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Officials charge world’s fourth-largest bank with letting foreclosed properties lapse into disrepair. Bank officials say loan servicers are to blame.

By Jessica Garrison and Kate Linthicum, Los Angeles TimesMay 5, 2011

Los Angeles prosecutors are calling Deutsche Bank one of the city’s largest slumlords, accusing it of allowing hundreds of properties it owns to fall into disrepair and breed crime.

The Los Angeles city attorney’s office filed a civil lawsuit Wednesday against the world’s fourth-largest bank, seeking hundreds of millions of dollars in penalties and restitution and an injunction forcing it to clean up its foreclosed properties in Los Angeles.

The Frankfurt, Germany-based bank has foreclosed on more than 2,000 homes over the last four years in neighborhoods across the city, according to the suit — many concentrated in the northeast San Fernando Valley, northeast Los Angeles and South Los Angeles.

Los Angeles officials say the bank has been a dreadful landlord and neighbor. Prosecutors say that during a yearlong investigation, they found evidence that Deutsche Bank had illegally evicted some tenants, let others live in squalor and allowed hundreds of unoccupied properties to turn into graffiti-scarred dens for squatters, gang members and other criminals.

Police records show scores of alleged crimes committed on the properties, including vagrancy, possession of drugs for sale and assault with a deadly weapon. In December 2007, police found a dead body at a Deutsche-owned house on West 55th Street. In 2008, they discovered prostitution at a house on Evers Avenue.

Many Deutsche Bank properties have also wound up in a slum housing database, in which tenants pay rent into an escrow program while the city tries to get the properties fixed up.

“This particular bank is … helping to destroy communities,” said Councilman Dennis Zine, one of six members of the Los Angeles City Council who joined City Atty. Carmen Trutanich at a news conference in which they excoriated Deutsche Bank and other banks that have foreclosed on properties in Los Angeles.

Trutanich said he wants the suit to send “a strong message to other banks” that the city might come after them too. Officials said they may soon take action against HSBC, the Bank of New York and U.S. Bank.

Deutsche officials said that Los Angeles was going after “the wrong party.”

“As we have repeatedly advised the Los Angeles city attorney’s office, loan servicers, and not Deutsche Bank as trustee, are contractually responsible for both the maintenance of foreclosed properties and any actions taken with respect to tenants of foreclosed properties,” spokesman John Gallagher said in a statement.

Many banks accused of neglecting foreclosures have shifted blame to loan servicers, who are contracted to manage properties.

Trutanich insisted that Deutsche Bank, as owner of the properties, ultimately is responsible. “We are not going to allow them to play the shell and nut game,” he said.

Renters living in some of the Deutsche-owned homes and residents living near others cheered the suit, saying they have been caught in the middle between the bank and its servicers and unable to find anyone to help them.

Maria Reyes was never sure who owned the Echo Park bungalow she rents with her disabled son. After the original landlord lost it in foreclosure, she paid her rent to the loan servicer. But she said the people she spoke to there turned a deaf ear on her repeated requests for repairs. City records show more than 50 code and habitability violations at the house, including faulty plumbing and a broken front window, which Reyes finally covered with plywood.

Other renters also have had to take matters into their own hands.

Jorge Jimenez, 30, got no response when he complained about a collapsed floor in the bedroom of his Deutsche-owned home on East 48th Street, so last year, he paid several hundred dollars for materials to rebuild it himself, he said.

“The floor was falling, and they wouldn’t do anything” Jimenez said. “They wouldn’t say anything when we complained.”

In the bathroom of the two-bedroom stucco house he shares with his wife, son and another couple, the shower is missing tiles and the faucets won’t stop dripping. Jiminez has wrapped plastic bags around them to try to stop the flow.

In the kitchen, he and his family have to use pliers to turn the water on and off because the handle is broken.

He’s hopeful that the city will prevail so that the family can get compensation for its hardship.

City officials say Deutsche Bank has divested of many of the properties. The city’s lawsuit notes that the bank never meant to be a landlord, but that after the financial crisis hit, bankers found themselves transformed from “detached investment brokers … to large-scale residential property owners.”

City officials say they hope to be the first in the nation to actually collect a settlement from a bank for the conditions of foreclosed homes.

Cleveland sued Deutsche Bank and other financial institutions in 2008, but the suit was dismissed. Milwaukee took a different tack. With the backing of city officials, community groups sent representatives to Frankfurt to speak at a bank shareholders meeting about the conditions of Deutsche-owned properties back home.

Much of the criticism of banks’ role in the foreclosure crisis has centered on their lending practices. On Tuesday, the U.S. attorney’s office in New York filed a fraud lawsuit against Deutsche Bank, seeking more than $1 billion. The government alleged that the bank’s New York-based home lender, MortgageIT, recklessly approved 39,000 mortgages for government insurance “in blatant disregard” of whether buyers could make the monthly payments.

Los Angeles’ suit takes a different approach. It seeks to hold the bank responsible for what happened in the city after loans went bad and foreclosures rippled through neighborhoods.

“A lot of the focus has been on how [banks], in effect, sold people mortgages that weren’t in their interest,” said Michelle White, an economics professor at UC San Diego. “This is a different angle. This is really focused on the problems that come up when the lenders end up owning the properties…. The problem is when a lender takes over a property, they have the interests only of the lender in mind.”

Kathryn Porter, a visiting professor at Harvard Law School, said she believes the city has a case in its contention that it is the responsibility of a property owner to make sure the servicers it hires do their jobs.

If the city is successful, many of the tenants living in substandard conditions could get compensation.

But those who live near run-down Deutsche-owned properties said their neighborhoods have suffered long-term damage.

In South Los Angeles, Richous Jackson lives next door to a Deutsche-owned vacant house on West 83rd Street. The frontyard of the white stucco home is wildly overgrown. The backyard is full of illegally dumped debris.

City records show 96 habitability violations, with dozens of pages of accompanying paperwork.

Jackson, who called the place an eyesore, was more succinct. “The stink is awful,” he said. “What they need to do is bulldoze the whole place.”

jessica.garrison@latimes.com

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