Cleveland Sues Countrywide, Wells Fargo.... Over Subprime Mess

Some of the cities hit hardest by the subprime mess may have a new option available if they follow the example of Cleveland.

The city, the home to over 7,000 foreclosures in 2007, announced on Thursday it is suing 21 major banks and mortgage companies for their part in the subprime mortgage crisis. The suit says these companies created a "public nuisance" in violation of state law by pushing subprime mortgages in the city.

Cleveland hopes to recover lost property tax revenue that numbers in the hundreds of millions. Homes left abandoned have been demolished, and neighborhoods hit hard by thousands of foreclosures have seen drastic increases in crime and have needed extra policing efforts. Overall, the city's tax base has been depleted, and entire neighborhoods are in ruin.

The lawsuit alleges that the subprime model used in the city was completely inappropriate for the residents, and the lenders didn't care. Companies sued include Deutsche Bank Trust, Ameriquest Mortgage, Bank of America, Bear Stearns, Citigroup, Countrywide Financial, Credit Suisse (USA), Fremont General, GMAC-RFC, Goldman Sachs, Greenwich Capital Markets, HSBC Holdings, Indymac Bancorp, J.P. Morgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, Novastar Financial, Option One Mortgage, Washington Mutual and Wells Fargo Bank.

Cleveland Mayor Frank Jackson said the activities by these investment banks and lenders amounted to a legal form of organized crime. He likens the end result of organized crime and drugs on neighborhoods and individuals as siphoning the equity and quality away. The same could be said for the subprime activities conducted by the lenders named in the suit.

Cleveland is the first city to launch a lawsuit on this scale. Earlier this week, the city of Baltimore sued Wells Fargo, alleging they intentionally sold high-interest mortgages to African-American borrowers more than white borrowers, in violation of federal law.

The suit launched by Cleveland is unique in its scope, and its targets: the investment side of the industry that feeds off the secondary mortgage market and encourages continued subprime lending. The suit states that although Cleveland had flat housing prices, along with widespread poverty and struggling manufacturing, investment bankers continued their activities at the expense of borrowers.

More on this subject at Washington Post

Sub-prime Mortgage Mayhem: Could it Effect You

Your credit rating is so far from sub-prime it's practically super-prime, so you've never come even close to having personal experience with the notorious sub-prime lending universe, in fact it's another planet altogether. Listening to the updates on the news regarding the latest sub-prime casualty or reading about it is seemingly the only exposure you've had to the disaster or is it? It might take some investigating on your part but chances are you have been impacted by the problem more than you think. The financial aftermath of the subprime meltdown has touched the far corners of the financial world as stocks have been hard hit and rare would be the bond fund that did not own any mortgage-backed securities. It would be difficult to avoid having some exposure to the problem if you are invested any mutual funds which contain the terms "high-income" or "high-yield" in their fund name. And if you own a financial services sector mutual fund, you can count on having taken a hit, in fact it is important to note that the financial services area now accounts for an almost 20% weighting within the S&P 500. Services related to the real estate industry have become such a substantial part of the U.S. economy and it's over all performance that it would be next to impossible to escape being touched by the problem in some way. Real estate values and consumer confidence have now become flip sides of the same coin. As real estate has surged in recent years it has become the linchpin of economic activity, so it may now be a far greater component of your investment portfolio than you even realize.

What can you do to protect yourself from the risk of the sub-prime industry's woes?

• The first step would be to check your asset allocation to determine if your investment's exposure to real estate and its related industries has ballooned into too large a percentage of your over all portfolio. If this is the case then it may be time to make some investment changes, shifting your positions into other investment categories.

• Consider taking a cash position in the market. Don't hesitate to increase your cash holdings and ride out the market gyrations and volatility from the sidelines. You can resume executing your investment plan, as well as adjusting your asset allocation, once things have settled down and the market has its bearings again.

• As the economy wavers on recession, now may be the time to move into investment sectors which perform well during times of a sluggish economy. You may want to adopt a defensive strategy when picking stocks moving forward.

• Take the opportunity to purchase blue chip companies that may be dipping in relative sympathy to their market sector. During times of uncertainty the baby is occasionally thrown out with the bathwater so to speak, be on the lookout for just such opportunities and bargains.

Always consult with your tax or financial advisor regarding your own individual circumstances before taking any action which could have a significant impact on your personal taxes or finances.