Lawsuit Targets Banks With Novel Tactic

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Monday, December 29, 2008 at 3:11 am

Some Cleveland neighborhoods have a message for banks that abandon their foreclosed houses or unload them at fire sale prices to speculators: Stop dumping your trash on us.

Illustration by: Matt Mahurin

Illustration by: Matt Mahurin

Using a novel legal technique that could be copied elsewhere, the Cleveland Housing Renewal Project Inc., a private, non-profit housing advocacy group, is asking Cleveland housing court to declare the business practices of Deutsche Bank and Wells Fargo in violation of local public nuisance laws. The suit seeks to force the banks to either fix up their foreclosed houses before selling them or to demolish them entirely – instead of dumping them back on the market at Basement Bob-style real estate prices.

A housing court judge on Dec. 15 granted a restraining order preventing the two banks from selling 36 foreclosed houses for at least two weeks. A ruling on whether to make the order permanent was scheduled for Monday, but the banks over the weekend had the case moved to federal court in Cleveland, Wells Fargo said in a statement.

Cleveland Housing Renewal Project is fighting that decision and hoping to get the case sent back to local housing court. No new hearings have been scheduled yet.

The challenge by a local housing group to the workings of two huge global banks is an attempt to halt the “death spiral” of falling property values in neighborhoods overwhelmed by foreclosures. In cities such as Cleveland, where home values never appreciated much during the housing boom, banks have little interest in holding on to an increasingly bloated inventory of foreclosed houses. After taking the properties back at sheriff’s sales, lenders unload the houses at fire sale prices, often to speculators and flippers. The public has an interest in stopping the practice because cities are losing huge amounts of revenue as property values fall and neighborhoods are devastated, said Kermit Lind, a Cleveland State University law professor representing the housing group.

According to the suit, once a property is sold by a bank at “an extremely distressed price,” things go downhill from there:

“The vacant property enters the cheap housing ‘commodity’ market, where the houses are bought and sold by speculators, sometimes on E-bay and other Internet auctions, sometimes for less than $1,000 – the housing equivalent of trading in ‘penny stocks.’

“The vast majority of speculators that purchase vacant Cleveland homes have no intention of rehabbing or living in the property – they are looking only for the opportunity to ‘flip’ the home for a profit to another speculator. Meantime the condition of the property declines and the impact on its neighbors and its neighborhood is devastating.”

Using local nuisance laws to stop foreclosure sales is a new technique, said Kathleen Engel, a professor at the Cleveland-Marshall College of Law, and an expert in subprime lending. It could also be tried by other cities frustrated by foreclosures and falling property values, she said.

Banks for the most part have not been held accountable for the damage left behind in neighborhoods by foreclosures. The Cleveland suit joins efforts in Chicago and Chula Vista, Calif. to make lenders responsible for the condition of foreclosed houses they sell or leave behind. The Cleveland suit contends that bank-owned properties often are left vacant, vandalized and stripped of any value they had before foreclosure, by the time the bank sells them.

“This is important,” Engel said, of the Cleveland action. “It’s way to hold the institutions responsible for the condition of the properties and to prevent them from just unloading waste onto the community.”

In Cleveland, there are entire blocks where over half the homes are foreclosed on, making the problem so acute it spills over into the entire community, said Patricia McCoy, a University of Connecticut law professor who specializes in banking and securities regulation. The situation in Cleveland and in some other cities illustrates the widespread reach of the subprime crisis, she said.

“In some ways the problem has evolved to include an entirely new set of victims – the neighborhoods,” McCoy said. “Often the holders of foreclosed properties have less and less incentive to keep up their properties. It creates the death spiral of deteriorating neighborhoods as a result, along with the collapse of the property tax base. Cleveland has a strong public interest in trying to make sure these properties don’t go further in creating neighborhood decline.”

Cleveland and other cities are “looking at old bodies of law to address new problems,” McCoy said, because they are trying to fight foreclosures with any tools they can.

Cleveland has taken legal action previously over foreclosures. The city in January sued 21 investment banks, including Wells Fargo and Deutsche Bank, and accused them of creating and enabling the subprime crisis. The suit was filed in Cuyahoga County Common Pleas court.

The latest suit differs in that it was filed in housing court. It also cites specific properties sold by banks and documents the cycle of foreclosure sales and speculation that leads to property value declines and neighborhood blight.

