Federal lawsuits filed recently against eight large production builders in California blame the companies for creating neighborhoods where high foreclosure rates have caused home values to plummet, wiping out the investments of many home buyers.

“I think they (builders) had a lot of help from the financial institutions,” said attorney Richard D. McCune, of the McCuneWright law firm in Redlands, Calif. “But I absolutely believe that they were at the center and the beginning of this.”

McCune filed the federal lawsuits in the U.S. District Court for the Central District of California on Sept. 3 on behalf of buyers who bought homes from Beazer Homes USA, Centex Homes, D.R. Horton, Lennar, Richmond American Homes, Ryland Homes, Shea Homes, and Standard Pacific Homes at the peak of the building boom.

All eight lawsuits are seeking to become national class action cases, representing buyers who put 20% or more down on homes in the builders’ neighborhoods across the country.

“This particular group of buyers, anyone would be hard-pressed to say they did anything wrong,” said McCune. “For the vast majority of these people there is no ability to go out and get the money back.” For instance one plaintiff spent $560,000 on a home in 2005. Now the local tax assessor says the house is worth $235,000. “He put 60% down on the house thinking that was the conservative move.”

The cases ask for compensatory and punitive damages as well as restitution and/or disgorgement of profits.

While the plaintiffs' names vary, the eight lawsuits’ allegations are essentially the same. Specifically, they accuse the eight builders and their mortgage companies of violating two portions of California’s Unfair Business Practices Act, as well as fraud, negligent misrepresentation, and breach of the implied covenant of good faith and fair dealing.

The general accusation is that the builders knew--or should have known--that by selling homes to investors who would not live in the houses and to buyers with credit issues and little money down, they would create communities that could fall in value if home prices failed to climb and buyers with little investment walked from their purchases.

The lawsuits claim that the builders had the responsibility to disclose to buyers that they were selling to investors and buyers with poor credit and/or were investing little in their homes.

“What we believe is that, for the people who were qualified to buy these homes and were financed by the builder themselves through their mortgage companies, there is an obligation from the builder to let them know the facts that could materially affect the value of their homes,” McCune said.

The lawsuits allege that builders’ practice in recent years of controlling every step of the home buying process, through appraisals and issuing loans through their finance companies, created an environment where there was no “neutral party” who didn’t have a stake in the deal. Plus, McCune said, the fact that the mortgage companies knew the details of buyers finances bolsters the allegations that the builder companies had to know there could be problems with foreclosures and buyers walking in the future.

“They certainly had knowledge that the house of cards had to come down,” McCune said.

Beazer and Standard Pacific, two builders who returned messages requesting comment on the lawsuits, said they haven’t been served with the lawsuits yet and don’t comment on pending litigation.

For now, all the lawsuits’ plaintiffs come from California’s Inland Empire, which has been particularly hard hit by the housing downturn.

“Our local governments are in trouble because of the shrinking tax base,” said McCune. “Life savings are gone, and these national builders came and built and then left us with this big mess. I know they feel like the market has affected them badly, but it’s hard for me to feel sympathetic because they played such a big part in this.”

Teresa Burney is a senior editor at BUILDER and BIG BUILDER magazines.

Learn more about markets featured in this article: Riverside, CA, Los Angeles, CA.