The suit named Wells Fargo and Deutsche Bank as the biggest foreclosers in Cleveland –  explaining that they sell REOs in bulk, at pennies on the dollar, to speculators and flippers, who often abandon the properties. But those practices are commonly used by other banks as well. If the suit succeeds, other localities could tackle the REO problem by going citing banks as a public nuisance.

The banks immediately fought back and in January got the cases moved to federal court, where the nonprofit would face a far more costly battle. Housing court judges also tend to be more familiar with the problem of neglected bank-owned properties. It looked like the lawsuits might be doomed.

But there’s been a big development, according to Kermit Lind, a Cleveland State University housing professor and one of the lawyers for Cleveland Housing Renewal Project, Inc., the nonprofit filing the suit. Federal court judges recently sent both cases back to housing court, at the request of the nonprofit’s lawyers. That means if housing court concludes that Wells Fargo and Deutsche Bank are violating public nuisance laws by neglecting their REO inventories, the sales could be stopped. The banks would have to either fix up the properties before selling them, or demolish them — anything to stave off the death spiral of plummeting property values. If the banks are smart, they’ll find a way to hand them over to community groups that will find a way to reuse them.

Keep your eyes on this case. If the Cleveland folks are successful, as TWI noted, their tactics could set a standard for other communities. It’s also a sign that cities are figuring out ways to fight back and are no longer willing to stand aside as banks dump their trash and walk away.

–

TWI is on Twitter. Follow Mary Kane’s ongoing coverage of the housing crisis here.

I’m hearing stories frequently of banks selling REOs far below market prices, only to have local investors flip the properties.

A reader sent me some info on a property in Redwood City that is typical. The lender turned down two short sale offers at close to $649,000, and then, after foreclosing on the property, the bank listed the property at $509,000. The property sold for $493,000 all cash, even though there were other offers above the list price.

What is going on? I think the lenders are swamped, and this is OPM (other people’s money). The money doesn’t belong to the people making the decisions, and it is hard for them to accept a short sale, and after foreclosure, it is probably easier for them to just take a check and get the property off their desk. The result is the banks make a series of less than optimal decisions, and they leave money on the table at several points in the process.

CR also cites a story from the North County Times in California, noting how banks are so overwhelmed by the foreclosure crisis they are dumping properties in bulk.

Maybe now that the furor over AIG bonuses is settling down a bit, this problem will begin to get the attention it deserves. Like so much in the mortgage crisis, it’s felt first in neighborhoods and communities, long before politicians and policymakers see it. They’re already way behind the curve.

Just to show you how bad the crisis in vacant and foreclosed has become, Habitat for Humanity is still around, and still helping out — only now the group is concentrating, in some places, on tearing houses down, The New York Times reports. The organization is already hard at work at this effort in Saginaw, Mich., a city plagued by abandoned properties.

As part of an agreement with the city, and with at least $500,000 from the state and federal governments, the Habitat for Humanity volunteers and paid workers plan to demolish two vacant, dilapidated houses here a week, every week, over the next two years. As for creating homes, they will build or refurbish eight houses this year.

The shift in the organization’s focus is a sign of the times in Saginaw, a shrinking city northwest of Detroit where at least 800 houses sit empty and doomed, and offers a glimpse of what increasingly empty neighborhoods in many cities may soon face as foreclosures continue.

International leaders of Habitat for Humanity, an organization more than three decades old, say their focus is changing to meet the demands of a changing economy. In cities where so many homes sit empty, the group is leaning away from building new houses and instead fixing up old ones, said Ken Klein, the vice chairman of the group’s board.

At least Habitat is out there, doing something about this. There’s much more Congress and the Obama administration could do to help out as well. It’s not an impossible task. In April, New Jersey will begin, for the first time, requiring a bank or other entity that forecloses on a house to take responsibility for it both before and after it becomes a bank-owned property, or REO.

Lawmakers could easily require banks receiving bailout funds to take care of their neglected REOs, as a condition of getting the money. Public shame, which worked in convincing some AIG executives to give back some of those bonuses, might also work here. Pass around a few photographs of trashed houses owned by Citigroup, Wells Fargo, etc., and it could go a long way in prompting some action.

The government could also get behind cities that are trying to stop banks from dumping their dilapidated REOs on the real estate market at fire-sale prices, claiming the practice has become a public nuisance because it causes a death spiral of falling property values. Washington, in addition, could support the idea of a federal land bank, or  land banking efforts in general,  so communities could more easily acquire and reuse large inventories of vacant homes. Fannie Mae and Freddie Mac’s new policy of not automatically evicting renters from foreclosed homes was a huge step in the right direction – but there have been few other innovative rental ideas coming from the government.

The worrisome question is not so much what Washington eventually will do — it is when will it finally get around to doing it? How many cities will be left scarred by vacant and abandoned homes before someone acts?

In Los Angeles, however, PVC farms and abandoned developments are more than an eyesore — they’ve become an epidemic, according to The Times.

Nearly 250 residential developments with a combined total of 9,389 houses and condominiums have been halted in California, according to research firm Hanley Wood Market Intelligence. The units, worth close to $3.5 billion, were in various stages of development.

Now, many are in bankruptcy or have been foreclosed by lenders. Developers have halted sales on an additional 370 new-home developments — about 30,000 units worth $11.9 billion.

“It’s a sad state of affairs,” said Greg Doyle, regional director of Hanley Wood.

And what happens to those abandoned developments?

By day, it’s far too quiet at the site of a planned housing and retail development on a former Navy base in Oakland.At night, neighbors can hear the thieves come out.

They rip out copper wire, haul away pipes and take anything else they can steal from dozens of buildings on the site, abandoned after Irvine developer SunCal Cos. fell victim to the economy.

It’s a scene not uncommon throughout California, as residential construction grinds to a halt under the dual weight of the credit crunch and the housing crisis: a rusty chain the only barrier between the community and a half-built structure in Hollywood; a bare dirt lot in Pasadena; old stoves amid the trash at the site in Oakland.

An interesting twist is that one developer of an unfinished project is suing Lehman Bros., contending funds for building the houses were cut off when Lehman declared its bankruptcy. The investment firm hoarded billions of dollars in cash, the suit contends, while the project it was supposed to fund failed.

Lehman filed a motion to dismiss the suit. A legal battle could drag on for years. In the meantime, as we reported, neighbors surrounding those half-built developments in California and around the nation endure the trash and vandalism that results, while banks and developers walk away.