One cited property, for example, has been through sheriff’s sales twice in three years, the suit said, with Deutsche Bank purchasing it both times. At the first sheriff’s sale on June 17, 2005, Deutsche bought the property for $72,600. It sold it to Nu Way Real Estate for $24,000 a few months later, on Aug. 4. Nu Way sold the same property to Dante Head Real Estate for $93,000 on March 17, 2006. Dante Head then lost the property in a foreclosure to Deutsche Bank, which purchased it again at a second sheriff’s sale for $25,400 on Jan. 15, 2008.

Deutsche Bank and Wells Fargo were singled out in the suit as the two top sellers of foreclosed properties for $10,000 or less in Cuyahoga County. Because the suit cites their business practices, the ruling would likely affect more than just the 36 properties named in the suit – 25 owned by Deutsche and 11 by Wells Fargo.

Wells Fargo said it could not comment on pending litigation. Deutsche Bank did not provide anyone to comment on the suit.

Municipal housing court judges in Cleveland and Buffalo have been aggressive in holding banks accountable for the deteriorated state of their foreclosed properties, Engel said. Banks have fought legal action in the past by contending they serve as trustees for investors in mortgage-backed securities, and that servicers are responsible for maintaining foreclosed homes. But, as Cleveland blogger Bill Callahan noted, Cleveland housing court often doesn’t buy that argument:

Deutsche and Wells are of course claiming that they’re not really the owners, it’s the servicers who are responsible, etc., etc. But (Housing Court Judge) Pianka’s court has held trustees responsible for code violations in the past.

Cuyahoga County Treasurer Jim Rokakis, who has been outspoken in his criticism of banks that made subprime loans in Cleveland, said the suit could help the city deal with the crisis. Ohio lawmakers in mid-December approved a land bank the county can use to take control of foreclosed properties and sell or reuse them.

“I think it’s a great idea,” Rokakis said. “It’s an all hands on deck approach.”
But others are more cautious. Michael Collins, founder of the PolicyLab Consulting Group in Ithaca, N.Y., a mortgage research firm, said the suit is a sign that “cities are desperate – and certainly they should be. Cities have every right to be worried and to try to do something.”
But falling values caused by foreclosures are a continuing problem that can’t be easily or quickly fixed, even by a novel lawsuit. The real value of the lawsuit, he said, is to put lenders and servicers on notice that they need to take better care of their properties.
In Chula Vista, lenders must hire a management company to maintain foreclosed homes The city of Chicago requires lenders to pay for a night watchman to check on their vacant properties, Collins said. The cost serves as an incentive to get banks to sell or maintain the properties, he said, and Cleveland’s lawsuit might serve a similar purpose.
“It’s grabbing them (banks) by the scruff of the neck and saying, ‘Pay attention here,’” he said. “But there is no good solution. They can’t just stop the market.”
Many of the properties that have been flipped or abandoned are so far gone at this point that they are “the worst of the worst of the worst,” he said. Cities might be better off “making the best of this situation” by clearing them away, instead of trying to force banks to clean them up.
“In some of the cities, subsidizing bulldozers is probably a good solution,” he said. “Some of these properties are not salvageable.”
In housing markets that experienced the heights of housing boom, a backlog of bank-owned properties is less of a problem, because the houses still are valuable enough that homeowners buy them at sheriff’s sales. But bank behavior in handling other foreclosed properties has come under fire. The Federal Deposit Insurance Corp. this summer sent a letter warning banks to maintain their foreclosed properties and to continue paying taxes on them. TWI reported last January that banks in Cleveland and elsewhere have walked away from properties without following through with foreclosures because the legal costs surpassed the value of the properties. Cities get stuck with the cost of cleaning up or demolishing the houses.
Engel said that if the neighborhood group is successful, the housing court could set up an inspection system under which banks would have to prove they had maintained their properties before putting them up for sale.
But even if the suit doesn’t succeed, she and others said, it’s a sign that cities aren’t going to stand by while lenders dump their foreclosure problems on them.

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Lawsuit Targets Banks With Novel Tactic
Pingback posted December 29, 2008 @ 3:57 am

[...] Random Feed wrote an interesting post today onHere’s a quick excerptSome Cleveland neighborhoods have a message for banks that abandon their foreclosed houses or unload them at fire sale prices to speculators: Stop dumping your trash on us. Illustration by: Matt Mahurin Using a novel legal technique that could be copied elsewhere, the Cleveland Housing Renewal Project Inc., a private, non-profit housing advocacy group, is asking Cleveland housing court to declare the business practices of Deutsche Bank and Wells Fargo in violation of local public nuisance l [...]


