The front page of today’s Virginian Pilot carries the above headline. It is part one of a three part series on CM Development. Even before I read the story, I figured I knew who it was about. Tomorrow’s article will be about the players, and gives this hint:
In his years of investing with the company, Becher has met most of CM Development’s business partners.
Yet he had no idea that some of them had been investigated twice for operating failed housing businesses or that several had served prison time for housing fraud.
Before each of the previous ventures fell apart, the pitch to investors and cities was simple: The companies were going to revive poor neighborhoods by renovating homes.
A number of years ago – I don’t remember the exact year – some young men rented office space in the building where my accounting offices are located. Clean cut, driving nice cars and possessing Mid-Western accents, these fellows set up shop. Over time, I learned that they had come here from Michigan to renovate houses, something that they had done there. Only later did I learn that they had come here one step ahead of the law.
Thinking that these young guys – none were over 30 – were on to something, I agreed to serve as their accountant. Once I got into the books, I knew I had made a mistake. At the time, what they were doing was not illegal – that would come later – but it was something that I was uncomfortable with.
What was going on then was much the same as what was described in the story today: an endless cycle of buying properties, and reselling them within a group of investors at higher and higher prices, and using the cash to fund the “operations” of the business. The lure of high returns – the article accurately mentions 30% – drew in an increasing number of investors, including one local prominent attorney. They were using the HUD 203k loan program, one designed to allow investors to buy and renovate properties. The neat thing about the 203k program was that the loan amount was based on the original cost of the property plus what was necessary to renovate. HUD initially didn’t envision investors taking advantage of the system but caught on soon enough. The rules got changed, making what these guys were doing more difficult. When I was asked how to skirt these rules, I ended the relationship.
I watched the actions of these guys, first while they were still in my building and later from afar, due to the wide net that they cast. I saw the ads they ran in the classifieds, promising the high returns. Clients of mine got caught up in the net, several of them ending up with virtually worthless properties with huge loans on them. Realtors, financial planners, builders – the list of folks who I knew who had gotten involved just continued to grow. I was not surprised that the company – by now operating under a new name but with the same players – ended up with indictments and jail sentences.
By keeping his activities separate, Cary McEntee, mentioned in the story as the president of CM Development, managed to avoid the fate of his buddies. But that didn’t mean he wasn’t involved. Cary had come a bit later from Michigan, following his brother and the other guys. He ran a parallel operation.
My question is this: how come, given what was known about the operations back then, something wasn’t done to avoid today’s situation? What tools are out there that could have been used to prevent this from happening? And, what can be done for those homeowners whose neighborhoods have been savaged by these guys?
The article raises some important issues:
- Higher real estate values, and thus, higher real estate taxes for other residents of these neighborhoods, based on the repeated sales of these properties at higher and higher values
- Removal from the inventory of affordable housing
- Safety of the surrounding residents.
Is it because they preyed on fragile neighborhoods that nothing has been done to stop this?
VIVIAN J. PAIGE | All Politics is Local 