Home sale practices are target of suits

Buyer, lenders see fraud in 'flipping'

lawmakers set hearing

August 17, 1999|By John B. O'Donnell | John B. O'Donnell,SUN STAFF

When Margaret Johnson paid $76,700 for her first house last year, records show that the 57-year-old nursing assistant put up more than $6,000 in cash. But Johnson insists she put no more than $375 into the deal.

The false claim that she paid $6,000, Johnson says in a recent lawsuit, is one of several irregular actions that eight defendants took to get her a $76,300 government-backed mortgage for which she wasn't qualified, based on her credit history and assets, to buy a problem-wracked rowhouse in Belair-Edison that had been purchased 10 months earlier for $32,000.

Johnson's is one of several recent suits targeting a widespread problem in Baltimore -- the quick turnover of houses known as "flipping."

The practice -- explored in a recent Sun investigation -- has so riled two Baltimore legislators, Democrats Samuel I. Rosenberg and Carolyn J. Krysiak, that they plan to address it at a public hearing late next month.

The Sun investigation showed that hundreds, perhaps thousands, of properties have been turned over for quick profits using questionable practices designed to secure loans in excess of the property's value.

On the day Johnson filed suit in city Circuit Court this month, a New Jersey bank claimed in U.S. District Court here that it had been induced by a Utah-based firm into financing nearly two dozen mortgages of more than $800,000 on Baltimore properties that, together, are worth far less than the loans.

Maryland is one of a number of "hot spots" for mortgage fraud in the U.S. "Significant numbers of incidents have been reported" in the past three years, according to the Mortgage Asset Research Institute, a Reston, Va. firm that tracks the issue.

The Sun reported more than two weeks ago that shabby Baltimore houses, mostly in poor neighborhoods, are being bought at rock-bottom prices by people who sell them quickly to unsuspecting buyers for two to 10 times the purchase price.

The Sun reviewed more than 400 transactions over the past three years in which houses were sold with big markups soon after their purchase -- sometimes on the same day. The average markup on each deal examined by The Sun was $35,000.

In some cases, first-time homebuyers making $20,000 or less ended up in foreclosure and bankruptcy, as did naive first-time investors who thought they could make money by assembling a portfolio of rental properties. Neighborhoods ended up with more vacant houses.

Some purchasers are low-wage workers with credit histories so bad that sellers and brokers inflate the buyers' income and assets and falsify other documents to make them appear eligible for a mortgage. Inflated appraisals and sham second mortgages are usually part of the deal.

Various investigations

Federal prosecutors and postal inspectors are investigating one of the alleged profiteers, Robert L. Beeman of Wilmington, Del., along with appraisers, brokers and attorneys who worked with him. Beeman has sold about 100 houses in Baltimore in the past several years at substantial markups, after doing minor cosmetic repairs.

Beeman also has been sued by Baltimore attorney Andre Weitzman on behalf of 82 people who bought houses from him in the Patterson Park area.

Attorney General J. Joseph Curran Jr. has heard complaints about flipping. Saying the office is "very concerned," John Nethercut, deputy chief of the Consumer Protection Division, said, "We're looking into the practices and what should be done."

Speaking of the hearing that she and fellow General Assembly delegate Rosenberg plan next month in Southeast Baltimore, Krysiak said, "I hope that once the word gets out and we set a date and time for the hearing that we're going to see a scramble in the attorney general's office."

Krysiak's Southeast Baltimore district has been victimized by flipping.

Neighborhoods and buyers are not the only victims. Lenders often put up more money than a house is worth.

Lender alleges deception

One lender, Superior Bank FSB of New Jersey, claims in a federal court suit filed Aug. 4 that it has been stuck with more than $820,000 in bad loans in Baltimore, most of which are in default or are delinquent. The suit accuses a Utah company, Tandem National Mortgage Inc., of deception in selling 23 loans to Superior between July 1998 and April. The suit claims that reappraisals on 21 of the houses show that they are worth $555,000 total, while the mortgages on those houses amount to $776,900.

"Each of the transactions involve inflated appraisals prepared to support the excessive contract price of the property," the suit says. "Each of the transactions involved purported down payments made by borrowers well in excess of the borrowers' stated income and assets, calling into question whether the down payments were actually made and, if made, whether such payments were made by the borrower or some other party on the borrower's behalf."

Superior says it first asked Tandem to buy back the mortgages in June.

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