Cleveland Suing Securitizers, Lenders

The complaint, filed last week in the Court of Common Pleas, Cuyahoga County, Ohio, alleges the defendants caused the current foreclosure crisis in Cleveland by routinely making loans to borrowers who had no ability to pay them back.

A rash of resulting foreclosures has left entire neighborhoods full of abandoned and boarded up properties, reversing a successful revitalization of Cleveland “seemingly overnight,” the complaint alleges. The foreclosure epidemic has deeply depleted Cleveland’s tax base.

“The purveyors of subprime mortgages could have and should have (and in all likelihood actually did foresee) a foreclosure crisis as the inescapable consequence of their conduct,” the city alleges.

Named in the lawsuit as defendants are Bank of America Corp., The Bear Stearns Companies, Citigroup Inc., Countrywide Financial Corp., Credit Suisse, Deutsche Bank Trust Co., GMAC-RFC, Goldman Sachs Group, Greenwich Capital Markets Inc., HSBC Holdings PLC, IndyMac Bancorp Inc., J.P. Morgan Chase Co., Lehman Brothers Holdings Inc., Merrill Lynch & Co. Inc., Morgan Stanley, Washington Mutual Inc. and Wells Fargo & Co.

Also named were Ameriquest Mortgage Co., Fremont General Corp., NovaStar Financial Inc., Option One Mortgage Corp. — all which have stopped making loans.

The city is placing most of the blame on investment bankers who held significant influence over subprime lenders, noting in its complaint that lenders and mortgage brokers were only nominally involved in the transactions. Securitizers not only purchased and packaged subprime loans, they also acted as underwriters and investors and provided lines-of-credit to lenders.

By 2003, investment bankers began directing originators on the type and volume of loans to be delivered — destroying the loan underwriting process, the filing said.

“Their appetite for mortgage-backed securities became so voracious that ‘securitizers’ explicitly countenanced loans made to borrowers either on financially irrational terms or without any information to corroborate the borrowers’ wherewithal to pay — anything to keep new mortgages coming for the creation of still more mortgage-backed securities,” the complaint states.

By creating hedge funds and keeping “the gravy train rolling,” investment banking executives were able to maintain six- and seven-figure bonuses, the lawsuit alleges.

“‘Securitizers’ typically paid themselves astronomical fees in putting together new offerings of mortgage-backed securities,” Cleveland alleges. “Mortgage-backed securities funded lavish pay days (by even Wall Street standards) for the firms engaged in this business.”

But the city was not experiencing property appreciation as was much of the rest of the country, and subprime lenders and securitizers should have “eliminated Cleveland as a market for subprime lending,” the lawsuit alleges.

Cleveland, which says it is the second biggest city in the state, claims subprime foreclosures — which have allegedly risen 80 percent from 2000 to 2006 — have created a public nuisance in violation of Ohio common law. A graph included in the complaint indicates foreclosures climbed from 397 in 2004 to 7,369 in 2006.

Deutsche Bank has filed over 4,700 foreclosures in Cuyahoga County over the past four years — by far the most actions of any of the defendants, the city alleges. Wells Fargo filed over 4,000 foreclosures during that same period, while Ameriquest and its former sister company, Argent Mortgage Co. — now part of CitiMortgage, filed around 1,600 foreclosures between 2004 and 2007.

HSBC filed 1,300 foreclosures from 2004 to 2007, according to the lawsuit. Citigroup and Countrywide have each had 1,300 filings since 2004.

JPMorgan reportedly foreclosed on over 1,000 loans over the past four years, while WaMu foreclosed on 900 properties. Bank of America had 450 foreclosures between 2004 and 2007 and Citigroup filed 600 foreclosures during the past four years.

While the city claims subprime foreclosures have devastated its property tax revenues, it also claims it never benefited from the growth in subprime lending leading up to the foreclosures.

Cleveland is asking the court to award it compensatory damages which it will quantify at trial, as well as interest, attorney’s costs and other relief.