The Return of Redlining?

A lawsuit filed in federal court in Brooklyn last week claims that the federal Department of Housing and Urban Development (HUD) has been selling insured delinquent mortgages to private investors, typically hedge funds and private equity funds, leading to higher rates of foreclosure, especially for black homeowners.

The lawsuit, as reported in the New York Times, was filed against HUD and the private equity firm Lone Star Funds, one of a dozen such firms now in the mortgage business. From 2012 to 2014, according to the lawsuit, more than 61 percent of the government-backed mortgages sold to investors were in predominantly black neighborhoods, including southeast Queens and the Canarsie section of Brooklyn.

After buying delinquent mortgages, private equity firms typically offer “loan modifications” that provide little relief. They sometimes demand a large balloon payment five years after the modification, according to the lawsuit, significantly increasing the mortgage’s cost. Another ploy is to allow interest-only payments, which lead to a large unpaid balance that can ultimately result in foreclosure – and a fat profit for the mortgage holder.

Since the housing bubble burst in 2008, a dozen private equity firms have spent tens of billions of dollars acquiring homes and troubled mortgages from banks and the federal government.

A spokesman for Lone Star’s mortgage firm said the lawsuit was “without merit.”