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Housing Group Taps Dubious Data, HUD Ties to Demand Millions from Banks

First in a series

The National Fair Housing Alliance held a pair of teleconferences over the past two months during which its president, Shanna Smith, accused two of the nation's biggest banks of a deplorable corporate crime: racial discrimination.

Bank of America (BAC) and U.S. Bancorp (USB) did a terrible job of maintaining homes they'd foreclosed on in predominately black and Hispanic neighborhoods, Smith declared, even as they were fastidious about upkeep in mostly white areas. The claims were a repeat of those the Washington, D.C.-based nonprofit has made during more than a half-dozen other teleconferences over the last year.

During its public events, the NFHA has pointed to photos of run-down properties, trash-strewn yards and even one of a dead dog, to bolster its claims that poor property management by banks is dragging down entire minority neighborhoods. The NFHA nicknamed one such property, a Baltimore foreclosure, "The Rat House." Not only are such homes hurting property values but they're also contributing to community health epidemics, like asthma, allergies, lead poisoning and obesity, Smith told the journalists and others assembled by phone.

"The banks have liability for the harm that they're causing. If you live next door to an REO home, you are being injured and the banks have liability for that," Smith said in an October interview. REO, or real-estate-owned, is an industry term for homes seized by banks through foreclosure.

The NFHA is seeking tens of millions of dollars from Bank of America and U.S. Bank as a result of their alleged misdeeds. In April, it finalized a $42 million settlement with Wells Fargo over similar claims that provided a financial windfall for the NFHA and its local member organizations.

A review of the NFHA's cases raises doubts about the validity of its claims, however. The group has disclosed addresses for only a fraction of the properties it alleges the banks have neglected, but a review of those it has released indicates that NFHA regularly misidentified the institution legally responsible for maintaining specific homes. In some cases, it conflated the banks responsible for maintaining properties with those that were simply serving as trustees for mortgage-bond investors. In others, it faulted banks for damage that occurred before they took possession of properties.

Not in dispute is the leverage the NFHA has gained in its dealings with banks from its close ties to supporters in the federal government. Unusual among Washington agencies, the Department of Housing and Urban Development both funds housing discrimination investigations by nonprofits, including by the NFHA, and provides the venue for them to negotiate their claims.

Sara Pratt, the HUD official responsible for investigating and resolving the NFHA's complaints, and who oversaw its settlement with Wells Fargo, is a former NFHA staffer and consultant. HUD and the NFHA dismiss the significance of Pratt's former affiliation; bank industry representatives counter that it poses a troubling conflict of interest.

"Having a senior HUD enforcement official supervising these cases who is a former NFHA employee undermines the credibility of this process," says Andrew Sandler, a Washington, D.C. attorney who chairs Buckley Sandler LLP and represents big banks but is not directly involved in the housing claims.

Testing Legal Boundaries

Sweeping, controversial civil rights cases are a stock-in-trade for the NFHA under Smith. A blunt Toledo native who worked her way from Ohio housing activist to Washington powerbroker, Smith has proven adept at marshaling the resources of scores of groups around the country to magnify the NFHA's leverage.

Founded in 1988 as a volunteer effort by five fair housing groups, NFHA was instrumental in the 1990s in bringing to the national consciousness banks' practice of redlining, or refusing to lend in minority neighborhoods. The group raised its profile further by conducting fair housing "testing," in which it dispatched volunteers to apply for loans, shop for insurance and monitor whether homebuilders were complying with the Americans with Disabilities Act. When the group has found what it regards as evidence of discrimination, it has filed complaints with the HUD and courts, relying on proceeds from its victories to help fund its operations.

With 21 full-time employees, NFHA calls itself the nation's preeminent fair housing advocate and actively courts big legal fights. In November it partnered with billionaire George Soros' Open Society Institute and the Ford Foundation to pull together enough cash to convince the town of Mt. Holly, New Jersey to drop a Supreme Court challenge to disparate impact the hot-button legal theory that banks and other real estate service providers can be held liable under the Fair Housing Act for discrimination that's entirely unintentional. Quashing Mt. Holly's suit has, at least temporarily, protected a legal doctrine on which the NFHA regularly relies.

