City property flipping in steep decline

Officials credit vigilance, hot real estate market and legitimate investors

August 04, 2005|By Matthew Dolan | Matthew Dolan,SUN STAFF

Baltimore's red-hot real estate market is helping to insulate the city from the widespread property fraud known as flipping that once ravaged some of its most vulnerable neighborhoods, according to law enforcement and industry officials.

Today, the 100th defendant will be sentenced as part of a broad federal investigation of residential property scams that stretched back almost a decade. This case, prosecutors said, could be among the last.

"I think we're close to the end," said Joyce McDonald, who oversees flipping cases for the Maryland U.S. attorney's office. "There are some open flipping investigations, but by and large, the majority are over."

Those who track flipping believe the skyrocketing price of homes and influx of legitimate investors have beaten back speculators who buy low-cost, inner-city housing, obtain false appraisals and quickly resell the properties at inflated prices.

Left behind was a trail of urban blight - abandoned and boarded rowhouses - and government agencies, commercial lenders and taxpayers who lost tens of millions of dollars.

It's impossible to say that illegal flipping in the city has ended. Housing advocates worry about more subtle scams and the availability of no-money-down and interest-only loans handed out by sub-prime lenders and obtained by people who might not otherwise qualify for homeownership.

Predatory lending schemes "at least are not as blatant anymore," said Diane Cipollone, the director of research and policy at the Community Law Center in Baltimore. "But that also makes it more difficult to detect."

Officials are quick to say the rising value of real estate is just one factor in the decline of illegal flipping cases. They also point to aggressive prosecutions, tougher laws and better consumer education.

A task force on property flipping administered by the Community Law Center will issue its final report within a few months, said Cipollone.

William Matthews, vice president and general manager for Mortgage Asset Research Institute of Reston, Va., tracks real estate transactions nationwide. In 1999, Matthews called Baltimore a "hot spot for mortgage fraud." His organization's research put Maryland among the top five states for mortgage fraud in the late 1990s.

Today, he says, it's a different story. The institute's latest report ranked Maryland 25th among states for mortgage fraud between 2001 and 2004.

"I think a lot of it is the amount of attention that has been paid to the issue by law enforcement and greater awareness in the community," Matthews said.

"Fraud does not make economic sense," he continued. "If you have a tremendously strong housing market, fraud may still occur, but it's bailed out by legitimate business."

Among the last of the offenders is Mazie Louise Jennings of Baltimore, who pleaded guilty to reselling recently purchased houses at inflated prices.

Her crime left commercial lenders and the U.S. Department of Housing and Urban Development with more than $500,000 in defaulted loans on the 47 properties she sold, according to prosecutors.

She could receive up to five years in prison when she appears for sentencing today in U.S. District Court in Baltimore.

Property flipping is in itself not illegal. It becomes a crime when people buy low-cost houses and quickly resell them at "fraudulently inflated prices" that exceed their value, often by 100 percent or 200 percent.

Buyers put little or no money into the deals and were promised cash at settlement. Enlisted in the effort were mortgage brokers, attorneys, appraisers and settlement agents who provided false information to obtain mortgages for the buyers.

FBI agent James J. Costigan remembers one home he investigated for flipping. He opened the door to find a natural gas jet lit up like a blowtorch.

"It was a crack house," he said. "We knocked on the house next door, and a girl answered. We asked her if she had noticed anything about the house next door. She said the wall had been hot for a week."

Seven years ago, former federal prosecutor Joseph Evans said, authorities had no idea of the scope of the problem.

"What we saw was an extraordinary number of individual real estate transactions on the same home at provocatively higher sale amounts within a short period of time," said Evans, who oversaw the cases for about six years before becoming a federal public defender.

He said the problem mushroomed when scam artists enlisted naive investors who bought up dozens of homes at a time.

"The spreads, the margins of profits, were less dramatic, but they made up for it by the large volume," Evans said.

In addition to rising real estate prices and vigilant prosecutions, Evans said, easily accessible real estate records posted on the Internet have made the appraisal industry more accountable. "Without the appraisers, none of this would be able to happen," he said.

The General Assembly passed a law in 2003 requiring appraisers to file quarterly reports with the city on appraisals done on residential properties in Baltimore.

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