lawsuits bear fruit.

In the meantime, they still have to deal with the spiraling problems of economic downturn, continuing (and in some cases accelerating) housing foreclosures, and a constituency that is just trying to survive these economic storms.

A Change in Perception is Needed

I know that even amongst my fellow bloggers, my initial knee-jerk reaction was not unusual. People should understand what they are signing and what they are getting into. Personal responsibility is a strong belief of mine.

But even with that belief, the apparent ease and widespread application of this unfair lending practice has gone a long way to changing my mind about this. I still believe that the people being taken advantage of should have read the fine print better (and possibly gotten a second opinion) but I can understand how the could have been taken in, by a slick salesperson and the allure of having more cash from their existing home. Everyone has some responsibility in causing the housing meltdown, but maybe in this case, the homeowner isn’t as guilty as I originally thought.

Do you know someone that was ‘fast-sold’ a new mortgage? Or someone that went with a subprime instead of prime rate mortgage on a sales person’s recommendation? Leave us a comment and let us know.