Vacant homes left to scavengers and arsonists. Police and firefighters increasingly called to the scene. Property after property in need of demolition. The whole region seemingly in decline. For months some have been wondering what legal remedies there might be for cities suffering the fallout from skyrocketing rates of home foreclosures ("Sue the Bastards" and "There Goes The Neighborhood"). Last week, Cleveland and Baltimore became the first to take the question to court.

Both cities want banks to pay for damages caused by widespread - and arguably preventable - foreclosures. But while Baltimore has sued one major mortgage lender under a well-established federal fair housing law for discrimination in lending, Cleveland has waded into uncharted waters. Citing state public nuisance statutes, Cleveland has targeted 21 Wall Street investment banks for fueling an explosion of subprime loan products that, given Cleveland's dim economic profile, city officials say, were bound to fail - and these banks knew it.

It's a gutsy move, and unprecedented. Cities have used similar state public nuisance laws in the past, in cases involving lead paint exposure and the gun industry (where gun manufacturers were sued for making weapons available to criminals and minors). But Cleveland is the first to make public nuisance claims against certain subprime mortgage lending practices - something not as obviously harmful as lead or firearms. As a result, the odds of success are impossible to predict.

Aside from the high-powered legal muscle that will surely be at Wall Street's fingertips, Cleveland's lawsuit will also face special scrutiny in the courts, where there is virtually no case law on cities using public nuisance statutes to address the effects of predatory lending.

CLEVELAND AND BALTIMORE's lawsuits share a common underlying question: If a bank knew a set of loans would result in foreclosures, why move forward anyway?

"It was just all about profits," says Cleveland Law Director Robert Triozzi. John Relman, the lead attorney in Baltimore's case, uses the phrase "gold rush."

Then the cities part ways into different legal theories and targets.

Relman says Baltimore Mayor Sheila Dixon was primarily concerned with disproportionately high rates of foreclosure in minority communities. "We're addressing the problem of differentiated treatment as a civil rights issue," Relman says. The federal Fair Housing Act, the basis of Baltimore's case, prohibits housing or mortgage lending practices based on race, religion, gender or sexual orientation.

The FHA has been invoked hundreds of times by both cities and individuals seeking redress for predatory or discriminatory lending practices, but Baltimore is the first city to seek damages like lost tax revenue from one major mortgage lender. Wells Fargo, Baltimore argues, knowingly marketed its riskier products, like no-document loans or teaser interest rates that exploded into unaffordable amounts within months, in African-American neighborhoods. The result: Wells Fargo's foreclosure rates in Baltimore's African-American neighborhoods are nearly double the city average. They are less than half the city average in white neighborhoods.

Triozzi says Cleveland is also working on a similar lawsuit and plans to file one as soon as he's ready. His office has been reviewing all possible legal avenues, and also found Ohio's public nuisance statutes applicable to Cleveland's foreclosure crisis. "We reached a point in our legal research to move ahead with this one, so there was no reason to delay."

One reason for that, according to Kathleen Engel, a law professor at Cleveland State University, might be that discrimination claims are extremely difficult to prove. One must show that certain groups of people paid more. But that requires credit scoring and pricing data, which lenders often consider proprietary. Prosecutors must either buy this data for hundreds and thousands of dollars, or hope a lawsuit lives long enough to get that information through the discovery process.

So race is a passing mention in Cleveland's lawsuit. The main argument is the city's economic plight, before and after the predatory subprime boom. What's noteworthy about this approach is that it allows Cleveland to implicate Wall Street investment banks, also known as "securitizers" or the secondary market - those financial institutions that bought pools of loans from mortgage lenders and brokers, thereby funding a cycle of decreasingly scrupulous loans to feed this appetite. (Wall Street investors' demand for high-risk subprime mortgages was voracious as profits, at first, were great.) The belief on Wall Street, some argue, was that housing prices would eventually appreciate enough to more than cover the cost of these loans.

That logic, according to Cleveland's team of lawyers, never applied in Cleveland. The city was already in a housing bust, and investment banks should have known that high-risk loans here would end in disaster - and that the resulting foreclosures would exacerbate the city's problems.

"By funding this scheme the way that they did," says Triozzi about the 21 investment banks named in the city's lawsuit, "they turned a complete blind eye to the city being devastated in this fashion."

ALMOST ALL THE advocates who have been working on the region's predatory lending issues are excited by the turn of events in Cleveland, but few can say what will happen next.

"It's very difficult to say how receptive courts will be to the legal theories [in Cleveland's lawsuit]," says Engel, the CSU law professor who's also authored "Turning a Blind Eye: Wall Street Financing of Predatory Lending," published in the Fordham Law Review last year.

While the state's public nuisance statutes have been tested in lead paint and gun manufacturer cases, predatory lending is a brand-new area of application, Engel says. There are many technical challenges Cleveland must first endure. Any one of the 21 investment banks, if headquartered outside Ohio, may ask that the case be moved to federal court because an elected, state-court judge could be biased. Then the court must decide if Cleveland has the authority to sue these banks, and if a public nuisance argument is valid.

(Baltimore will face nothing of the sort. There's 40-plus years of federal case law under the Fair Housing Act, and cities have established standing to bring a lawsuit like Baltimore's; it's just been a matter of when.)

If Cleveland's lawsuit passes all these tests, then the long road of real litigation begins. There will be exorbitant costs, especially with 21 defendants filing a multitude of motions. For Cleveland to properly defend its case, Law Director Triozzi admits, economists and other costly experts will have to be hired. He says he's prepared. "We will prosecute this case to the fullest."

There's a sign that Cleveland might have picked a reasonable first fight. An investigation by New York Attorney General Andrew Cuomo is looking into possible forewarnings Wall Street investment banks might have had. Several Wall Street firms commissioned reports that stated some high-risk loans didn't meet even the weaker credit standards set by subprime mortgage companies. Yet no Wall Street bank disclosed these specific details to investors or credit-rating agencies. According to the New York Times, criminal or civil charges could be filed in coming weeks.

While that could bolster Cleveland's case, the city still has its work cut out for it, says fair housing attorney Ed Kramer of Housing Advocates Inc., who last year filed a class-action complaint against banks and mortgage lenders alleging they paid brokers to target African Americans.

"This is going to be much more difficult than lead paint or guns," Kramer says. "Cleveland and its lawyers have an awesome responsibility."

cgupta@freetimes.com