A New Approach to the Subprime Public Nuisance

At the close of 2008, the Cleveland Housing Renewal Project Inc., a private, non-profit housing advocacy group, tried a new legal tack to deal with the havoc the subprime housing fiasco is causing Cleveland, Ohio. It asked Cleveland’s housing court to declare that business practices used by some banks when selling foreclosed properties are creating a public nuisance in violation of the law. The suit asks the court to abate the nuisance by ordering the banks to either fix up the foreclosed houses before selling them or to demolish them entirely. The case has since been removed to federal court.

According to the original complaint, the current bank practices of unloading the foreclosed houses at fire sale prices to speculators is creating a “death spiral” of falling property values in neighborhoods overwhelmed by foreclosures. Once sold by the bank, a public nuisance is created because:

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.

As a result, the 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 suit differs from other public nuisance suits in that it identifies specific properties sold by banks that it claims are a public nuisance and that this nuisance is causing property values to decline and causing neighborhood blight.

It is an important suit because it uses local housing codes and standards as a basis for declaring the bank’s practices as creating a housing public nuisance. Normally, banks are not held accountable for a foreclosed house’s condition. This suit attempts to make lenders responsible for the condition of foreclosed houses they sell or leave behind. While the banks may not technically be the owners of the foreclosed houses, courts have been known to hold trustees responsible for code violations.

Using local housing and nuisance laws to stop foreclosure sales is a new technique that could be tried elsewhere. It is a unique attempt to hold the banks responsible for housing conditions and to prevent them from simply selling the homes to speculators. Even if this suit isn’t successful, it’s a sign that Cleveland isn’t going to turn a blind eye to foreclosure problems.