For years, financial institutions took bad mortgage loans, bundled them as derivatives and sold them. The entire house of cards collapsed in 2008, plunging the world into the worst crisis since the Great Depression.
One would think the banking industry would be contrite and want to help those struggling to keep the homes they can no longer afford because of the recession.
Well, a newly released report by California housing rights organizations implies that one would be wrong in that assumption. The report says the foreclosure policies of Wells Fargo Bank, America's largest lender, could cost the California economy up to $3.3 billion in lost revenue. It's the first report to examine the economic impacts of the San Francisco-based bank's foreclosure policies on distressed homeowners, neighbors and investors.
The report says that since 2008, Wells Fargo has led a pack of banks that have foreclosed on approximately 1.7 million California homes and about 65,000 California homeowners are currently in the "foreclosure pipeline."
"Wells Fargo, which is one of the largest servicers in California, has 11,616 people in their foreclosure pipeline," Grace Martinez, an organizer with the Alliance of Californians for Community Empowerment, which co-authored "California in Crisis, how Wells Fargo's Foreclosure pipeline is damaging local communities," told DW.
Martinez said if Wells Fargo does foreclose on that many borrowers, the economic impact would be felt state-wide.
For example, each home would lose approximately 22 percent of its value, for a total loss of more than $1 billion. And homes in the surrounding neighborhood would also lose value, for an additional loss of about $2.2 billion.
Martinez says the bank's practices don't allow for any meaningful or helpful reduction policies.
"We've got members in Oakland, LA all the way down to San Diego and Sacramento who are impacted, not only by Wells Fargo practices, but also by its refusal to provide any kind of principal reduction," said Martinez.
According to the report, Wells Fargo's mortgage principal reduction policies are the least generous of the major banks when renegotiating mortgages. For example, Wells Fargo forgives about $74,000 per average principal reduction, while Bank of America writes down nearly $200,000 per average principal reduction.
But Wells Fargo disputes the report, saying it has had "an aggressive principal reduction policy in place since 2009."
The bank released a statement reading, in part: "Most of the more than $6 billion in principal forgiveness Wells Fargo has given out during the mortgage crisis has gone to California borrowers. Our delinquency and foreclosure rates are 4 percent below the national average."
But Peter Fairfield has had a different experience. He and his wife took out a home equity loan four years ago to shore up their flagging photography business. They now face foreclosure on the San Francisco home they've been in for 34 years.
"Wells Fargo sold me a loan that I couldn't afford," Fairfield told DW. "They promised they would refinance it so we could make the payments. That never happened."
Fairfield says his family was the victim of predatory lending and when the rent on their business went up $5,000 overnight they went to Wells Fargo to find a solution and were given the runaround.
"False promises, lost paperwork month after month after month of trustee sales hanging over my head never knowing what's going on, not getting return phone calls," Fairfield said. "It's just enough t make you want to head to the bridge, but we're not doing that. We're fighting."
Another San Francisco homeowner, Manuela Alvarez had a similar experience. She took out a home improvement loan with Wells Fargo a few years back. The loan payment skyrocketed after the mortgage meltdown. Her jobs at a hair salon and at nursing homes doing hair for the elderly weren't enough to make the payments so she rented out part of her home. That, and her husband's job as a laborer, helped get her household income up to about $6,000 per month. But the bank wasn't impressed.
"I sacrificed my kitchen and my living room in order to qualify and they told me that it wasn't enough, in order for me to qualify, I had to make $11,000 per month," said Alvarez.
Among other recommendations, the report suggests that Wells Fargo make principal reduction a core front-end strategy when considering loan modifications; release ethnicity and income data on borrowers facing foreclosure and put a moratorium on foreclosures until these steps are put into place.
The report also charges Wells Fargo with fostering discriminatory loan practices.
Citing a 2011 US Justice Department study, the report determined that between 2007 and 2009 mortgage brokers working with Wells Fargo were 188 percent more likely to steer black borrowers into higher cost subprime loans than whites. Hispanics were 117 percent more likely to get subprime loans.
The Justice Department study also found that mortgage lending to whites went up 34 percent between 2007 and 2009, whilst lending fell to 44 and 38 percent to blacks and Hispanics respectively.
Wells Fargo denies its practices are discriminatory.
"Wells Fargo conducts all lending and servicing activities in a fair and responsible manner without regard to race or ethnicity," a company statement said. "The report is based on flawed assumptions and connects findings from a series of unrelated studies."
However, housing activists say Wells Fargo's and other bank's lending policies are leading minorities to quit communities across California.
"They're just pushing people out and running up costs," said Martinez of the Alliance of Californians for Community Empowerment. "They get to dictate by their very practices where people get to live."