Real Estate Secret Info » Blog Archive » The Washington Independent » Lawsuit Targets Banks With Novel Tactic
Pingback posted December 29, 2008 @ 4:45 am

[...] unknown wrote an interesting post today onThe Washington Independent » Lawsuit Targets Banks With Novel TacticHere’s a quick excerptThe suit seeks to force the banks to either fix up their foreclosed houses before selling them or to demolish them entirely – instead of dumping them back on the market at Basement Bob-style real estate prices. … [...]


Real Estate Newbie Info » Blog Archive » The Washington Independent » Lawsuit Targets Banks With Novel Tactic
Pingback posted December 29, 2008 @ 6:11 am

[...] unknown wrote an interesting post today onThe Washington Independent » Lawsuit Targets Banks With Novel TacticHere’s a quick excerptThe suit seeks to force the banks to either fix up their foreclosed houses before selling them or to demolish them entirely – instead of dumping them back on the market at Basement Bob-style real estate prices. … [...]


Safe Real Estate Info » Blog Archive » The Washington Independent » Lawsuit Targets Banks With Novel Tactic
Pingback posted December 29, 2008 @ 7:28 am

[...] unknown wrote an interesting post today onThe Washington Independent » Lawsuit Targets Banks With Novel TacticHere’s a quick excerptAt the first sheriff’s sale on June 17, 2005, Deutsche bought the property for $72600. It sold it to Nu Way Real Estate for $24000 a few months later, on Aug. 4. Nu Way sold the same property to Dante Head Real Estate for $93000 on … [...]


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Pingback posted December 29, 2008 @ 9:13 am

[...] agents losing their …Raising the Roof – http://blogs.iht.com/tribtalk/properties/roof/|||The Washington Independent » Lawsuit Targets Banks With Novel Tactic4 hours ago Some Cleveland neighborhoods have a message for banks that abandon their foreclosed [...]


?????????? » Blog Archive » No Furnaces but Heat Aplenty in ‘Passive Houses’ | 4 entrepreneur
Pingback posted December 29, 2008 @ 12:32 pm

[...] Stop dumping your trash on us. Illustration by: Matt Mahurin. Illustration by: Matt Mahurin Read More|||8221;%26lt;/p%26gt;%26lt;p%26gt;%26lt;hr class=%26quot;infobox-hr-separator%26quot; /%26gt; [...]


Nick
Comment posted December 29, 2008 @ 6:16 pm

This would be a good tactic for communities to use to force the banks either to work with current homeowners and keep them in these properties, or pay for the damaged properties later on. The city governments shouldn't be responsible for draining pools and making sure buildings don't fall down — that's the role of the owners of the real estate. Offering the homes at rock bottom prices and contributing to the sharp decline in real estate values, as banks are doing, is not a sustainable solution that will help other borrowers avoid foreclosure.


ForeclosureDefender.com » Blog Archive » Banks with Deep Pockets Dodge Foreclosure Damages But a New lawsuit Targets Banks With a Novel Tactic
Pingback posted December 30, 2008 @ 12:58 pm

[...] the original story at the Washington Independent:  Lawsuit Targets Banks With Novel Tactic: Advocacy Group Takes Grievances to Housing Court Posted in Eviction, Foreclosure, Legal Actions | Leave a [...]


Vena Jones-Cox
Comment posted January 3, 2009 @ 11:30 am

Every time local governments try to get involved in the foreclosure “problem”, their well-intentioned interventions end up making things much, much worse.

Houses in Cleveland aren't selling for $1,000 because banks are doing anything wrong–they're selling for $1,000 because the SUPPLY of houses in Cleveland greatly exceeds the demand. It's a dying city with a crappy school system and an aged housing stock. Many of the foreclosed properties in question literally need $40,000-$50,000 in repairs to make them safe and habitable for the tenants who will be their eventual occupants–you can pretty much forget selling them to homeowners in most areas, because homeowners can afford to live where the schools are good, the jobs are plentiful, and the crime rate is low.

