The housing collapse of 2008 crushed millions of American home owners but a suit filed in federal court in New York claims it hit minority home owners particularly hard.
The suit, filed on behalf of five Detroit residents and Michigan Legal Services, is against the investment bank Morgan Stanley, claiming it discriminated against black homeowners and violated federal civil rights.
In a statement, the bank said the charges in the suit were without merit and promised a vigorous defense.
Encouraging risky business
The suit is tied to the securitization of mortgage-backed securities, the action that eventually brought on the credit meltdown. It seeks to hold Morgan Stanley accountable for allegedly providing strong incentives to a subprime lender to originate mortgages that were likely to be foreclosed on.
The suit is the first to connect racial discrimination to the mortgage-backed securities that were sold to institutional investors and pension funds. It is also the first case where a prospective class of victimized homeowners is suing an investment bank directly rather than the subprime lender whose loans the bank bought.
The lawsuit was brought by the American Civil Liberties Union (ACLU), the ACLU of Michigan, the National Consumer Law Center, and Lieff Cabraser Heimann & Bernstein, a San Francisco-based law firm. The complaint asks the court to certify the case as a class action.
"With this lawsuit, real victims of the subprime lending scandal are stepping forward to hold investment banks like Morgan Stanley accountable for the devastation the banks wrought in their lives and in our economy," ACLU executive director Anthony Romero said. "Illegal practices surrounding mortgage-backed securities robbed people of their homes, violated our civil rights laws and left all Americans holding the bag as our economy teetered on the brink of another Great Depression."
The five homeowners in the suit received their loans from now-defunct New Century Mortgage Corp., a one-time major player in subprime lending. Many of its loans were eventually purchased by Morgan Stanley, which bundled them into securities.
One of the plaintiffs is Rubbie McCoy of Detroit, who purchased a home through New Century with an adjustable mortgage rate of 12.1 percent.
Dictated the terms
The plaintiffs argue Morgan Stanley provided funds to New Century to originate the loans and dictated the terms of the loans it wanted and ultimately purchased for its securitized pools. It allegedly pushed New Century to issue certain types of loans with no concern about risk, because it made its profit at the outset, when the securities were created and sold.
"Morgan Stanley actively encouraged the proliferation of irresponsible subprime mortgage loans, the complaint charges, in order to feed its hunger for purchasing, pooling, and securitizing mortgage debt for sale to investors," said Elizabeth J. Cabraser, a partner at Lieff Cabraser Heimann & Bernstein, and co-counsel for the plaintiffs. "The targeting of communities of color for loans that unfairly raises the risk of default and foreclosure is the quintessential "reverse-redlining' outlawed by the Federal Fair Housing Act."