Housing Group Taps Dubious Data, HUD Ties to Demand Millions from Banks

Mortgage & Real Estate

First in a series

The National Fair Housing Alliance held a pair of teleconferences over the past two months during which its president, Shanna Smith, accused two of the nation’s biggest banks of a deplorable corporate crime: racial discrimination.

Bank of America and U.S. Bancorp did a terrible job of maintaining homes they’d foreclosed on in predominately black and Hispanic neighborhoods, Smith declared, even as they were fastidious about upkeep in mostly white areas. The claims were a repeat of those the Washington, D.C.-based nonprofit has made during more than a half-dozen other teleconferences over the last year.

During its public events, the NFHA has pointed to photos of run-down properties, trash-strewn yards and even one of a dead dog, to bolster its claims that poor property management by banks is dragging down entire minority neighborhoods. The NFHA nicknamed one such property, a Florida foreclosure, “The Rat House.” Not only are such homes hurting property values but they’re also contributing to community health epidemics, like asthma, allergies, lead poisoning and obesity, Smith told the journalists and others assembled by phone.

“The banks have liability for the harm that they’re causing. If you live next door to an REO home, you are being injured and the banks have liability for that,” Smith said in an October interview. REO, or real-estate-owned, is an industry term for homes seized by banks through foreclosure.

The NFHA is seeking tens of millions of dollars from Bank of America and U.S. Bank as a result of their alleged misdeeds. In April, it finalized a $42 million settlement with Wells Fargo over similar claims that provided a financial windfall for the NFHA and its local member organizations.

A review of the NFHA’s cases raises doubts about the validity of its claims, however. The group has disclosed addresses for only a fraction of the properties it alleges the banks have neglected, but a review of those it has released indicates that NFHA regularly misidentified the institution legally responsible for maintaining specific homes. In some cases, it conflated the banks responsible for maintaining properties with those that were simply serving as trustees for mortgage-bond investors. In others, it faulted banks for damage that occurred before they took possession of properties.

Not in dispute is the leverage the NFHA has gained in its dealings with banks from its close ties to supporters in the federal government. Unusual among Washington agencies, the Department of Housing and Urban Development both funds housing discrimination investigations by nonprofits, including by the NFHA, and provides the venue for them to negotiate their claims.

Sara Pratt, the HUD official responsible for investigating and resolving the NFHA’s complaints, and who oversaw its settlement with Wells Fargo, is a former NFHA staffer and consultant. HUD and the NFHA dismiss the significance of Pratt’s former affiliation; bank industry representatives counter that it poses a troubling conflict of interest.

“Having a senior HUD enforcement official supervising these cases who is a former NFHA employee undermines the credibility of this process,” says Andrew Sandler, a Washington, D.C. attorney who chairs Buckley Sandler LLP and represents big banks but is not directly involved in the housing claims.

Testing Legal Boundaries

Sweeping, controversial civil rights cases are a stock-in-trade for the NFHA under Smith. A blunt Toledo native who worked her way from Ohio housing activist to Washington powerbroker, Smith has proven adept at marshaling the resources of scores of groups around the country to magnify the NFHA’s leverage.

Founded in 1988 as a volunteer effort by five fair housing groups, NFHA was instrumental in the 1990s in bringing to the national consciousness banks’ practice of redlining, or refusing to lend in minority neighborhoods. The group raised its profile further by conducting fair housing “testing,” in which it dispatched volunteers to apply for loans, shop for insurance and monitor whether homebuilders were complying with the Americans with Disabilities Act. When the group has found what it regards as evidence of discrimination, it has filed complaints with the HUD and courts, relying on proceeds from its victories to help fund its operations.

With 21 full-time employees, NFHA calls itself the nation’s preeminent fair housing advocate and actively courts big legal fights. In November it partnered with billionaire George Soros’ Open Society Institute and the Ford Foundation to pull together enough cash to convince the town of Mt. Holly, New Jersey to drop a Supreme Court challenge to disparate impactthe hot-button legal theory that banks and other real estate service providers can be held liable under the Fair Housing Act for discrimination that’s entirely unintentional. Quashing Mt. Holly’s suit has, at least temporarily, protected a legal doctrine on which the NFHA regularly relies.

Despite the controversy surrounding the NFHA’s tactics, banking industry sources acknowledge that high concentrations of foreclosed properties harm neighborhoods. Mortgage servicers, who are responsible for the upkeep of homes in foreclosure, have long recognized that even well-maintained vacant properties are at heightened risk of arson and vandalism.

There’s also ample evidence that mortgage servicers have often done a poor job of upkeep in the wake of the housing collapse. Cities from Riverside, Calif. to Allentown, Pa., have publicly grappled with post-foreclosure blight, and children in Florida and Indiana have drowned after falling into the unsecured backyard pools of foreclosed homes. Like numerous housing activists, the NFHA blames banks for such troubles, and it has thrown itself into the debate over foreclosures, loan modifications and banks’ responsibilities toward hard-hit communities.

What sets the NFHA apart is its view that banks’ perceived lapses offer abundant opportunities to pursue racial discrimination claims under the Fair Housing Act. Critics say it’s a stretch for the NFHA to sue banks for allegedly neglecting empty homes in foreclosure under the law, which was passed in 1968 with the aim of providing protection for those seeking to buy or rent residences.

HUD Help, Dubious Data

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