Cities sue home lenders

MINNEAPOLIS -- Valeria Golebiowski moved to the Hawthorne neighborhood 45 years ago, and she's staying even as it crumbles around her.

Golebiowski, 72, remembers when flower gardens bloomed and neighbors chatted over coffee. Eleven of the 13 houses that once made up her block are vacant, condemned or demolished — victims of a foreclosure crisis that walloped this north Minneapolis neighborhood on the Mississippi River.

A city plan to redevelop the neighborhood stalled over 415 31st Ave. North, a decrepit, long-vacant bungalow in the middle of the block. In October, CitiMortgage foreclosed on the house.

The Hawthorne Area Community Council then sued CitiMortgage in January, saying the lender had approved an inflated mortgage on the property and created a nuisance by failing to fix it up after foreclosure.

Hawthorne and the city of Minneapolis are pioneers in an emerging civic strategy to sue lenders and banks to recoup lost revenue and reclaim neighborhoods devastated by the mortgage crisis. Around the country, the loss of tens of thousands of homes to foreclosure is shrinking cities' tax base, straining city services such as policing, and ruining neighborhoods.

Minneapolis and three of its neighborhoods won their first legal battle last month in a separate lawsuit against real estate company TJ Waconia, when a judge appointed a legal caretaker to manage 141 mostly vacant properties.

Cleveland, Baltimore and Buffalo also have sued lenders and banks in recent months. St. Paul has written to its lenders threatening a lawsuit if they don't fix their foreclosed properties.

"Hundreds of cities across the United States are in the same position," says Greg Squires, a professor of sociology at George Washington University who studies urban redevelopment. "I think there will be more lawsuits. If we get an early decision in one of these cases, it will either encourage or discourage" other cities from filing suit.

Alan Mallach, a senior fellow at the National Housing Institute, says the lawsuits are "a bit of a reach under the laws of most states, but … a creative court could reasonably make some law in that direction."

Yet John Mechem, spokesman for the Mortgage Bankers Association, says the lawsuits could deter lenders from working with cities to preserve the properties. "These lawsuits can scare lenders out of the market," he says. "Lenders simply won't make loans in areas where they perceive a risk of a lawsuit. It's not the best means to help the local housing market."

Mark Ireland of the Foreclosure Relief Law Project in St. Paul says cities have no choice. "I think we're all charting new territory," says Ireland, who represents the Hawthorne group. "When you're faced with one of the biggest economic crises facing our country in a long time, cities in particular have to explore every tool they have."

Paving new legal ground

The neighborhoods and cities are using a variety of legal claims — from city codes to federal civil rights laws — to get at lenders who control the properties.

Buffalo, which has about 10,000 vacant buildings, sued 37 lenders under the city's property upkeep codes to recoup the cost of maintaining or demolishing 57 abandoned houses. The first court hearing is May 22.

"We wanted to send a message to the banking community that we will not allow them to put people out of homes and then have them walk away from all responsibility for the homes," Buffalo Mayor Byron W. Brown says.

In Cleveland, foreclosures have spiked from about 100 five years ago to 8,000 last year.

"The cost of foreclosure is very large — demolition, dumping, maintenance, arson, police services," Mayor Frank Jackson says. The city budgeted $6 million this year to demolish abandoned homes, up from $1.7 million a few years ago.

On Feb. 20, Cleveland filed suit against 21 financial and investment companies with the most foreclosed properties for creating a public nuisance. "They created a situation in Cleveland and throughout this country that resulted in the foreclosure crisis," Jackson says. "They could have stopped it."

Baltimore sued Wells Fargo under the federal Fair Housing Act in January, alleging that the company targeted residents of predominantly African-American neighborhoods for substandard loans.

Wells Fargo denies the claim. "The Baltimore lawsuit allegations are not supported by fact at all," says Brad Blackwell, national sales manager for Wells Fargo. "I can tell you that our lending decisions are based on credit risk. They are not based on race or ethnicity."

St. Paul, Minneapolis' neighbor across the river, hopes to avert legal action. In an April 8 letter, St. Paul told lenders to develop a plan to fix and sell some of the city's 1,750 vacant and foreclosed homes. City Attorney John Choi says the lenders are willing to cooperate.

Making a case

As foreclosures escalated in Minneapolis, city leaders and neighborhood activists decided that suing lenders and investors for control of vacant properties would be part of their revitalization strategy.

The city's previously buoyant real estate market had attracted investors who snapped up homes in working-class neighborhoods, Housing Director Tom Streitz says. He says some of those investors inflated the appraisals and then sold the property for quick profits. "They've left a wave of devastation that's just disgusting," Streitz says.

North Minneapolis community advocate and resident Bonnie Moore, who began tracking home sales and foreclosures in three north Minneapolis neighborhoods in late 2005, noticed a pattern: TJ Waconia bought property, then sold it a few months later at a significantly higher price.

She and Roberta Englund, executive director of the Folwell Neighborhood Association, brought the information to Minneapolis Council President Barbara Johnson, who called the FBI.

The Folwell neighborhood joined with two other neighborhoods and the city to seek control of houses abandoned by the TJ Waconia owners. In a separate criminal case, those owners pleaded guilty April 17 to mortgage fraud.

"We want control of the properties," Minneapolis Mayor R.T. Rybak says. "The simplest thing you can do to stabilize a neighborhood is to have a strong homeowner. When you lose a neighbor, you have a house that's boarded up and a magnet for crime."

In nearby Hawthorne, the Community Council had tried to buy foreclosed and vacant homes so a non-profit group could rebuild them into an energy-efficient "Eco-Village."

After unsuccessfully attempting to buy the property at 415 31st Ave. North, the council sued CitiMortgage. CitiMortgage did not return calls seeking comment.

"We know we're breaking some new legal ground here," says Jeffrey Skrenes, the council's housing director, "but we think we've got a good case."