Despite the controversy surrounding the NFHA's tactics, banking industry sources acknowledge that high concentrations of foreclosed properties harm neighborhoods. Mortgage servicers, who are responsible for the upkeep of homes in foreclosure, have long recognized that even well-maintained vacant properties are at heightened risk of arson and vandalism.


(10) Comments



Comments (10)
It appears as if tbaize has some personal interest in the activities of both of the entities being discussed. tbaize indicates that I am simply wrong. You may be interested to know that I have probably been a community banker longer than you are old. I have 61 years plus in the industry. I am not wrong about the cause of the debacle in the housing lending. It was at the insistance of certain legislators and regulators that wanted to have everyone a home owner. The result was approval of buyers who did not have to present any financial data, the historical requirements for approval of buyers with loans guaranted by one of the government agencies was violated. Debt to income ratios were increased, percentage of monthly payments to income was increase from a 35% to 46% and in some cases more because certain short term payment amounts were excused. To encourage non profits to extract funds from tax paying entities is a double cost to the american taxpayer. The profit company takes the deduction as a cost of doing business so that their tax payment is reducted while the non profit receiving the funds pays nothing in taxes. Thus, the taxpayers of america are subsidizing the non profit that has fleeced both the bank and the american taxpayer. It is unfortunate that tbaize does not seem to have complete knowledge of the situation supporting the agency and its director without due understanding.
Posted by Alfred Kreps | Friday, December 13 2013 at 3:31PM ET
First, the article is completely unfair to Sara Pratt. She is an expert in fair housing law, and has been around since the Fair Housing Act was given real teeth for enforcement in 1988. If these cases had no merit, they would be dismissed.

Second, respectfully, Mr. Kreps is simply wrong about banking today. Banks are foreclosing on properties and walking away, in part because they are overwhelmed with foreclosures, and in part because the notion of the local banker has gone the way of the local telegraph operator. Google the term "zombie title" and read the articles about people whose homes have been foreclosed upon, but the bank refuses to take title to the property, thus removing the homeowners from the home but keeping the homeowners on the hook for upkeep. I invite Mr. Kreps to come with me to housing court in Jefferson County, KY where nearly every day I see homeowners whose homes were foreclosed upon, but are being fined by the city and county for failing to cut the grass, make repairs and keep out squatters. When the homeowners say they're home has been foreclosed upon, they are told that the property is still in their names and they are responsible, because the bank that kicked them out will not take title.

Third, I love the notion that a nonprofit with a couple dozen employees somehow shook down Wells Fargo for $40 million using "dubious data." I guess a national bank with $20 billion in quarterly revenues wasn't able to assemble a competent legal team. Yeah, that must be it.

Please pardon me if I do not shed a tear for the industry that caused the real estate collapse in 2007 and 2008. And, pardon me if I think there should have been a few more Sara Pratts at HUD prior to the collapse. Then, perhaps, the predatory lending that greatly contributed to the collapse would have been mitigated or eliminated.
Posted by tbaize | Thursday, December 05 2013 at 7:23PM ET
As one commenter said: "Why would any lender, bank or individual, allow a property to deteriorate thus causing additional loss to the lender. What an inane and totally ridiculous thought." Yes, you would think so. But that is not the experience of communities all over the country with many banks, mortgage companies, mortgage servicers they hire, and others in the lending industry who end up owning properties that were mortgaged or pursuing foreclosure on them. True they are just exercising their legal rights when they threaten owners, scaring them out of properties, then lock them up and essentially take over houses, but then refuse to maintain them, selling them "as is" at exorbitant prices that no one in their right mind will pay. So what happens? The property sits in limbo for years further deteriorating with little maintenance, dragging down the surrounding neighborhood. Or they sell finally to a bulk buyer sight unseen with no interest in the house or the community other than to flip it with as little money spent as possible. I know this from years of experience on the ground trying to fight these plagues on our neighborhoods. I've seen a bank out bid my city at Sheriff Sale, and then sell the same house to my city within 2 years at half the price. Many banks refuse to cooperate with communities on short sales, deeds in lieu or other measures to take a property out of limbo and either demo it or allow it to be rehabbed and brought back to life. The idea that some banks, even if they are trustees for a mortgage trust of some sort, are free from responsibility to the community once they take over a property is really what is outrageous. And to admit that some of these banks have discriminated against certain neighborhoods in how they have dispensed their resources to maintain or not maintain properties, but say they should not be held to account for it because "they didn't discriminate on purpose!" is unconscionable. If business entities like banks have free speech rights, they should be held accountable for "unconscionable" acts, too.
Posted by GruberWL | Wednesday, December 04 2013 at 9:27AM ET
This article betrays a stunning lack of understanding about the HUD enforcement process. Sara Pratt may have helped to develop a theory about discrimination in the upkeep of REO properties, but neither she nor anyone on her staff will decide whether the banks have liability in this case. FHEO at HUD will determine whether there is "reasonable cause" to believe a Fair Housing Act violation took place, but that is only one step in the process and has (at least theoretically) a lower standard of proof than an ultimate finding of liability. But the ultimate finding (if the cases get that far and are found to have reasonable cause) will be by an administrative law judge, or, if the cases are elected to federal court, by a federal judge and/or jury.

