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Bob Moon: Here we are three years into the housing crisis. The recession it sparked is already deemed to be over, but it seems we still haven't really settled on a culprit. Was it home owners who bought more house than they could afford? Or was it predatory lenders who didn't care what happened to the mortgage after they got their fees?
Today, Marketplace's Jeremy Hobson is wrapping up our series on how the heartland is coping. His final installment is a look at the fight over foreclosures in the land of the Delta blues.
Jeremy Hobson: Call it the Memphis misery tour. I'm in a car with a lawyer who's representing Memphis and surrounding Shelby County in a lawsuit against Wells Fargo. We're driving through Orange Mound, one of the poorest neighborhoods in the city.
Hobson: This neighborhood is just filled with foreclosures.
Steve Barlow: Oh absolutely, it's, you know, about a third.
Attorney Steve Barlow says many of the former owners of these homes were doing just fine until lenders came along and convinced them to refinance or take on a second mortgage. An adjustable-rate loan that meant more cash in their pockets right away in exchange for a sky-high mortgage rate later. What's left for all to see is foreclosure after foreclosure.
Hobson: It looks like just about every window is broken. It's boarded up, the grass is overgrown, there are weeds coming out the side, it's next to an empty lot.
Barlow: Yeah, it's a nightmare for the person who lives next door.
Hobson: Although next door is also boarded up.
You can imagine what all these abandoned homes mean for the people who still live here.
Kim Watkins: It's so much, what can we do? Look at all these houses.
Kim Watkins is watching her two small kids in front of her home. She's living right in between two empty houses. She says squatters have taken over the neighborhood.
Watkins: They got sheets up to some of them, they come in do all kind of illegal things. This house just got broken into -- the door kicked in. And you're afraid to tell them leave, leave. You know they shoot up your houses, all kinds of things, we got kids here. So it's just like jail in your own home, if you ask me.
The lawsuit the city filed against Wells Fargo claims that the bank violated the Fair Housing Act by targeting minority neighborhoods and deceptively steered borrowers toward high-cost sub-prime loans. It says between 2004 and 2008, more than half of Wells Fargo loans to black borrowers were sub-prime. That's three times the rate for white borrowers.
What's more the rate of foreclosure in black neighborhoods has been seven times higher than in white neighborhoods. Bring that up with the people at Wells Fargo, and you'll get this response:
Brad Blackwell: We do not make lending decisions based on race. We make it based on credit, on amount of debt outstanding, on other factors like down payment.
Brad Blackwell is the national sales manager for Wells Fargo. He says the city is unfairly focusing on his company. He says blighted neighborhoods existed long before any of these loans were made, and that foreclosures soared because of the recession in general -- not because of Wells Fargo's sub-prime loans.
Blackwell: What's happened in Memphis and in many other municipalities, particularly big urban centers, is that many areas have been very hard hit by the economy. And some of these areas, like downtown Memphis have been harder hit, and consequently, you have higher foreclosure rates in those neighborhoods.
And he says lenders have no more interest in a foreclosure than home owners do.
I brought that argument up with Steve Barlow -- the lawyer representing the city.
Hobson: But why would the original lender want to do that? They have no interest in having a foreclosed home, do they?
Barlow: The original lender makes their money in fees at the closing table, then packages the loan, sells it.
But proving that Wells Fargo acted illegally and caused broader damage to Memphis won't be easy. Similar cases against Wells Fargo and other lenders have been dismissed in Cleveland, Birmingham and Baltimore, and unless this lawsuit progresses to the next phase, the city's lawyers won't have access to the loan documents they'll need to show the scope of what they call "Wells Fargo's predatory lending."
Mayor A.C. Wharton can see the scope of the housing crisis from his 7th floor office in City Hall. He says all the foreclosures have brought financial harm to the city, a spike in crime and a big loss in property tax revenue.
A.C. Wharton: In the South, particularly in this city, we live on property taxes -- roughly 60 percent of the revenue, 62 percent almost, comes from property taxes. We don't have diverse sources of income as other jurisdictions do.
Whatever happens with the lawsuit, Mayor Wharton will have to deal with a shrinking base of home owners. Between 2005 and 2008, the city lost 7,000 of them. Two-thirds of whom left because of foreclosure.
In Memphis, I'm Jeremy Hobson for Marketplace.