Real Estate Law

Lapine on City of Cleveland v. Ameriquest Mortgage Securities, Inc.


In City of Cleveland v. Ameriquest Mortg. Sec., Inc., 2009 U.S. Dist. LEXIS 41303 (N.D. Ohio May 15, 2009), the City of Cleveland filed an action against over 20 major investment banks, accusing the banks of creating a public nuisance by reason of their securitizing pools of subprime mortgages made to Cleveland residents. In this Emerging Issues Analysis, Kenneth M. Lapine discusses the decision in Cleveland v. Ameriquest , which held that securitizing subprime loans does not constitute a public nuisance. He writes:
     The essence of the Complaint was the assertion by the City of a single public nuisance cause of action against each of investment banking companies or their affiliates that provided funding for mortgage backed securities ("MBS"). The City blamed subprime lending for the "epidemic" of foreclosures afflicting the City, that subprime lending was inappropriate for Cleveland because of its "unique" economic situation, characterized by its high poverty rate, sluggish economy, limited employment opportunities, and stable, but not booming, housing values. The Complaint did not target the bankers for making the subprime loans, but rather for their role in securitizing the subprime loans into MBS's, which entailed creating MBS's by packaging together subprime loans and providing the funding used to purchase the underlying loans. The City thus contended that these actions created a public nuisance, with the volumes of foreclosures being its foreseeable result.
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     . . . [T]here were five arguments that all of the defendants asserted as the reasons the City's public nuisance claim must fail: (1) the claim was preempted by Ohio laws regarding mortgage lending; (2) the claim was barred by the "economic loss rule"; (3) the City of Cleveland did not allege interference with a public right; (4) the allegations failed to demonstrate that securitizing subprime loans constituted an "unreasonable interference with a public right"; and (5) the allegations were insufficient to demonstrate that the securitizers' conduct proximately caused the problems faced by the City of Cleveland as a result of home foreclosures
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     In the case where conduct allegedly constituting a public nuisance is subject to regulation, courts will assess whether the defendant complied with the regulatory scheme to determine whether a duty was breached; i.e., whether the party unreasonably interfered with a public right. The Court made it abundantly clear that not only were lending and funding activities of the bankers unquestionably legal and in compliance with the then-existing regulatory schemes, but also that the federal government had encouraged the very expansion in subprime lending that the City was claiming to be unlawful. Moreover, if the underlying subprime lending was lawful, facilitating that lawful conduct by financing it cannot be a public nuisance either.

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