California Homeowners’ Suit Against Builders Revived

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A federal appeals court revived a lawsuit by homeowners who accused eight major homebuilders of causing them to overpay for their homes by marketing nearby houses to high-risk borrowers who later went into foreclosure.

The 9th U.S. Circuit Court of Appeals in San Francisco said last month that a lower court erred in concluding the homeowners lacked standing to pursue their fraud claims.

The plaintiffs had bought houses from 2004 to 2006 in new developments built by Beazer Homes USA, DR Horton, Lennar Corp., MDC Holdings, PulteGroup’s Centex Homes, Ryland Group, Shea Homes Inc. and Standard Pacific Corp.

Many of these homeowners claimed the developers falsely represented they were building “stable, family neighborhoods” in the Inland Empire region of California, one of the hardest hit in the nation’s housing crisis.

In fact, the plaintiffs said the builders were marketing homes to and financing unqualified borrowers, fueling a “buying frenzy” that artificially inflated demand and prices.

When the bubble burst, foreclosures and short sales soared, causing a surge in abandoned homes, multiple families living in single homes, unkempt yards and even crime, the plaintiffs said. They sought to hold the homebuilders responsible because their homes lost value and became less desirable.

A federal district judge dismissed the complaint, saying the injuries were “speculative.”

The 9th Circuit disagreed. A three-judge panel said the homeowners sufficiently alleged that the defendants’ practices “inflated the ‘bubble’ in their particular neighborhoods.” It also said “decreased economic value and desirability” are injuries for which homeowners could recover.

The appeals court said the plaintiffs may file an amended complaint to show a stronger link between the defendants’ actions and the resulting alleged harm. It returned the case to the district court for further proceedings.

The case is Maya et al v. Centex Corp. et al, 9th U.S. Circuit Court of Appeals, No. 10-55658.