FBI probes fraud in City

Federal investigation of housing schemes disclosed at hearing

`Egregious violators'

Postal inspector says 20 to 30 in Baltimore profit from 'flipping'

March 28, 2000|By John B. O'Donnell | John B. O'Donnell,SUN STAFF

Saying that mortgage fraud is more lucrative than bank robbery, federal investigators told a Senate subcommittee yesterday that they are conducting more than 20 probes of real estate flipping in Baltimore.

"We have over 20 active investigations targeting those whom we have identified as the most prolific and egregious violators," Richard M. Mosquera, who heads the FBI's Baltimore division, testified at a hearing prompted by the epidemic of reselling property for astronomical profits under false pretenses that has hit Baltimore in the past four years.

And postal inspectors have found that 20 to 30 "flippers are operating in the city of Baltimore," said James J. Rowan Jr., who heads the Washington Metro Division of the Postal Inspection Service, which includes Baltimore.

Rowan's agents investigated the case that produced the first federal flipping indictments three weeks ago.

"In some cases," Rowan said, "individuals engaged in this enterprise have flipped over 200 homes in a period of two years. With a potential profit of $10,000 to $20,000 per home, those operators can realize lucrative returns in the neighborhood of $4 million."

Added Mosquera, "The average mortgage fraud nets 10 times what is taken in the average bank robbery."

In 15 cases, the investigations have reached the stage where federal prosecutors are involved, said U.S. Attorney Lynne Battaglia.

`Virus is spreading'

The disclosure of multiple investigations came as federal legislators sought testimony on flipping, its causes and possible solutions.

"This is a virus that is spreading," said Maryland Sen. Barbara A. Mikulski, chairwoman of yesterday's hearing by the Senate subcommittee that handles the budget for the Department of Housing and Urban Development. Mikulski, the senior Democrat on the panel, noted that flipping is a problem across the country.

The only other senator at the hearing was Maryland Democrat Paul S. Sarbanes. He is not a member of the Mikulski panel but is the senior Democrat on the Senate Banking Committee, which has legislative authority over HUD.

The hearing, held at the World Trade Center, brought the national spotlight to a problem that has seen more than 2,000 houses bought and quickly resold in Baltimore in the past four years for price increases of more than 100 percent -- and often for increases of 1,000 percent. While some of the deals are legal, many are only possible through the use of inflated appraisals and falsified paperwork that makes buyers look eligible for the loans. Usually, the properties are in poor condition and sometimes are uninhabitable.

Mikulski, Sarbanes and witnesses at the hearing said remedies need to go beyond law enforcement.

"We need to figure out some way to dry up the availability of credit to lenders" who finance flips, Sarbanes said. Most of those mortgages are sold to investors who are unable to seek redress from the originating lender if the borrowers subsequently default.

HUD fuels schemes

And witnesses complained that HUD has fueled flipping. For one thing, they said, the agency has relaxed its control over the issuance of mortgages insured by one of its agencies, the Federal Housing Administration, allowing lenders to make questionable loans that often end up in foreclosure.

"Baltimore has the highest number of FHA foreclosures per capita in the nation," said Vincent P. Quayle, director of the St. Ambrose Housing Aid Center.

He noted one nine-square-block area of Northeast Baltimore where 69 of the 193 FHA mortgages issued from 1996 through last year have gone into foreclosure.

Quayle called the area a "typical, beautifully manicured working-class neighborhood of 926 rowhouses that had never seen a boarded-up house until these recent FHA loans fell into foreclosure."

Once HUD pays off the lender and acquires title to a property after foreclosure, the house often sits vacant for months. And, he said, HUD sells houses on an "as-is" basis. Often they are in poor shape and unattractive to potential homeowners. As a result, he said, they frequently are sold to investors who quickly flip them for a huge markup.

"Flips often begin with FHA foreclosures," Quayle said.

"FHA's abdication of responsibility has resulted in tremendous damage to the wonderful neighborhoods that are the hallmark and pride of this city," he said.

In a review of more than 400 property flips between 1996 and early 1999, The Sun found that HUD supplied more homes to flippers than any other source.

Witnesses said that HUD -- and the administration of former Mayor Kurt L. Schmoke -- had focused so much on increasing the homeownership rate that they had, in effect, promoted flipping and the sale of homes to buyers financially unable to make payments and pay for upkeep of their houses.

Questions for Cuomo

Mikulski promised to question HUD Secretary Andrew M. Cuomo about the agency's disposal of houses acquired through foreclosure when he appears before her subcommittee Thursday in Washington.

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