Sunday, August 31, 2003

Home schemes, broken dreams


'Flipping' and foreclosures harm blocks and owners

By Ken Alltucker
The Cincinnati Enquirer

The cardboard signs sprout from yards, trees and telephone poles: "We Buy Houses." "Cash for Homes." "Any condition." "Quick closing."

The signs promise an easy way for homeowners to unload problem houses in a hurry. But they also represent an industry that allows a few smooth operators to enrich themselves at the expense of working-class people and neighborhoods.

SPECIAL REPORT
TODAY:
Questionable home loan deals are contributing to record foreclosures.
High-interest loans jeopardized their home
Fliers and signs popping up on streets
Papers she can't read gave away her home
She owned, now rents family home of 100 years
Novice owner put faith in her former teacher
Subprime loans carry high risks, high rates
Lured into investing, left with shabby rentals

MONDAY:
West and East Price Hill are prime examples of how foreclosures contribute to a neighborhood's decline.
ONLINE EXTRAS:
Search Greater Cincinnati property records and use a mortgage calculator to see how much home you can afford
INFOGRAPHICS
Where people lost homes
10 neighborhoods in decline
At least two dozen real estate investors, mortgage brokers, appraisers and title agents are suspected in hundreds of dubious home-buying schemes from Price Hill to Forest Park, an Enquirer investigation has learned.

Federal investigators describe widespread "property flipping" over the past four years: Unscrupulous investors buy houses. An appraiser certifies that a home is worth more than it is. An unwary buyer is steered to a mortgage broker who helps get a loan for the overpriced house. A friendly title company processes the paperwork with no outside oversight.

The deception then snowballs: Low-income people who can't really afford houses lose them to foreclosure. Unsuspecting lenders are left with loans worth far more than the value of the homes. Investors buy houses in foreclosure and start the cycle over. Long-time residents opt to get out before things get worse. They sell their homes, which become part of the churn, too.

"We know it's happening in Cincinnati," says Jim Turgal, a spokesman for the local office of the FBI. It recently raided the offices of two lenders and two title companies suspected in more than 500 possible flippings in Hamilton and Butler counties.

The damage is dramatic. At a time of historic low interest rates and strong homeownership nationally, questionable home deals here are helping cause record foreclosures. Neighborhoods hit hard by home forfeitures are deteriorating with rising home vacancies, closed shops and escalating crime.

[IMAGE]
[IMAGE]
Desiree Watts Edwards bought a rundown house in Corryville for $73,000 - $46,500 more than the seller had paid for it less than three months before. He made a nice profit; she depleted her savings. She prevented foreclosure by filing a lawsuit claiming she was a victim of fraud.

"We thought it was our dream come true, but it's totally turned us off on the idea of owning a home," she says today.

The Enquirer examined 11,412 foreclosures of single-family homes and small apartment buildings in Hamilton County from 1999 through 2002. Those records, and interviews with dozens of real estate operators, residents and community activists, reveal a pattern of home-buying problems:

•Foreclosures in 55 of 97 communities exceeded national rates. Residents in Over-the-Rhine, South Fairmount, Lower Price Hill and East Westwood were most likely to lose their homes. African-American communities were hit hardest, accounting for 13 of 15 communities with the highest loan default rates.

•More than 2,200 loans written by "subprime" lenders ended in foreclosure, accounting for nearly 20 percent of all foreclosures. People with low incomes or weak credit obtain these high-interest, high-fee loans when they can't qualify for conventional mortgages.

•Bad loans have jolted some working-class neighborhoods. In Madisonville, banks reported that 91 home loans totaling more than $6 million went bad just last year. One-third of those homeowners were bankrupted. On one block of Gilsey Avenue in West Price Hill, more than $1 million in bad loans in the past four years led to foreclosure of 15 of 50 homes.

