Cities Take Aim at Servicers in Foreclosure Crisis
Mayors of cities, most prominently Cleveland and Baltimore, are taking aim at mortgage lenders with lawsuits alleging that the lenders and investment banks that financed loans have contributed to a foreclosure crisis in their cities.
The city of Cleveland has sued 21 lenders and Wall Street firms involved in the subprime mortgage market, seeking monetary damages under a "public nuisance law."
The Cleveland lawsuit alleges that the lenders "financed and cultivated" the subprime market, leading to a foreclosure crisis that has proved costly for the city. While the litigation focuses on ills in the loan origination business, it is servicers and investors who are the target of the litigation.
Bank of America, Citigroup, Deutsche Bank, JPMorgan Chase, Merrill Lynch, Bear Stearns, Ameriquest, Washington Mutual, Countrywide Financial Corp., Morgan Stanley, Wells Fargo, Fremont General Corp., GMAC-RFC, Goldman Sachs, Greenwich Capital Markets, HSBC Holdings, IndyMac Bancorp, Lehman Brothers, Novastar Financial and Option One Mortgage were all named defendants in the Cleveland lawsuit.
While the use of a "public nuisance law" may be an unusual tactic, the Cleveland suit demonstrates the lengths to which cities will go to hold lenders responsible for the rash of foreclosures they are facing.
The city, calling public nuisance "a longstanding, well-established legal concept," said this allows recovery for circumstances created by the defendant that "interferes with the public's rights and interests." The Cleveland lawsuit alleges that "unscrupulous lending practices" in the subprime mortgage market have devastated neighborhoods in Cleveland to such an extent that it creates a public nuisance.
Cleveland Mayor Frank Jackson expressed little sympathy for lenders in announcing the suit. "Cities can rebound. However, it is extremely costly to do so given that declining tax revenues are part of the fallout of foreclosures," he said.
Earlier, Baltimore became the first city in the nation to sue a lender by seeking to recover costs for "injury to the city" caused by racially discriminatory lending.
The city of Baltimore alleges that steering of minority borrowers into subprime loans contributed to an "epidemic of foreclosures."
The Baltimore lawsuit targets Wells Fargo Bank, one of the nation's two largest mortgage servicers. The Baltimore suit is seeking "millions of dollars" from Wells Fargo, alleging that the company violated the Federal Fair Housing Act.
Baltimore Mayor Sheila Dixon accused Wells Fargo of "reverse redlining," saying the company targeted minority neighborhoods for bad loans with unfair terms.
The city of Baltimore is being represented by Relman & Dane, a Washington-based civil rights law firm.
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