Los Angeles is pursuing the so-called slumlord suit against Deutsche Bank for allegedly allowing foreclosed properties owned by the bank to deteriorate and evicting poor residents.
"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks," Lord John Acton famously said. It's as if the 19th century English historian was speaking about the city of Los Angeles and Deutsche Bank, as the city proceeds with legal action against the leading holder of foreclosed property in LA.
A Los Angeles judge recently ruled that a lawsuit filed by the city can continue against Deutsche Bank for allegedly allowing scores of foreclosed properties it owns to deteriorate, causing blight around the city. The so-called slumlord suit also alleges that Frankfurt-based Deutsche Bank unlawfully evicted hundreds of low-income residents.
Los Angeles Superior Court Judge Elihu Berle denied Deutsche Bank's motion to dismiss a 2011 civic enforcement suit requiring the bank to properly maintain its properties.
The city's lawsuit followed on the heels of a 2011 federal suit accusing Deutsche Bank of contributing to the international financial crisis by approving more than 40,000 dodgy loans over a number of years and with having a "blatant disregard" for whether the borrowers could afford to repay the loans.
City Attorney Carmen Trutanich said the judge's ruling "will now allow our action to move forward to trial and ultimately to holding the bank accountable for its intolerable practice of perpetuating blight."
Deutsche Bank denies responsibility for the run down state of the 166 properties named in the civil action. The bank says it has handed management of the properties over to various "servicers" who are legally responsible for their upkeep.
"The court did not make any factual determinations regarding Deutsche Bank's responsibility with respect to the allegations," said Deutsche Bank in a statement. "While we are disappointed in this procedural decision allowing the case to proceed, we continue to believe that the LA City Attorney has sued the wrong party and will continue to defend ourselves vigorously."
But a 2012 survey from real estate valuation service Zillow estimates that half of the 400 bank-owned homes in South Los Angeles, where many of the vacant foreclosed homes are concentrated, are in disrepair.
Housing rights activists say that when the banking industry was teetering on the edge of collapse in 2008, the US taxpayer provided the industry with a $700 billion bailout. The banks have repaid the public, activists say, with foreclosures, evictions and blighted communities, whilst lavishing their executives with exorbitant executive bonuses and salaries.
The foreclosure crisis has hit California the hardest. Some two million of the estimated 16 million US homes facing foreclosure since 2008 are Californian homes. The Los Angeles metro area has made up the lion's share of those with an estimated 200,000 homes in foreclosure.
LA city officials accuse Deutsche Bank of leading a group of lenders who behave like absentee "slum" landlords by violating federal, state and city laws against maintaining substandard housing conditions and overseeing nuisance properties.
According to the city's complaint against DB, the bank swooped in an acquired over 2,200 properties in Los Angeles during the 2007-2008 mortgage meltdown. The complaint also alleges many of the properties were vacant at the time of foreclosure and the bank failed to maintain them, and of those that were occupied, Deutsche Bank illegally evicted the tenants and sold the homes.
City officials say they warned Deutsche Bank repeatedly over a number of years to bring its empty properties into compliance with city health, safety and tenant rights laws, but the warnings were ignored.
In response to citizen pressure, Los Angeles enacted a "blight ordinance," which fines banks $2,500 for each day they fail to maintain their properties.
Most of Deutsche Bank's properties are in the low-income areas of South Los Angeles and the Northeast San Fernando Valley. City officials say the neglected vacant properties depress property values, contribute to crime and stretch overburdened city services.
A 2012 report from the community group Alliance of Californians for Community Empowerment estimates that the foreclosure crisis caused Los Angeles County homeowners to lose nearly $80 billion in home values from 2008-2012. The report also estimates that the county lost about $480 million in property tax revenue over the same period.
Some analysts argue that the city's attempt to hold the banks accountable is commendable, but not enough to reverse the trend of foreclosure caused blight. They point to a "right to rent" pilot program underway now in Ireland as an example of how to deal with the problem. Under the program, some 10,000 foreclosed Irish homeowners are given the right to stay in their homes as renters at fair market rate for an extended period, rather than allowing the banks to evict them. An equivalent program in the US would involve about 700,000 homeowners facing foreclosure.
"Right to rent"
The idea has found some traction in the US Congress. Raúl Grijalva, an Arizona Democrat, sponsored a "right to rent" bill in the House of Representatives twice in 2009 and 2011. It stalled in the Financial Services Committee both times because of majority Republican opposition.
Economist Dean Baker, Co-Director of the Washington D.C.-based economic think tank the Center for Economic and Policy Research, conceived of the plan way back at the beginning of the financial crisis in 2007.
"This is something Congress can still do and hundreds of thousands of foreclosed homeowners can benefit from," said Baker. "It also wouldn't cost any public money."
Baker said foreclosed homes could remain occupied and maintained (thus avoiding blight) and homeowners could be spared unnecessary stress.
"By not allowing banks to just throw people out, it makes foreclosure a much less appealing option for the banks," said Baker.
Meanwhile, Los Angeles officials say they plan to continue to hold Deutsche Bank and other major lender's feet to the fire.
"We are sending a clear message to banks, if you neglect properties and endanger neighborhoods, if you illegally put families on the street, we're coming for you," said City Council member Eric Garcetti.