Hit by the US' mortgage crisis, Cleveland, Ohio, has launched a legal battle against major Wall Street banks it blames for the devastation of its housing market.
Cleveland Mayor Frank Jackson has accused a group of 21 big banks and financial firms of triggering local housing woes through the marketing of subprime home loans.
The number of housing foreclosures in the city leapt to 70,000 last year from 120 in 2002 amid a national housing slump.
PHOTO: AFP
"The subprime market devastated my city. It wound up creating blight and a public nuisance," the mayor said in an interview.
The use of subprime home loans, granted to Americans with poor credit, ballooned during a years-long housing boom that ran out of steam in 2006. The nation's housing market has been in decline since that time.
"The consequences of what they were doing didn't matter. They were living large off our misery. They are the ones that fueled this operation and that put us in this meltdown," Jackson said of the banks.
A formerly prosperous industrial city situated on the banks of Lake Erie, Cleveland's population has shrunk in recent decades to some 450,000 inhabitants from around 950,000 as job opportunities have declined.
The city is seeking hundreds of millions of dollars in damages from the banks to cover what it says is the social and economic damage caused by subprime loans and its local housing meltdown.
Officials say that the money is needed to cover the cost of demolishing abandoned homes, cleaning up afflicted neighborhoods, policing emptied homes taken over by drug dealers and squatters, as well as to offset a fall in property taxes.
One of the accused banks, Citigroup, strenuously denies Jackson's accusations.
Other banks targeted for damages by the city include Bank of America, Goldman Sachs and HSBC among others.
Jackson described the situation as disastrous and said organized crime had soared in neighborhoods where homes have been abandoned by families who could no longer afford their mortgage payments.
Subprime foreclosures have spiked across the country in part because the loans were sometimes based on a low "teaser" interest rate that adjusts dramatically higher within a few years.
Borrowers claim banks and lenders obscured the resets, leaving them struggling to make their mortgage payments when rates spiked.
"Remember David and Goliath? Now it's a small town like Cleveland against Wall Street," said Michael Polensek, a city councilor.
Polensek said it was important for Cleveland to take action, but some legal experts and housing advocates are skeptical.
"It's ambitious, but what the lenders did was legal. But maybe that's not what is important," said Kathy Hessler, a law professor at Case Western Reserve Law School in Cleveland.
Other observers said the mayor was reacting to political pressure.
"How could you sue companies facing bankruptcy? Some companies do not even exist anymore. That is a joke. We told the mayor two years ago what was happening. We didn't hear from him," said Mark Seifert, director of the East Side Organizing Project, a Cleveland non-profit organization.
Seifert said the mayor was acting because constituents had likely been "pounding" on his door.
"That's why he is trying to do something," Seifert said.
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