Paul Krimmer, who has purchased and leased homes in East Price Hill, North Fairmount and other neighborhoods, alerted federal investigators to a mortgage scam in the mid-1990s that resulted in convictions of three investors. His conclusion: Fast-talking sellers and people eager to buy homes with little or no money down are all to blame.

"It's the American Dream," Krimmer says, "to get something for nothing."

Inflating the value

Neighborhood activists say that explanation is too simple.

[IMAGE] A property auction conducted by the Hamilton County Sheriff's Office in a hallway at the Hamilton County Courthouse.
(Gary Landers photo)
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They cite a mortgage market that allows virtually anybody to buy a home. The liberal lending market leads to opportunities for questionable real estate ventures. And lax real estate laws allow abuses to occur with little penalty, activists say.

"They don't use guns, and they don't use knives, but they steal just the same," says Steve Olden, a lawyer with Legal Aid Society of Greater Cincinnati, a nonprofit group that helps poor people fight alleged predatory practices.

Ohio state Rep. Steve Driehaus has urged Hamilton County Prosecutor Mike Allen to investigate dozens of property sales that he believes are flips. Most involve single-family home sales in West and East Price Hill, which rank No. 1 and No. 3 in the city for total foreclosures over the past four years.

Allen says he's willing to prosecute anyone who breaks the law, but so far he's forwarded complaints to the FBI.

At least one lender, Indiana-based Trustcorp Mortgage, was a victim of a flipping scheme over the past two years. In a federal lawsuit, Trustcorp claimed it bought bad loans from Midas Mortgage of Blue Ash in a standard real estate transaction. Midas agreed in June to repay Trustcorp for 27 fraudulent loans that totaled $2.6 million in neighborhoods from Price Hill to Madisonville.

Midas President Michael Bowen says his loan officers were duped, too. In some cases, unscrupulous appraisers gave his loan officers property reports that included photos of more expensive houses than the ones being sold.

"You'd never think that somebody would be that dishonest," Bowen says. Now, Midas loan officers doublecheck all photos, he says.

Federal prosecutors say that case is just one of many. They say one out-of-state lender, which they would not name, may have up to $100 million in fraudulent loans in the Cincinnati area. Amul Thapar, assistant U.S. attorney in Cincinnati, says investigators are building cases against at least two dozen investors, mortgage brokers and other participants.

"We have a Wild West approach to borrowing and lending like nothing I've seen in my 15-year career," says Chris Finney, a Hyde Park lawyer who teaches a course on mortgage fraud to area real estate brokers. "At some point, if it is not stopped, we have a house of cards that will fall."

Over her head

Desiree Watts Edwards wasn't thinking of buying a house; she was just looking for a place to rent in Corryville. Then she met investor Roger Pepples, who offered to sell her a three-bedroom home for $73,000.

Pepples had purchased the house for $26,500 three months earlier, in April 1998. He had bought the house from another investor, who had purchased it out of foreclosure that same day for $24,500.

Watts Edwards, then a single, unemployed mother of two and pregnant, worried she wouldn't qualify for a loan. Pepples, a former Cincinnati Public Schools math and gym teacher, told her not to worry.

Pepples referred her to a mortgage broker, Ronald Trester, whom he described as "one of my guys" in a deposition to Legal Aid lawyers.

Watts Edwards alleged in her Hamilton County Common Pleas lawsuit that Trester falsified her loan application to make it appear she could afford the house. Among other things, the application said she had a job, $5,000 in savings, $10,000 in life insurance, a $4,000 car and $20,000 in other property. At the time, the woman's only income was a $700-a-month Social Security check.

Watts Edwards was approved for financing from a Florida lender and received a second mortgage loan from Pepples. At the closing, Pepples produced a cashier's check for $4,000 to cover her closing costs. He described the money as a gift from her mother. She said her mother never gave her money.

Pepples won't discuss specific cases. He says he lends money to buyers who need a down payment but doesn't always press them for payment.

Watts Edwards quickly found herself in trouble.

