At Risk Homeowners Allege Discrimination

Emery Celli Brinckerhoff & Abady (ECBA) and MFY Legal Services recently filed a federal class action challenging the legality of a Department of Housing and Urban Development (HUD) program, DASP, that sells government-insured FHA home mortgages to private equity funds, leaving these borrowers without insurance-program benefits they are entitled to and putting them at heightened risk of foreclosure, according to a release from ECBA. The lawsuit was filed in the Eastern District of New York.

Additionally, the release states that the suit alleges that HUD’s program violates the Fair Housing Act, attributing this to HUD disproportionately selling FHA loans issued to African-American borrowers in New York City for homes in predominantly African American neighborhoods like St. Albans, Queens.

According to ECBA, this suit also challenges the actions of Lone Star Funds, the largest purchaser of mortgages sold through the HUD program. The lawsuit alleges that when Lone Star purchases the mortgages from HUD, it “preys on the homeowners”. They allege that the company makes false and misleading statements to the homeowners while refusing to offer homeowners loan modifications it is legally obligated to provide. Instead, it alleges that Lone Star offers homeowners exploitative loan modifications that spell almost certain foreclosure for these borrowers down the line. ECBA also says that the complaint alleges that Lone Star violates the Fair Housing Act because its policies disproportionately impact African-American borrowers and predominantly African-American communities in New York City.

It was noted by the New York Times that the sales to private investors had already been under criticism in Washington, thus causing the agency to put in new protections for homeowners whose federally backed mortgages change ownership.

Despite the new addendum, more than 100,000 mortgages already sold by HUD in a series of auctions will not qualify for the new protections. The controversy over mortgage sales is something the housing agency has faced over its Federal Housing Administration mortgage program for quite some time now. By selling the mortgages to the highest bidder, the agency can bolster its insurance fund that had been eroded by the flood of foreclosures in the immediate aftermath of the housing crisis and according to the New York Times, the more the insurance fund increases, the more mortgages to lower-income borrowers the department can backstop.