The City v. Wells Fargo: Baltimore's Response to the National Credit Crisis —by Firmin Bebrabander

The City v. Wells Fargo: Baltimore's Response to the National Credit Crisis —by Firmin Bebrabander

The national credit crisis, with its symptomatic rash of foreclosures, could be devastating to Baltimore. The crisis risks undoing modest and fragile gains made in homeownership in the city. Housing advocates argue that homeownership is key to the health of Baltimore: those who own their residences are more likely to keep them up and remain in the neighborhood, thereby stemming the tide of boarded-up housing.

The recent sub-prime mortgage market, through low introductory interest rates and minimal (or no) down payments, made it easier for thousands to own a home. This was a boon for Baltimore city, hungry for homeowners. Now we see that the sub-prime boom was a false promise, with devastating consequences. Many homeowners now facing adjusted interest rates on their mortgages find that they cannot afford them, and they teeter on the brink of foreclosure. Thus, the current credit crisis, is triply devastating for Baltimore: not only does it risk sending recent homeowners back into the streets or the transience of renting, but it also risks exposing new housing stock (the recently owned housing stock) to the slow decline of Baltimore’s rental properties. Furthermore, new generations of Baltimoreans now learn a harsh lesson in real estate, one that may leave them reluctant to take the plunge into homeownership in the future. As has been documented, many lenders failed to disclose critical and dangerous terms in the mortgages they sold to low-income clients. With this in mind, Baltimore’s renters will be unlikely to trust mortgage companies for quite some time.

Reacting to this crisis, Mayor Dixon recently announced that the city would sue Wells Fargo, one of the largest national banks and mortgage providers, for disproportionately targeting African American Baltimoreans with risky sub-prime mortgages, resulting in a disproportionate number of foreclosures in black neighborhoods. Wells Fargo indignantly replied that this was sour reward for risking loans to low income, often first-time homebuyers. Wells Fargo feels that it put its neck out in offering these loans, and it will be reluctant to do so again when the market recovers, and the credit crisis dies down. The bad news here is that other banks may feel the same way, and follow Wells Fargo’s trend, thereby reducing credit sources for future homebuyers.

Together, these developments spell potential disaster for homeownership in Baltimore city, at least in the near future. Many low-income Baltimoreans are likely to think it not worth the risk to purchase a home, and many lenders will likewise think it not worth the bother to make concessions for low-income homebuyers. It is the mayor’s responsibility to prevent this deadlock from occurring—or from persisting for long—and repair the road to homeownership in Baltimore city. On its face, Dixon’s lawsuit risks creating just such deadlock: banks may see it as a steep price for doing business in Baltimore city, and drift towards safer suburban markets. And though litigation is a nasty resort, typically leaving resentment and debt in its wake, this lawsuit is a necessary measure, upon which future homeownership gains in the city may well rest.

From its lawsuit, the Dixon administration hopes to gain millions of dollars, which it would then use to help embattled homeowners to retain their properties. Specifically, the city would sustain endangered homeowners working to refinance their mortgages. Dixon aims to protect gains in Baltimore city homeownership, and guard it against further eroding on the sea of foreclosures. This action to protect the status quo, which involves burning a prominent lending company, may well upset some of the business community in the short run, but it is critical to Dixon’s long-term goals for Baltimore’s health. For, if she did not act decisively now to save the city’s endangered borrowers, this would prove a tremendous setback for increased homeownership in the future. In other words, the latter cannot occur if recent gains are erased: if Baltimore’s housing stock and neighborhoods should degrade further in the wake of the credit crisis, this will make it a less appealing product for future homebuyers. The way forward is predicated upon protecting established gains.

Even if Dixon’s suit should not win, it will likely reap some of its desired effect. For example, as the lawsuit proceeds, it should forestall foreclosures among Wells Fargo clients in Baltimore. Indeed, as the lawsuit simmers, Wells Fargo will not be eager to pursue its foreclosures, but should act to reduce them. It is easy to imagine that other banks will follow suit, as they look to keep a low profile amid the brouhaha.

And despite Wells Fargo’s indignant reply to the lawsuit, Dixon’s action may well prove fortunate for business in Baltimore. After all, potential homebuyers may be reassured by Dixon’s offensive, and feel that someone is looking out for them in the murky mortgage business. At the very least, they may believe that an effective warning shot has been fired, and lenders will now shrink from insidious and predatory behavior. This all promotes greater confidence among Baltimore consumers, and makes them more willing borrowers. In short, Dixon’s lawsuit ironically serves to shore up demand for mortgages, and sustain a customer base for banks willing to do business in Baltimore. As long as demand remains, any economist knows, suppliers will emerge.

Dixon has stuck her neck out with this suit, singling out Baltimore as a possible danger zone for the nation’s lenders. However, it turns out that Cleveland will follow Baltimore’s example, and many other cities will do so, too. In this case, Dixon has established herself as the vanguard of a momentous trend, where cities do what they can to address the credit crisis in the absence of serious or radical federal assistance.

Firmin DeBrabander is a Professor of Philosophy at Maryland Institute College of Art