A north Minneapolis neighborhood is taking on mortgage giant CitiMortgage in a test case attempting to make careless lending an act for which lenders can be held liable in Minnesota.

The lawsuit filed Wednesday for the Hawthorne neighborhood reflects a growing national effort to hold lenders legally responsible for the damage caused by shaky loans that go to foreclosure.

Some cities have taken on lenders. Baltimore this month asked a federal court to order Wells Fargo Bank to reimburse it for lost taxes and other costs from foreclosures. It alleged predatory lending that targeted black home buyers.

The Hawthorne case has the potential to set a national precedent, according to Prentiss Cox, a University of Minnesota law professor. Cleveland State University credit market specialist Kathleen Engel reports a flurry of recent calls from cities and states considering lawsuits but added, "It's by no means a slam-dunk."

In Hawthorne, the lawsuit alleges that CitiMortgage used "negligent and improvident lending practices" to finance the purchase last March of a two-story white frame house on 31st Avenue. N. The neighborhood wants to buy the house from CitiMortgage for a redevelopment project but said it can't get a response.

Meanwhile, the lawsuit alleges, the property has become a neighborhood eyesore that has attracted housing tags and 911 calls. It is seeking damages, a monitored alarm system and compliance with the city housing code.

A CitiMortgage spokesman declined to comment on the litigation.

'An aggressive legal theory'

According to lawyer Mark Ireland of the nonprofit Foreclosure Law Relief Project, who researched and filed the lawsuit, courts nationally have established the tort, or injury, of improvident lending in cases involving credit cards or lending to someone who is mentally incompetent. The Hawthorne lawsuit attempts to extend that to mortgage lending and foreclosures.

"This is an aggressive legal theory," Cox said. But he added that courts evolve with the larger society.

"The thinking about mortgage lending has changed radically in the last year as the consequences of the industry's lack of care have become obvious to everybody," Cox said. Those include owners losing homes, blighted neighborhoods, tightened credit markets and Wall Street losses, he said.

"This industry acted in a rogue manner increasingly over the last 10 years, until last year, and the consequences of that have become obvious. I think that changes people's thinking about the legal consequences."

The Hawthorne neighborhood is in the epicenter of the Twin Cities foreclosure crisis. Citywide, foreclosures have tripled from 865 in 2005 to at least 2,500 last year.

Here's what Ireland alleges happened:

A year ago, the Hawthorne Area Community Council and its chosen developer, Project for Pride in Living, began to try to buy the house at 415 31st Av. N. They wanted it for the first phase of a city-supported housing redevelopment project.

After an appraisal, they offered $137,500, but were told that the property had been sold. A deed listed a new owner backed by a $235,000 mortgage from CitiMortgage, or $100,000 more than the city assessment, which the lawsuit cites as an example of carelessness.

They couldn't find the new owner, whom the mortgage required to live in the property, leading them to conclude he may have been a straw buyer. Such buyers sometimes lend their names in cases of mortgage fraud.

Later last year, CitiMortgage started foreclosure proceedings and bought back the property at an October sheriff's auction. But the house remained empty, and accumulated police calls for burglaries and a fire, and tags for unmowed grass and weeds and rubbish.

Neighbors' pleas unheeded

The neighborhood complained by letter to CitiMortgage twice last fall that the property was a nuisance. It asked CitiMortgage to use a lender's option to shorten to five weeks the period in which a boarded and foreclosed property can be redeemed by the borrower. But it said it got little substantive response.

The lawsuit alleges, citing studies elsewhere, that the property has diminished property values for neighbors.

It claims that CitMortgage either knew the mortgage couldn't be repaid or would have known it if it had exercised due care before making the loan.

Engel said the lawsuit faces the hurdle of establishing the neighborhood's standing as an entity harmed by the mortgage deal. She said that old legal theories are being dusted off to see if they can be applied to predatory lending, which lending critics define as involving terms largely unfavorable to borrowers.

Steve Brandt • 612-673-4438