St. Paul threatens legal action against banks that own vacant houses

St. Paul sent letters this week to six financial institutions urging them to fix the homes. They're giving the banks 30 days to arrange a meeting with City Hall.

City officials say the lawsuits would be a last resort. Mayor Chris Coleman says he'd rather have the mortgage holders meet with city staff to discuss how they plan to rehab the properties.

"But we want to be clear. If they don't show up at the table, we're going to go after them," said Coleman. "And we're going to go after them with all the resources and all the tools available to us."

About 2,300 St. Paul houses have gone through foreclosure since early last year. And more than 70 percent of them are controlled by big names like Wells Fargo, USBank, Deutsche Bank, HSBC and Chase. Topping the list is the electronic registry system known as MERS.

"The city of St. Paul is a property manager for all these large lenders. We can't afford to do it. We won't do it."

There was a time when building owners would immediately respond when the city threatened demolition. Legislative hearing officer Marcia Moermond says that's no longer the case.

"Right now, half of the time we have these orders to remove a building, we don't have the owners showing up. By and large, these owners are the financial institutions who hold the mortgages on them," said Moermond. "If they're not showing up in the room, we certainly not getting a rehabbed building. We are demolishing at an alarming rate, compared to what we've done historically. And we have no other options."

City Council President Kathy Lantry says she thinks the larger lending companies have been so slow to respond because the national foreclosure crisis has saddled them with an unmanageable stock of vacant homes across the country.

"Part of it is, it's not the business they do," said Lantry. "They're not in the property management business. They're in the mortgage business."

Lantry says that has left cities with the responsibility of shoveling sidewalks and mowing lawns. Copper thieves have broken into the properties, and other homes have been destroyed by burst water pipes.

St. Paul officials estimate the city spends millions of dollars every year on inspections, demolitions, and other costs associated with empty houses.

"Right now, you understand, the city of St. Paul is a property manager for all these large lenders. We can't afford to do it. We won't do it," said Lantry.

St. Paul wouldn't be the first city in the U.S. to duel with lending companies over the foreclosure crisis. The city of Baltimore recently sued Wells Fargo, saying the bank discriminated against black borrowers.

Minneapolis last week sued a Roseville firm, alleging mortgage fraud. And Cleveland and Buffalo, New York, have gone to court arguing that abandoned properties have created public nuisances.

Attorney Mark Ireland of the Housing Preservation Project says St. Paul's approach is unique in Minnesota.

"in this case, we're looking at lenders who own large portfolios of properties in the city of St. Paul, and coming up with a systematic way to evaluate and get them in the property of homeowners," said Ireland.

One option is to ask a judge to appoint a third-party "receiver," such as a contractor or community-development corporation, to take control of the properties and rehab them.

But some housing experts who have been closely following lawsuits elsewhere doubt that cities will win the damages they are seeking.

"Not to be pessimistic, being a law professor and all that," said Dennis Keating, who teaches law and urban planning at Cleveland State University.

But he is pessimistic that this approach will work. Keating says the banks will argue they're not responsible for the broader effects of empty houses.

"They'll, I'm sure, have some evidence that they make good-faith efforts and can't be accused of making public nuisances. They'll probably blame homeless people, and vandals and other influences for causing the problems," said Keating.

"The cities really are trying to say 'You're damaging the neighborhoods that have the houses in them,'" Keating continued. "And I think the banks will say, 'While we're responsible for the homes, we have no control what happens to property values or the cities' expenses in trying to reclaim the neighborhoods.' I think that's the ultimate goal of this, and it's a real long shot."

Chase Bank spokeswoman Christine Holevas of Chicago agrees that property owners should maintain the buildings. But she says banks are constrained by the lengthy foreclosure process.

"However, once they're back in our possession, we have a team that goes back in and tries to sell the home," said Holevas. "So they come in and they clean it up. Whether it's repairing windows or repainting or fixing it up, we do whatever we need to make it a viable purchase."

St. Paul officials say the banks need to act faster. Attorney John Choi says the city sent the letters Tuesday, so he's hoping to receive a few phone calls soon.

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