Published • Sun, Jan 29, 2012

Detroit has other options than an EM

http://michigancitizen.com/sue-the-banks-deficit-tied-to-foreclosures-p10759-1.htm

By Eric T. Campbell
The Michigan Citizen

DETROIT — If you believe the status quo media reports and some state officials, the city of Detroit has exhausted all of its options to erase its mounting budget deficit. The only solution, according to Gov. Rick Snyder and State Treasurer Andy Dillion, is imposing an emergency manager.

The city, according to some legal experts, has another possible course of action: Suing the banks to recoup revenue losses caused by fraudulent lending practices.

Since the onset of the nationwide home foreclosure crisis, several cities have challenged the banking industry in court. In most cases, the goal was to establish a direct link between bank-led home foreclosures and municipal budget deficits. The efforts have largely failed thus far.

But recent court decisions and an April 2011 Federal Reserve Board review might tip the scales in the direction of communities devastated by home vacancies and declining property tax revenue.

“The destruction of our tax base is directly related to the foreclosure crisis,” attorney Jerry Goldberg told the Michigan Citizen. “There is now mounting documentation of fraudulent practices — the city can legitimately claim the deficit is a result of fraud and abuse.”

Goldberg cites a January 2009 City Planning & Development Department report indicating that more than 20 percent of all household mortgages in Detroit were foreclosed on between 2005-09.

The city of Baltimore sued Wells Fargo at the beginning of 2008 on the grounds that the bank intentionally pushed high-interest mortgages to Blacks in that city.

The city of Cleveland, with the support of Mayor Frank Jackson, went to court against 21 banking institutions in January 2008. The city sought to recover millions of lost taxes from devalued property and costs associated with the demolition for thousands of vacant homes.

Two separate cases were brought by the city of Cleveland. One in the federal courts — stating the banks violated a city public nuisance statute by causing home foreclosures — and the other in state court, which was a racketeering claim based on mortgages that had questionable ties to properties. In 2008, 40 percent of mortgages in Cleveland fell in this category.

The effort came up short of a victory, but was fought all the way to the U.S. Supreme Court. The lead lawyer in the case, Joshua Cohen, told the Michigan Citizen that the Cleveland case failed to convince judges that the banks caused the revenue decrease. But he says Detroit is in a prime position to further the case against the banks.

“It’s amazing to me that the courts have been so uncommitted to the idea that the law would permit financial recovery — it’s not that farfetched,” Cohen says. “In front of the right court, the ideas we pushed could be moved ahead.”

Cohen says Detroit and Cleveland suffered similar depressed economic conditions in 2006, when subprime loans were pumped into minority communities by fraudulent lenders. He adds the results could have been predicted by looking at the relatively stable housing markets and the increasing unemployment.

“The homeowners that were receiving these subprime loans were not going to be able to handle them,” Cohen continues. “The banks’ rationale for vast subprime lending was appreciating home values throughout the nation. But those premises, which were weak at best, never applied to Cleveland and Detroit.”

Kimberly Boyd-Harris, director of the Detroit-based Center for Community Justice and Advocacy (CCJA), says early efforts to sue banks were lengthy and costly because new ground was being forged. But recent settlements approved by the U.S. Department of Justice and a scathing report by the Federal Reserve Board may provide the legal basis that such a lawsuit requires.

“In the past couple of years we’ve connected a lot of dots,” Harris told the Michigan Citizen. “Since that time, there have been numerous revelations about fraudulent practices and their affects on the community.”

CCJA has initiated a class action lawsuit against CitiMortgage. Harris said she couldn’t discuss the details of that case but noted the April 13, 2011 decision by the Federal Reserve Board to review the mortgage loan servicing and foreclosure processing of 10 major bank organizations. That decision, she says, could have major ramifications for future court cases.

Mayor Dave Bing’s 2011 Financial Restructuring Plan indicates massive declines in revenue from income tax, property tax and state revenue sharing. Even after massive cuts to basic services and public transportation, the general fund deficit is $145 million. Long-term debt obligations associated with the general fund amount to $1.8 billion.

Naomi Patton, spokesperson for the mayor’s office, says she can’t say whether the city has done an analysis linking bank foreclosures to declining revenue.

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