Counties file suit in housing crisis

Cobb, Fulton, DeKalb sue British bank, allege predatory lending

Three major metro Atlanta counties filed suit Thursday claiming predatory lending by a British bank caused hundreds of millions of dollars in damage through lost tax revenue from eroded property values that followed the housing collapse.

Cobb, DeKalb and Fulton counties sued London-based HSBC in U.S. District Court in Atlanta, claiming HSBC and affiliates abused minority borrowers by putting them into mortgages they couldn’t afford, or gouging consumers with pricey loans and high fees when they might have qualified for cheaper mortgages.

The suit is the latest example of counties or municipal governments attempting to assign blame and seek damages for an overheated housing market that contributed to the Great Recession, which put the squeeze on communities nationwide.

The complaint was filed under the federal Fair Housing Act and is likely unprecedented in Georgia, though at least two other U.S cities have filed similar suits against another major bank. The suit seeks unspecified damages.

A spokesman for HSBC in New York did not immediately return a message seeking comment.

The suit contends discriminatory practices caused the foreclosure crisis, which disproportionately affected minority borrowers. Predatory loans resulted in higher rates of foreclosure, which depressed overall housing values and reduced property tax revenue.

The housing crisis “has caused tremendous tangible and intangible damage” to the tax bases in Cobb, DeKalb and Fulton, the lawsuit states, and resulted in increased costs related to vacant properties “and many other injuries to the fabric of plaintiffs’ communities and residents arising from the resulting urban blight.”

As a result of depressed tax collections, cities and counties across metro Atlanta have grappled with service cuts — and in some cases property tax rate increases — to stay above water.

HSBC generated billions of dollars in fee income nationally during the housing boom by using improper sales tactics to lasso African-American and Hispanic borrowers into subprime loans, the lawsuit contends.

Cobb, DeKalb and Fulton allege that HSBC’s lending practices encouraged loan volume over quality, and the bank enticed new customers by offering credit cards, car loans and other consumer credit lines through targeted mailers and other marketing efforts. HSBC used these marketing efforts to “up-sell” clients to high-cost mortgages that were more lucrative to HSBC.

Foreclosures as a result of HSBC and other banks’ actions were a foreseeable outcome, the lawsuit states, and have left the metro counties with a glut of foreclosed and abandoned houses. Since the foreclosure crisis started, banks have refused to take ownership of vacant homes, leading to a “growing shadow inventory” of properties awaiting repossession, which further harms the counties, according to the suit.

The counties also cite foreclosure abuses, including the use of faulty documentation.

“We are seeing so many lawsuits because the banks got sloppy and abusive at times in their mortgage practices and their foreclosure practices. Now they have to pay for it,” said Kevin Jacques, a finance professor at Baldwin-Wallace College in Ohio and a former economist and regulator for the U.S. Treasury Department and the Office of the Comptroller of the Currency.

Georgia ranked sixth nationally in foreclosure rate in September, according to RealtyTrac, a real estate research firm.

During the housing boom, lenders bundled subprime loans into securities and sold them to other banks and investors. The implosion of this riskier mortgage market contributed to the global financial collapse. The continued moribund housing market and national high joblessness has resulted in elevated foreclosure rates across the income spectrum.

Officials in Baltimore and Memphis and Shelby County, Tenn., sued Wells Fargo in 2011 in two separate cases alleging lending discrimination, including similar allegations of so-called “reverse redlining.”

Redlining is a term describing systemic denial of or overcharging for credit or other services in minority areas. Reverse redlining is when lenders target minority communities by charging higher fees or offering inferior terms than what a borrower in a majority-white community with a similar credit profile might receive.

Add-on fees, higher interest rates and restrictive terms can put borrowers at higher risk of default. These loans are often resold to other investors or banks, passing along the risk of foreclosure to parties other than the loan originator, which means the original lender has less skin in the game.

Baltimore and the Tennessee cities also claimed in their suits the actions of Wells Fargo resulted in a host of ills to their jurisdictions, including increased foreclosures, blight and crime. Wells Fargo settled both cases this year.

HSBC entered the U.S. subprime mortgage market in a big way with its 2003 acquisition of Household Finance Co. The British bank eventually became among the nation’s largest subprime lenders.

Like Bank of America’s struggles with its purchase of Countrywide, Jacques said, acquisitions made during the housing boom or during the economic crisis have come back to haunt major banks now facing minefields of litigation.

Jacques, the former Treasury economist, said he expects more cases to arise like this one following the recent $25 billion national mortgage and foreclosure settlement.