Tabatha Evans didn't set out to buy a house. An unemployed single mother living on $12,000 a year in government assistance, Evans was looking to rent a place in Baltimore when she was approached by a speculator who told her she could become a homeowner for just $500 down with a loan backed by the Federal Housing Administration. After looking at a house that had been approved by the FHA, she signed some papers, secured a $78,000 government loan, and moved in with her two boys.

Evans quickly discovered that the house was worth much less than she paid for it. The investor, it turned out, had purchased the run-down house from the government only a few months earlier for $6,672. He had billed it as "fully rehabilitated," but the repair work consisted of a paint job and a drop ceiling to hide structural damage. The foundation was crumbling, and the house had no working furnace. The gas leaked, the kitchen cabinets fell from the wall. When it rained, water poured into the kitchen. "That house got the duct-tape version of home improvements," says Carl Cleary, a housing counselor in Baltimore. The cost of repairs left Evans strapped for cash. "I could fix the house so the kids would be safe," she explains, "or I could pay the $500 mortgage." While the investor walked away with a hefty profit, Evans now faces foreclosure. And should she lose her home, taxpayers will pick up the tab to pay off her defaulted loan. (Of course, the seller committed an act of fraud, but just try to find a lawyer willing to work for a woman on public assistance, simply for the interests of justice. WFI Editor)

Evans is among tens of thousands of low-income homeowners victimized by a scam called "flipping" that is being repeated every day in inner-city neighborhoods from Syracuse to Los Angeles. To resurrect blighted urban areas, the government sells abandoned houses to real estate investors for renovation. But some speculators simply snap on cosmetic repairs and "flip" the properties, reselling them for many times their true value. Because the FHA co-signs the loans, it gets stuck with the bill when homeowners can't pay the inflated mortgages. Last year the agency spent $6.5 billion to bail out 78,890 home loans that went bad - up 30% in three years. The foreclosed homes are seized, boarded up, and put back on the market, and the cycle starts all over again.

"We have found flipping scams in every city we've investigated," says an official with the Department of Housing and Urban Development (HUD), which recently indicted 41 Realtors, lenders, and appraisers in California. "What has me shaking is that we have these kinds of numbers on defaults and we are in a bull market." Federal investigators call flipping more lucrative than bank robbery - but it was mortgage bankers who lobbied to make the scheme possible. Historically, the FHA assigned independent appraisers to inspect houses and set a fair value. But lenders wanted to select their own appraisers. They claimed it would streamline the process. But it would also make it easier to find someone who would ignore shoddy repairs and approve jacked-up prices.

The industry certainly had plenty of clout on Capitol Hill. From 1991 to 1994, lenders handed out $2.3 million in campaign contributions, and the investment paid off. At a meeting of the Mortgage Bankers Association in 1993, the FHA unveiled a "lender select" policy allowing bankers to choose appraisers. The news was greeted by a standing ovation. Because the FHA supports low-income home buyers with shaky credit, defaults on agency loans have always been above the industry average. But since lenders have been allowed to hand-pick their own appraisers, investigators say, foreclosures have skyrocketed. In Baltimore, lenders filed 5,000 petitions for foreclosure on FHA loans last year, up from just 1,900 in 1994. In Chicago, 150 homeowners in a single neighborhood are suing a realty firm called Easy Life that they accuse of selling dilapidated housing at inflated prices. In Milwaukee, lawmakers are investigating investors who bought up entire city blocks and fixed prices - sometimes buying homes for as little as $3,000 and reselling them weeks later for $40,000.

Appraisers are supposed to serve as the FHA's last checkpoint against such fraud. But a review of federal records and interviews with dozens of housing inspectors and federal regulators reveals that some lenders are pressuring appraisers to overlook defects and inflate values. "One guy threatened to break my legs if I didn't pass his house," says Jim Hawthorne, who inspects repairs for the FHA in New Jersey. "Another pulled a gun on me because I wouldn't pass his house." In one loan document obtained by Mother Jones, a Florida lender added a handwritten note instructing the appraiser to pass a house at a set price - or pass up the job. "Please do not complete this appraisal," the note reads, "if you cannot get the value I need."

"Lenders and brokers are dependent on each other for their income," says Michael Comstock, a former FHA appraiser in California. "It is pretty well recognized by everyone that this relationship is corrupt." The FHA is supposed to review 10% of all appraisals to ensure that homeowners and taxpayers aren't being cheated - but sources familiar with the agency say such reviews rarely take place. "There just isn't the staff or the know-how to pull off that kind of thing," says a former official who asked not to be identified. (The FHA has enough money to pay salaries and pensions of employees who are cheating homebuyers and taxpayers, but they don't have the resources to make sure that the work being done is honest and on the level. This same excuse is handed out every time the government is caught red-handed enabling embezzlement, when anyone challenges it for letting the public interest get looted. WFI Editor)

As a result, lenders are using the federal loan program to cheat the very people it is intended to help. (The same thing is happening in the so-called welfare program, where eligibility technicians get paid $2,500 to $5,000 per month to dole out checks for $600 to families on welfare. WFI Editor) Families "place their trust in someone they thought was an agent of the government, and they get taken for a ride," says Cleary, the housing counselor. The government has attempted to address the loan crisis by penalizing appraisers and lenders who have disproportionately high default rates. But when a firm called Capital Mortgage and 19 other lenders suspended from the FHA program sued, the agency backed down and reinstated the companies.

"It's the perfect scam, really," says Ira Rheingold, an attorney representing hundreds of homeowners in Chicago. "Appraisers need their work, the real estate agents get their commissions up front, and FHA cleans up the mess. I call FHA the enabler of this scam. There are lots of people preying on poor people, but for the government to approve these shoddy loans is a disgrace."

SOURCE: This article was excerpted from the July/August 2000 issue of the Mother Jones magazine, from an article entitled, "Home Cheat Home," by Kathryn Wallace. Reprinted in the public service of the national interest of the American people.