Mikulski targets flipping

Government agencies `subsidizing fraud,' Democrat charges

Letters to HUD

Baltimore to be site of a hearing for Senate subcommittee

January 15, 2000|By John B. O'Donnell | John B. O'Donnell,SUN STAFF

Charging that the government is "subsidizing fraud," U.S. Sen. Barbara A. Mikulski called yesterday for a federal investigation of property flipping in Baltimore and announced that a Senate hearing would be held here.

In letters to Andrew M. Cuomo, Secretary of Housing and Urban Development, and Susan Gaffney, HUD's inspector general, Mikulski asked for "a review on the extent and nature of flipping and related mortgage housing fraud schemes with regard to Baltimore as well as an overall analysis of these housing fraud activities throughout the nation."

The letters also were signed by Sen. Christopher S. Bond, a Missouri Republican who is chairman of the Senate appropriations subcommittee that handles the HUD budget.

Mikulski, the ranking Democrat on the committee, said Bond had agreed to hold a subcommittee hearing in Baltimore, probably in spring.

Another panel, the Senate Permanent Subcommittee on Investigations, launched an investigation of flipping in Baltimore and other cities in the fall and is aiming toward a spring hearing in Washington. Mikulski suggested the two panels could hold a joint hearing in Baltimore.

The Baltimore Democrat released her letters to Cuomo and Gaffney at an East Baltimore meeting of a coalition of nonprofit organizations and government agencies formed to combat flipping.

Gaffney is investigating mortgage fraud, some of which involves property flipping, in Baltimore and several other cities. Recently, her agency worked with the U.S. Attorney and the FBI in Los Angeles to obtain 41 indictments in a $110 million mortgage scheme. And her audits have been critical of HUD for its handling of the FHA program.

She said yesterday that the case is the "just the tip of the iceberg" and that the defendants had pleaded guilty.

Gaffney operates independently of Cuomo and the two have often been at loggerheads.

A HUD spokesman, Chris Walz, issued a statement last night in Washington saying that the agency agreed that flipping "is intolerable" and "is taking decisive action to crack down on this type of activity." Beyond mentioning the Los Angeles case, the statement did not say what the agency is doing.

More than 2,000 Baltimore houses have been bought and quickly resold in the last four years with an increase of at least 100 percent in the price, according to the Maryland Department of Assessments and Taxation. In many cases, little work was done to the houses before resale, and inflated appraisals were used to obtain mortgages for the buyers that exceeded the values of the house.

While most of the flips have been financed by conventional mortgages, critics of flipping say hundreds of deals have been financed with loans insured by the Federal Housing Administration. At least two lenders who provided FHA mortgages for these deals have been sued.

Mikulski said her panel has to focus on deals where the government is involved. But, she predicted, "by getting to the heart of FHA, you'll clean up everything else."

"I am really very outraged by this," Mikulski told the group. "The poor are being gouged the federal government is supporting gouging the poor and the rip-off of taxpayers because these are FHA-subsidized loans."

She asked, "Why didn't HUD know that some of these scams were going on?"

Mikulski also complained of the rising inventory of houses that HUD acquired when the owners defaulted on their mortgages and FHA paid off the lenders.

In November, Mikulski said, 21,270 houses nationwide had been in the HUD inventory for more than six months and another 7,270 had been there for more than a year. All told, HUD held title to about 50,000 houses, according to figures in Mikulski's letter. Representatives of nonprofit housing groups said the HUD inventory in Maryland stands at 4,200.

HUD, Mikulski said, "has been slow and sluggish" in dealing with the problem.

The HUD statement last night said improvements have been made and claimed that the inventory of houses is declining.

In her letter to Cuomo, Mikulski wrote that "the failure to dispose of HUD-owned foreclosed single-family properties often results in the deterioration of the housing, the lowering of the local housing values and the deterioration of the surrounding neighborhood."

Many of the houses that speculators have bought and flipped in Baltimore have come from the HUD inventory. A Sun examination of more than 400 deals found that HUD was the largest source of properties.

"FHA is insuring these bad lenders left and right," Vincent P. Quayle, executive director of St. Ambrose Housing Aid Center, told Mikulski. "They're just making loans to people who are not ready to buy a house."

Ed Rutkowski, who heads the Patterson Park Community Development Corp., complained that HUD had rejected his organization's offer four months ago to buy about 30 vacant East Baltimore houses owned by HUD. Most of the houses are still vacant, he said.

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