ASKED & ANSWERED: Michael Steinberg on Morgan Stanley discrimination suit

By Steve Thorpe Legal News On Monday, Oct. 15, the American Civil Liberties Union and others filed suit on behalf of five Detroit residents and Michigan Legal Services, claiming that Morgan Stanley discriminated against black homeowners and violated federal civil rights laws by providing strong incentives to a subprime lender to originate mortgages that were likely to be foreclosed. The complaint asks the court to certify the case as a class action, claiming that as many as 6,000 black homeowners in the Detroit area may have suffered similar discrimination. Michael J. Steinberg has served as the legal director of the American Civil Liberties Union of Michigan since 1997 and is responsible for overseeing all litigation taken on by the ACLU throughout the state. Thorpe: What is the scope of the problem you're addressing? Steinberg: The scope is very wide. We're attempting to address a problem that afflicted people throughout the country. What we're hoping to do is hold accountable the people at the top on Wall Street who played a role in destroying neighborhoods in the city of Detroit. Banks like Morgan Stanley made millions and millions of dollars, but it's our clients, the victims of predatory lending, who paid the price. Thorpe: You contend that these customers were targeted. How did marketing a mortgage differ in the last decade from the old lending model? Steinberg: It used to be that lenders and banks made loans to individuals and they wanted the buyers to afford to be able to pay them back. In the last decade there was a perverse incentive to entice customers into buying the riskiest loan possible and many deceptive practices were used to get them into those loans. The banks and the lenders didn't suffer when the individuals couldn't repay the loan because they had already bundled them and sold them as securities and made their millions on the backs of the borrowers. Thorpe: This suit targets an investment bank directly, rather than the lender whose loans they bought. Can you explain that strategy? Steinberg: Morgan Stanley worked hand in hand with the lender, in this case New Century, to insure that as many high risk, high interest loans as possible were made in areas like the city of Detroit. There was a huge appetite for these sub-prime, high risk loans. Morgan Stanley would buy them up from New Century, bundle them into a security and sell them on the market. Also, the higher the risks of the loans the more fees Morgan Stanley was able to take and the more securities they could sell. There was a symbiotic relationship between the lender and the bank and there was tremendous pressure on New Century to make high risk, high interest loans. Thorpe: Walk us through how the mortgage consumer was misled or exploited. Steinberg: They were deceived many times into assuming loans they could not repay. Many tactics were used. First of all, the lenders were going into Detroit where traditionally it had been difficult for residents to get mortgages. They preyed on individuals by enticing them into high interest, high risk mortgages. Often they lied saying, for example, 'Yes, of course, your interest rate is going to go down when you refinance, and the taxes will be included in your monthly payments.' In fact, their taxes were only included in their monthly payments for two years. They almost all had adjustable rate mortgages. While it may have been about the same as their former mortgage for the first couple years, the payment would steadily go up and up until the interest was in the mid-teens or even the high teens. If they tried to refinance and get out of the subprime mortgage, there was a prepayment penalty. There were also loans that were no longer based on documentation, but instead on 'stated income.' The lenders would encourage them to fudge the numbers and claim more income than they actually had. They worked with appraisers to get appraisals that were much higher than the true value of the property. So you get huge high interest loans that are extremely risky and a third or more of the homeowners defaulted. Many of the rest lost their nest egg. These were often people who didn't owe anything on their house and owned it outright. Mortgage brokers would come to their house and say, 'I see you need your roof fixed. I can get you some easy free money.' The homeowner would get into one of these predatory loans and eventually lose their house. Thorpe: From your viewpoint, what would be the most positive outcome of the suit? Steinberg: We want to send a message to Wall Street that there are consequences to their actions on Main Street. We want them to follow the Fair Housing Act and Michigan's Elliott Larsen Civil Rights Act. They cannot engage in practices that have a disparate impact on people of color. That's what happened in Detroit. Everybody suffered from the foreclosure crisis, but communities of color suffered particularly harsh consequences. If we win this case, there will not be the incentive to engage in these predatory practices in the future. We're seeking class certification and suing for damages. Morgan Stanley was unjustly enriched through illegal practices and that money should go back to compensate the victims. Published: Wed, Oct 24, 2012

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