A north Minneapolis neighborhood that filed a groundbreaking careless-lending lawsuit against mortgage giant CitiMortgage has forced the lender to eat more than $200,000.

The Hawthorne neighborhood has bought for just $18,900 a fire-damaged house on which CitiMortgage held a $235,000 mortgage.

Although the deal avoids a precedent on whether a lender can be held liable for the effects of allegedly careless loans, it gives the neighborhood a key house it needs for a rowhouse redevelopment project. "We shook the foundations of a financial institution that, like the rest of corporate America, claims to do no wrong," said Peter Teachout, a neighbor of the house and the chairman of the Hawthorne Area Community Council, which sued CitiMortgage.

The council's attorney, Mark Ireland, said the legal challenge was the first he's aware of in the Twin Cities where a neighborhood has proactively forced a lender to pay attention to neighborhood impact of its lending rather than passively suffering increasing blight.

Neither CitiMortgage, which has refused to comment on the suit, nor its attorney, could be reached Friday.

CitiMortgage lent the money in early 2007 on 415 31st Av. N., although a city assessment at the time said it was worth $100,000 less. After CitiMortgage began foreclosure proceedings later that year, neighborhood officials said the lending giant ignored their inquiries about buying the house.

Neighborhood efforts to find the borrower were unsuccessful, leading some to conclude that he was a straw buyer (a buyer who lends his or her name to a sale in some cases of mortgage fraud).

The neighborhood claimed that CitiMortgage either knew the mortgage couldn't be repaid or would have known if it had exercised due care before making the loan.

Ready for rehabbing

The lawsuit alleged that the property has become a neighborhood eyesore that attracted housing tags and 911 calls. It sought damages, a monitored alarm system and compliance with the city housing code.

The case had the potential to set a precedent in Minnesota. Nationally, lenders can be sued for "improvident lending" in cases involving credit card debt or loans to someone who is mentally incompetent. The Hawthorne neighborhood sued to extend that to mortgage lending.

The settlement means there's no such precedent.

The house is in the middle of a swath of five properties along 31st Avenue and 6th Street that the neighborhood is acquiring with city help. Both have designated a four-square-block area as the Eco-Village redevelopment, which includes new construction and rehabilitation in several phases. Energy audits of some homes begin this fall.

Those involved in the redevelopment say that rehab work may go ahead first, until the area's housing market stabilizes and it makes sense to build the rowhouses. But the settlement now allows the neighborhood to tear down a house that's been a nuisance, said Ireland, of the St. Paul-based Housing Preservation Project.

That's just what will happen in early October, said Jeff Skrenes, the association's housing director. He and Ireland said they could join forces against lenders holding other properties going through the limbo of foreclosure and boarding.

Meanwhile a swarm of city workers and other volunteers joined skilled-trades workers Saturday in a one-day blitz of housing improvement projects at six North Side houses, including three in Hawthorne.

Steve Brandt • 612-673-4438