In the years leading up to the housing crash, public data suggest that black would-be homeowners in Detroit were 70 percent more likely than white borrowers to receive a risky subprime loan from the now-defunct lender New Century Mortgage Company. This is the central statistic embedded in a 70-page lawsuit filed Monday in New York against Morgan Stanley, the investment bank that went on to purchase a large share of those loans for repackaging in mortgage-backed securities.
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The suit, filed by the ACLU and the National Consumer Law Center, alleges that a kind of "reverse-redlining" became the norm in Detroit. Fifty years ago, discriminatory housing policies prevented many blacks from obtaining home mortgages. Barely five years ago, this suit suggests that a different kind of racial discrimination was taking place in Detroit: Predatory lenders couldn't approve enough high-risk loans to black borrowers, increasing Morgan Stanley's profits and disproportionately leaving many of these black homeowners in financial ruin.
In a twist on the ever-expanding legal fallout from the housing crisis, this case "“ filed on behalf of five Detroit borrowers with the hint of thousands more to come if this turns into a class-action lawsuit "“ accuses for the first time an investment bank elbow-deep in the housing bubble of violating federal civil rights laws.