Housing fraud still high, U.S. Senate panel told

Federal efforts have failed to prevent thousands of flipping deals, officials say

May 15, 2001|By John B. O'Donnell | John B. O'Donnell,SUN STAFF

Despite federal prosecution of more than three dozen defendants and investigations of dozens of other people, property flipping is still a serious problem in Baltimore, a congressional subcommittee was told yesterday.

"Flipping continues with several thousand such deals every year," Mayor Martin O'Malley told a Senate Appropriations subcommittee hearing called by Sen. Barbara A. Mikulski, a Maryland Democrat.

"We are not winning the war," said Ken Strong, director of research and policy at the Community Law Center and consultant to the city Housing Department.

"Property flipping ... hasn't decreased," Strong testified. "New flippers have replaced old flippers. Even with all the publicity, all the investigations and people going to jail, all the consumer education efforts, all the counseling, there are still too many people trying to make a fast buck in Baltimore's housing market, whether illegally or unethically." And he said there are "too many witless or hapless buyers."

Acting U.S. Attorney Stephen M. Schenning said 10 federal prosecutors are responsible for preparing cases against 40 defendants -- including 15 who have been convicted -- and overseeing about 25 more investigations involving "multiple individuals and entities."

A wave of property flipping began sweeping across Baltimore in the mid-1990s. Thousands of homeowners and investors bought houses that had been recently purchased by the sellers for much lower prices. The buyers paid inflated prices, often signing mortgages for more than the houses were worth. Many buyers obtained loans insured by the Federal Housing Administration, an agency of the U.S. Department of Housing and Urban Development. Often, the buyers ended up in foreclosure and bankruptcy.

Mikulski, the senior Democrat on the Senate Appropriations subcommittee that handles the HUD budget, held the hearing at City Hall as a follow-up to a similar hearing in March 2000. After that earlier session, she demanded that former HUD Secretary Andrew M. Cuomo deal with the problem, prompting him to appoint a Baltimore task force and another to look at the issue nationally.

Two months later, William C. Apgar, the FHA head who left office in January with other Clinton appointees, promised financial relief to flipping victims in Baltimore who had FHA-insured mortgages. He pledged that mortgages would be reduced to the value of the houses.

That hasn't happened.

Yesterday, another HUD official told Mikulski that "FHA perhaps overcommitted what it was able to deliver." Laurie Maggiano, the official, said the law prevents HUD from forcing lenders to reduce loans that FHA insures. In cases where HUD asked lenders to take such a step, she said, they refused. She also said there is little HUD can do to aid a homebuyer who is keeping up with payments on the mortgage.

Said Mikulski, "HUD underestimated the size and complexity of the flipping problem, not only in Baltimore but everywhere."

Nonprofit housing agencies and community activists complained two months ago that HUD had done almost nothing to deliver on its promises of March 2000. After Mikulski and U.S. Sen. Paul S. Sarbanes, another Maryland Democrat, complained to HUD's new secretary, Mel Martinez, the agency took steps to provide limited relief to buyers.

Martinez then tapped Maggiano to spearhead the agency's effort to deal with flipping in Baltimore. She said HUD has re-evaluated 560 Baltimore FHA loans that it previously reviewed and has found that in 225, the owners "did purchase homes that were overvalued." Limited help is being offered in many of those cases.

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