Introduction

New York City homeowners filed a class action lawsuit on August 12 alleging that auctions of government-insured mortgages discriminate against predominately African-American neighborhoods.

The lawsuit involves a U.S. Department of Housing and Urban Development (HUD) program that since 2010 has auctioned delinquent mortgages insured by HUD’s Federal Housing Administration (FHA).

The program, the lawsuit states, strips homeowners of FHA protections without first informing them that their mortgage could be sold.

The Center for Public Integrity first investigated the HUD program in 2015, finding that the mortgages were sold at a steep discount and only 16.9 percent of mortgages sold between 2010 and 2014 successfully avoided foreclosure.

As part of that investigation, the Center for Public Integrity mapped the results of HUD’s auctions in New York City and Baltimore. The map showed that the mortgages clustered in neighborhoods with a higher proportion of minorities.

FHA mortgages have been a popular means for African Americans to buy homes because they are available to borrowers with lower credit scores and typically require smaller down payments. Borrowers pay an FHA premium in return for protections such as intervention options when borrowers fall behind, a mortgage modification program and refinancing options.

Because of that, the lawsuit claims the sales have a disparate impact on African Americans. The FHA insures 43 percent of all mortgages made to African-American homeowners, according to HUD.

“HUD, in selling these loans out of the FHA mortgage program, they’re depriving homeowners out of a sustainable mortgage product that ensures they will be able to stay in their home for years to come,” says Christopher Fasano, a staff attorney with MFY Legal Services Inc., which filed the lawsuit along with Emery Cilli Brinckerhoff & Abady LLP, another New York City based law firm.

Although just 36 percent of FHA loans issued in the New York City area from 2012 to 2014 were issued to African-American borrowers, Fasano says 61 percent of the mortgages sold through HUDs program were in predominately African-American neighborhoods, such as St. Albans and Canarsie, in Brooklyn.

“It’s not just going to affect the homeowners who will lose these benefits once their mortgage gets sold,” Fasano said, “it’s also is going to destabilize these neighborhoods that have historically been bastions of African-American homeownership.”

The lawsuit also lists as a defendant Caliber Home Loans, a mortgage servicer owned by Lone Star Funds, a Dallas-based private equity firm.

After purchasing mortgages through the program, Caliber offered five-year, interest-only loan modifications, which the plaintiffs claim would result in unsustainable “balloon payments” and eventually foreclosure. The Center for Public Integrity described similar offers in the 2015 report, including one that would lead to a $70,000 balloon payment after a modification term.

“Caliber is committed to treating all borrowers fairly, to helping families stay in their homes where it is feasible, and has complied with all FHA-mandated servicing requirements,” Caliber’s head of servicing Marion McDougall told the New York Times in a statement.

HUD declined to comment on the lawsuit, but in July announced changes to the sales program, including requiring that buyers of FHA mortgages evaluate borrowers for principal reduction, limiting interest rate increases and alternative bidding process for non-profit buyers.