Since the rent on a 3 br home in an older section of cleveland is around $700-$900 per month, and taxes and insurance take up perhaps $150 of this, and management, vacancy etc cost another 20% of gross, you can easily see that the risk vs. return on a $40,000+ repair bill calls for a very low purchase price.

what's more, when banks DO make repairs to a property, they tend to do the cheapest, highest-returning work, which means cosmetic upgrades as opposed to the mechanical and energy-saving furnaces, windows, insulation etc that makes it affordable for low and moderate income tenants to live in the finished product. I would much, much rather pay $1,000 and spend $40K to do the repairs myself, and know that the work is done right, than pay the bank $40,000 for a property they've repaired–primarily because i know that i will have to do additional work to their “fixed” house.

I've been in real estate for more than 18 years, watching what's happening to city neighborhoods. Leave housing to the experts–and yes, that includes the “flippers” who take those $1,000 properties and make a little money putting them into the hands of people who know how to rehab and manage them. The example given in the article of the property that was apparently flipped 3x before going back into foreclosure is far from the norm, and would be hard to replicate in today's market where financing for investors is almost impossible to get. Today, most investor buyers are, by necessity, paying CASH for these properties (and thus CANNOT go into foreclosure), and are NOT sitting on money-sucking vacant properties in CLEVELAND hoping they'll magically increase in value. The end buyers of these properties–the ones that the “speculators” are doing a huge service for by locating and negotiating the deals–don't think of them as commodities, but as income-generators, and that's the best thing that could happen to the city of Cleveland right now.

“Banks”–and that's not even who owns most of these properties, thanks to the bizarre securitization of subprime loans, but that's a topic for another day–are NOT going to fix up these properties when they'll lose even MORE money by doing so. They'll continue to do what they've already been forced to by Cleveland's LAST brilliant law…stop foreclosing and leave the rotting properties in the hands of the owners who can't maintain them. NOT the solution. Let the market work, let it shake out which of these properties are worth having and which aren't, and the banks can be charged to tear down what's left.

Or better yet, fix the underlying problems of crime, bad schools, poor services, an expensive, overblown bureaucracy, high taxes, low-paying jobs, and corrupt politics in our rust belt cities, and the housing problem will quickly take care of itself.


Sharp Foreclosure Facts That.. » Blog Archive » Va foreclosure
Pingback posted January 6, 2009 @ 3:32 am

[...] Some Cleveland neighborhoods have a message for banks that abandon their foreclosed houses or unload them at fire sale prices to speculators: Stop dumping your trash on us. Illustration by: Matt Mahurin Using a novel legal technique that could be More Foreclosure News [...]


civitas
Comment posted January 6, 2009 @ 11:20 am

Well said Vena. If the banks can be prevented from selling their property for whatever they can get for it, what's to stop the courts from directing how private citizens must sell their property?

It's actually a boon to people looking for real estate for the banks to sell it cheap. Maybe they're looking for a first home and have little cash but are willing to put in the “sweat equity” to fix the place up.


penny stocks
Comment posted April 14, 2009 @ 10:31 pm

That will be great if they can do something instead of letting the substantial drop in the value of their houses.


penny stocks
Comment posted April 15, 2009 @ 5:31 am

That will be great if they can do something instead of letting the substantial drop in the value of their houses.


entrust
Comment posted November 27, 2009 @ 5:36 am

The city governments shouldn't be responsible for draining pools and making sure buildings don't fall down — that's the role of the owners of the real estate.


entrust
Comment posted November 27, 2009 @ 10:36 am

The city governments shouldn't be responsible for draining pools and making sure buildings don't fall down — that's the role of the owners of the real estate.


louis vuitton
Comment posted August 1, 2010 @ 8:17 am

Since the rent on a 3 br home in an older section of cleveland is around $700-$900 per month, and taxes and insurance take up perhaps $150 of this, and management, vacancy etc cost another 20% of gross, you can easily see that the risk vs. return on a $40,000+ repair bill calls for a very low purchase price.


louis vuitton
Comment posted August 1, 2010 @ 8:19 am

It's actually a boon to people looking for real estate for the banks to sell it cheap. Maybe they're looking for a first home and have little cash but are willing to put in the “sweat equity” to fix the place up.


Stop Foreclosure
Comment posted September 8, 2010 @ 2:36 pm

The city government shouldn't be held responsible for this but the real estate owners themselves


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