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Dallas firm put black homeowners at higher risk of foreclosure, suit alleges

dallasnews.com | August 19, 2016

By Julieta Chiquillo

Dallas equity firm Lone Star Funds is being sued by a group of black homeowners in New York who allege the company pushed them toward foreclosure by misleading them about their mortgages.

A 53-year-old plaintiff told a federal court that the company's mortgage servicer would call him almost every day — sometimes two or three times a day — threatening foreclosure and pressuring him to accept an unfavorable change to his loan.

Lone Star's mortgage servicer, Caliber Home Loans, disputed the allegations and called the lawsuit "without merit."

The federal suit filed last week also targets the U.S. Department of Housing and Urban Development. At issue is the agency's sale of delinquent mortgages backed by the federal government to private investors such as Lone Star.

Those sales leave homeowners with fewer protections and disproportionately harm black families because their share of government-insured mortgages in New York City is higher than that of white families, according to the suit.

A HUD spokesman declined to comment. Meanwhile, Irving-based Caliber maintains that it treats borrowers fairly.

"Every Caliber loan modification is reviewed thoroughly without regard to race, gender, religious, or sexual orientation," executive vice president Marion McDougall said in a prepared statement.

Caliber helped 15,300 families stay in their homes last year by modifying their loans, according to the company statement.

But four homeowners seeking to turn their complaint into a class-action suit claim that Caliber:

Falsely told homeowners when it took hold of their loans that the transfer wouldn't change the terms of their mortgages.

Lied to homeowners by stating it doesn't offer a type of loan modification that would make payments affordable long term.

Violated federal law by refusing to review homeowners for such loan modifications.

Lone Star, a company that acquires troubled assets worldwide, is one of the top buyers of distressed mortgages sold by HUD. In the span of four years, it purchased over a fifth of the at-risk loans auctioned by the agency in national or regional bundles.

Mortgages can be a messy business. Here's a primer on what happens when the government becomes involved:

Why does the federal government insure mortgages?

One of HUD's goals is to increase homeownership among low-income Americans. So it insures loans for people whose credit scores aren't high enough to qualify for conventional mortgages. The loans are issued by private lenders approved by HUD.

Minorities use this service a lot. HUD statistics show that nearly half of all home purchase loans by blacks and Hispanics are mortgages guaranteed by the housing agency. That's compared with about a fifth of all mortgages by white households.

If a borrower defaults on a loan, HUD compensates the lender from a mortgage insurance fund. Borrowers pay a long-term premium to feed this fund as part of their government-backed mortgage.

The federal agency requires the lenders it works with to take several steps before resorting to foreclosure. Lenders must attempt to meet with the borrowers in person, inform them about free housing counseling and consider eligibility for reduced payments, among other things.

So why is HUD selling at-risk loans to investors?

The recession depleted the agency's mortgage insurance fund from $21 billion in late 2007 to less than $4 billion two years later. By 2012, the fund was in the red.

In an attempt to replenish the fund, HUD began packaging delinquent mortgages deemed unsalvageable to sell them at auction to private investors.

Loans are sold at a discount, with the condition that buyers defer foreclosure for a year. The idea is that the buyers will help borrowers stay in their homes because there are things they can do that HUD's lending partners can't. That includes reducing the principal or lowering the interest rate below the market rate.

But once HUD sells the mortgages, it no longer insures them. The cascade of foreclosure alternatives that it requires lenders to consider also goes away.

Critics of the program say some of HUD's lending partners refer loans for sale without checking all the boxes. A plaintiff in the New York case described being in the process of negotiating a loan modification with his original lender when he got a notice that HUD had sold his mortgage to someone else.

How do the investors make a profit from distressed mortgages?

Let's say an investor pays the government $90,000 for your $150,000 loan. Thanks to the markdown, the investor can lower the amount you owe and get you to resume your mortgage payments.

Foreclosures can be long, stressful and expensive. But investors turn those into profit, too.

Lone Star bundles distressed mortgages into bonds that it sells to investors. In 2014, it sold securities worth $10 billion in unpaid debt, The New York Times reported. Investors who buy the bonds get money quickly from the foreclosure of homes and their sale on the open market.

Buying delinquent loans and turning them into foreclosures has also become a strategy for single-family rental companies on the hunt for cheap properties, according to the Center for American Progress, a think tank in Washington, D.C.

Can you win in court if you sue a lender for racial discrimination but can't prove it was intentional?

Yes. The U.S. Supreme Court has upheld that a government agency or a company can be held liable for a practice that disproportionately harms a minority, even if the bias was unintentional. (The legal doctrine is referred to as disparate impact, and its affirmation by the Supreme Court originated from a case in Dallas.)

But proving that a discriminatory effect exists is only the first step. If the defendant shows that the practice is necessary to achieve a legitimate interest, the plaintiff must convince the court that there is a less discriminatory way.

While the New York homeowners allege disparate impact in the case against HUD and Lone Star, a court will decide whether the theory applies.

 

 

 

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