She couldn't regularly make the $629 monthly house payments. Plumbing leaks damaged floors and ceilings. Six feet of sewage collected in her basement. Electrical outlets didn't work. She paid more than $1,000 to fix the house, but repair bills, house payments and everyday living expenses were too much.

Facing foreclosure, she sued Pepples and Trester in June 2000. Under a court-approved settlement, Trester bought the house back from Watts Edwards in May 2001.

Trester, now operations manager for Charter First Banc in Fairfield, didn't return repeated phone calls. The FBI raided Charter First in July in connection with its flipping probe.

Watts Edwards is renting an apartment in Evanston and working to repair her credit.

Making millions

Hundreds of investors buy and sell real estate in Cincinnati and Hamilton County. Most are legitimate, spending thousands of dollars to fix up older homes and provide families with places to live.

Pepples is one of the more active investors. Property records show that he or his companies sold more than 45 homes that ended in foreclosure since 1996 in Northside, Price Hill and other neighborhoods. Those sales amounted to more than $2.7 million, according to county auditor records.

Pepples also has been named in complaints from low-income homebuyers. Legal Aid has filed two lawsuits against Pepples for loans he arranged for homes over the past four years. In a third lawsuit, Legal Aid intervened when the owner of a house Pepples sold faced foreclosure. All those lawsuits were settled.

In one, Pepples agreed to refer all future buyers to a home counselor before selling to them. He also paid cash settlements and had to buy back one home.

Pepples says he's extending the American dream of homeownership to working-class and low-income people. It's not his fault that they lose their homes, he says.

"You've got these low-income people who just don't pay their bills," Pepples says.

He also says he no longer sells property to homeowners, only to other investors.

Neighborhoods hurt

The distress spreading through Cincinnati's older suburbs is reminiscent of the 1950s and early 1960s, when thousands of homeowners flocked to the suburbs and investors purchased their near-downtown homes.

Then, people were driven by racial fears and opportunities opened up by superhighways. Now, the changes are the result of an easy flow of mortgage dollars and savvy investors.

But the results are similar.

Of 10 communities with the highest foreclosure rates in Hamilton County, nine are losing population and nine have more vacant homes than a decade ago.

Crime is up, too: Murders, rapes, robberies and other serious offenses shot up 44 percent in West Price Hill in 2002 over 2001. Crime was up 15.3 percent in East Price Hill and 22 percent in Westwood, compared to an 11.8 percent increase for the city overall.

Instead of conventional "For Sale" signs, neighborhoods are tagged with notices offering easy money for quick sales. Major mortgage lenders have given way to subprime lenders offering high-interest loans to people who are credit risks.

Foreclosures have "totally knocked our legs out from under us," says Pete Witte, president of the Price Hill Civic Club.

The real estate get-rich-quick schemes aren't totally to blame for the decline. Families are leaving for bigger, newer homes in the suburbs. The slumping economy has been difficult for businesses and families alike. And foreclosures happen everywhere, even in the most stable communities.

But housing experts say speculators play a significant role in accelerating neighborhood changes. And foreclosures, when they're clustered on streets or blocks, hasten the decline.

Babs Moore, who's lived on Manss Avenue in West Price Hill since 1951, notices a constant churn of neighbors because of foreclosures and lending activity.

She rarely chats with neighbors, a far cry from when she was a child.

"Everything was quiet. Everything was clean," Moore says. "Nobody tolerated kids on the street after dark.

"Now, I don't know any of my neighbors, and I don't want to."

E-mail kalltucker@enquirer.com




SPECIAL REPORT: FORECLOSURES
Home schemes, broken dreams
High-interest loans jeopardized their home
Fliers and signs popping up on streets
Papers she can't read gave away her home
She owned, now rents family home of 100 years
Novice owner put faith in her former teacher
Lured into investing, left with shabby rentals
Subprime loans carry high risks, high rates

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