NEW YORK - Baltimore's defeat in a lawsuit accusing Wells Fargo & Co of steering minority borrowers to expensive home loans may not derail efforts by local governments to hold the biggest mortgage providers responsible for lending they contend hurts cities.

Nonetheless, the dismissal of Baltimore's two-year-old federal lawsuit is another setback to legal efforts by state and local governments to combat the economic and social costs of mounting foreclosures and falling housing prices.

Baltimore was the first major American city to accuse a mortgage lender of violating the federal Fair Housing Act with predatory lending practices that exacerbated the nation's housing slump.

On Wednesday, U.S. District Judge J. Frederick Motz dismissed its case. Last August, a federal judge dismissed a similar lawsuit brought by Birmingham, Alabama against Bank of America Corp and Citigroup Inc.

It is difficult for cities to show a causal link between one lender's actions and overall economic blight, said Linda Fisher, a law professor at Seton Hall University in Newark, New Jersey who has written about reverse redlining and the correlation between race and subprime lending. Cities may need to tailor their lawsuits more narrowly.

Many home loan providers have been accused of steering minorities to costly mortgages, known as reverse redlining. Industry critics say this leads to high foreclosure rates in areas with many black and Hispanic homeowners.

Wells Fargo still faces a Memphis, Tennessee lawsuit alleging FHA violations, and a lawsuit by Illinois alleging state law violations.

A spokeswoman for the bank, Teri Schrettenbrunner, said lawsuits against Wells Fargo ignore its processes that are designed to ensure that every person qualified for a prime loan will get one. She added that Memphis' case promotes the same seriously weak argument that other courts have rejected.

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In his six-page opinion, Motz found it not plausible to connect Wells Fargo's alleged harmful practices with claimed damages of lower property tax revenue, rising home vacancies, increased criminal activity, and higher police and fire costs.

Baltimore had argued that Wells Fargo's lending practices led to increased foreclosures and millions of dollars of damages to the city.

Yet the judge said the city's own data showed the San Francisco-based lender was responsible for only a negligible portion of Baltimore's vacant housing stock.

The alleged connection is even more implausible when considered against the background of other factors leading to the deterioration of the inner city, such as extensive unemployment, lack of educational opportunity and choice, irresponsible parenting, disrespect for the law, widespread drug use, and violence, the judge wrote.

Motz said he would let Baltimore file by February 3 a more limited complaint, focused on specific houses or neighborhoods where damages might be more directly traceable to Wells Fargo. The city may also appeal his decision to a higher court.

City Solicitor George Nilson said the odds were very substantial that Baltimore would amend its complaint, saying that in some respects, Judge Motz has misunderstood the thrust and some of the basic elements of the city's claim.

The normal, obvious plaintiff in these cases is the individual borrower who was inappropriately put into a loan, Nilson said in an interview.

The challenge in our case was one to some degree shared in other cases: being able to prove or establish damage to the city. The cases remain worth bringing because of the opportunity to change the conduct of lenders.

OTHER LAWSUITS

In August, U.S. District Judge Karon Bowdre dismissed Birmingham's lawsuit against Bank of America and Citigroup, saying any number of factors could have resulted in lost tax revenue and higher crime-fighting and fire prevention costs.

Three months earlier, more than one dozen U.S. mortgage lenders and investment banks won dismissal of a Cleveland lawsuit saying subprime mortgages were categorically inappropriate for that city, and created a public nuisance.

Among the defendants in that case were Bank of America, Citigroup, GMAC LLC, Goldman Sachs Group Inc, JPMorgan Chase & Co and Morgan Stanley.

Lawyers for Memphis, which sued Wells Fargo last week, did not immediately return requests for comment.

The office of Illinois Attorney General Lisa Madigan said its case differs from others in the remedies sought, in that the state wants to make whole those individual Wells Fargo borrowers it said paid too much to take out mortgages.

Blacks compose a majority of the populations of Baltimore, Birmingham, Cleveland and Memphis, according to the U.S. Census Bureau's American Community Survey.

The Baltimore case is Mayor & City Council of Baltimore v. Wells Fargo Bank NA, U.S. District Court, District of Maryland, No. 08-00062.

(Reporting by Jonathan Stempel; Additional reporting by Elinor Comlay; Editing by Phil Berlowitz)