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Cleveland Neighborhoods Win a Round in Fight Against Banks Over Foreclosures

For neighborhoods fighting the blight and deteriorating property values caused by foreclosed properties that banks abandon or unload on speculators, this is big news: A housing court judge in Cleveland has ordered Wells Fargo to clean up the foreclosed houses it owns in Cleveland.

In the preliminary injunction he issued Thursday, Judge Raymond Pianka also required Wells Fargo to prove its foreclosed properties are up to city building and housing codes before the bank can sell any of them for less than $40,000, Cleveland.com reports. Pianka will decide at some point whether to make the injunction permanent. But housing advocates still consider his initial decision a huge step forward, because it gives a local community – for the first time ever – some legal clout in battling huge global banks that own vacant or dilapidated foreclosed properties in their neighborhoods.

As TWI has [reported,](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) a local housing group in Cleveland filed a novel lawsuit last year against Wells Fargo and Deutsche Bank, trying to halt the “death spiral” of falling property values in neighborhoods overwhelmed by foreclosures. The suit asked housing court to declare blighted and foreclosed properties owned by both banks in Cleveland in violation of public nuisance laws – -and to require the banks to fix them up or tear them down.

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, the neighborhood group and its attorneys argued. And banks, for the most part, have not been held accountable for the damage they’ve left behind.

The Cleveland lawsuit is especially significant because using local nuisance laws to stop foreclosure sales is a new technique — and it could also be tried by other cities frustrated by foreclosures and falling property values.

From Cleveland.com:

“I don’t believe a court anywhere in the country has issued an order that’s this comprehensive against a major financial institution,” said Frank Ford, executive director of the nonprofit housing advocacy group that had sued Wells Fargo over its property conditions.

“The ruling is specific to Wells Fargo, but it sets a precedent that says banks that have foreclosed on property, allow it to go vacant, and don’t maintain it are going to be held to the same standards as any property owner in Cleveland,” he said.

Cleveland housing attorney Kermit Lind told TWI in an email that the court’s decision makes it clear local governments have the right to challenge the business practices of global banks that made subprime loans in cities and left foreclosed properties behind.

“The court is saying that banks are not too big to comply with local laws and they are not protected by preemption from being required to do so. Local governments are not prevented from protecting the public health, safety and welfare from the unlawful business practices of those who deal in housing for commercial gain.”

Thursday’s decision applies only to Wells Fargo’s properties in Cleveland, which numbered about 180 as of April. Both Wells Fargo and Deutsche Bank previously had tried to get the suit reassigned to a federal court. Wells Fargo is trying to get Pianka removed from the case and is challenging the ruling, according to Cleveland.com.

In a written statement issued late Thursday, Wells Fargo spokesman Kevin Waetke said the company believed there was no legal basis for the decision and will consider appealing.

“Wells Fargo has a long history of responsible lending and servicing in our communities,” he said. “We stand by our lending record and practices as we feel it is always in the best interests of the community to have the home reoccupied in order to preserve the neighborhood.”

Wells Fargo separately requested Thursday that Pianka remove himself from the case and suggested that his attendance at a recent conference on vacant properties, the primary issue in the case, created an appearance of bias. Pianka declined to recuse himself.

The suit initially was filed in December. Last month, Pianka issued a temporary restraining order preventing Wells Fargo from selling any foreclosed properties it owns in Cleveland before fixing them up. That order expired Thursday.

As far as Deutsche Bank goes, its part of suit is in the federal court of appeals and scheduled to be briefed over the summer.

The preliminary injunction for Wells Fargo is probably going to be appealed to the state court of appeals in Cuyahoga County. According to Lind, Pianka’s injunction stays in effect until the case is decided finally. That could be months, he said.

In the meantime, other towns struggling with vacancies and foreclosures will no doubt be following this case very closely.

*You can follow TWI on Twitter and Facebook. *

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