Further, I have known Sara Pratt for a long time; she is a legend in the fair housing community. Everyone who knows her knows that she approaches every case with honesty and integrity. To suggest that she is part of a shadowy conspiracy with NFHA and Relman Dane to bring down the banks is simply idiotic. HUD found someone with a long career of fair housing enforcement and put her in a position of influence on fair housing enforcement, which is one of HUD's core charges. It is certainly 180 degrees from what we've seen under other administrations, where lobbyists are put in charge of regulatory agencies in order to destroy their work from the inside. There is no conflict here.
Posted by tmccartney | Tuesday, December 03 2013 at 11:13PM ET
It seems to me that such charges are base less and very inflamatory. Why would any lender, bank or individual, allow a property to deteriorate thus causing additional loss to the lender. What an inane and totally ridiculous thought. This is another witch hunt for funding without cause. I have been in lending for some 50 years. The lender enters the premesis as soon as possible in order to preserve the value. However, there has been two situation in my banking career where the property was so destroyed by the owner and/or tenants that the best answer for the lender was to GIVE the property back to the owner free and clear charging off the loan balance. NFHA appears to be another one of this administrations socialist agencies looking to destroy the republic.
Posted by Alfred Kreps | Tuesday, December 03 2013 at 6:45PM ET
So, where was the banking industry's righteous indignation about a conflict of interest when Timothy Geitner, Henry Paulson, Robert Rubin, etc. went to work for the Department of Treasury?
Posted by FLOnEDDIE | Tuesday, December 03 2013 at 2:20PM ET
Shocking, absolutely shocking. Imagine the outcry if a banker went to work for a regulator.

Oh, wait...
Posted by Rob Randhava | Tuesday, December 03 2013 at 1:55PM ET
An interesting--and incendiary topic. I didn't know of this group, but it sure seems they've been beating this drum for a long time (1988?). No doubt that a $42MM cash injection will endow their fine work until the next housing crisis arrives. An incredulous similarity to the causes of Sharpton and Jackson (I don't think the article baits as such, but it's easy to get there), though I imagine that the foundation of this cause ( like Sharpton et al), has been subverted by the celebrity. Another case of noble activist turns high-profile bounty hunter? The question of "who is being served here" surely comes to mind. Good work, Kate!
Posted by RDKoncerak | Tuesday, December 03 2013 at 12:46PM ET
HUD's fiftieth anniversary is approaching. No need to do a big cost-benefit study. Shut it down.
Posted by kvillani | Tuesday, December 03 2013 at 11:05AM ET
The only organization guilty of wrongdoing here is NFHA and HUD. This is nothing more than extortion by NFHA and HUD so that certain officials at NFHA and HUD can line their own pockets. The only organizations hurting minorities here are NFHA and HUD. The national media should do as the reporters of this article have done - and expose this cronyism for what it is - extortion of corporate America by those whose only agenda is to self aggrandize themselves and line their own pockets. This is outrageous.
Posted by commobanker | Tuesday, December 03 2013 at 7:20AM ET
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