Depending on your climate I would plant some green Giants for screening of your back neighbors.

Search the web for swale gardens. This Old House has articles on them as well as here. You need plants that like damp feet--iris, possibly.

I'd get rid of all grass in that area, put in big-ish river rocks and plant ornamental grasses and iris among them.

Plant a tall hedge at the bottom. Something to drink the water. Get rid of the grass and do as tats said. Rocks, grasses, shrubs maybe a small pond. Grass is a water glutton and often looks terrible.

Which zone are you in? I would plant a row of narrow trees such as swedish aspen along the back of your fence. It would also give you some privacy