One of the largest mortgage fraud cases in state history has gotten bigger.
More than 300 people who bought lots in coastal Carolinas subdivisions in 2006 and 2007 filed suit this month because they believe the value of their property was destroyed by fraud allegations in the sales of nearby lots, which resulted in a scandal and a wave of foreclosures.
The subdivisions are Cannonsgate in Carteret County, Summerhouse in Onslow County and Craven's Grant in Georgetown, S.C. The new lawsuit, like several earlier suits alleging mortgage fraud, seeks damages from the developers, lenders, appraisers and others involved in the land deals there.
"When you look at these developments and see the foreclosure rates, it's clear that the devastation has spread to all the property there," said David Binkley, a Michigan lawyer who filed the suit, along with lawyer John S. O'Connor of Charlotte.
His clients weren't directly defrauded, Binkley said, but the land flipping that allegedly inflated the cost of some lots makes it almost impossible for anybody in the development to sell. Most potential buyers have been scared off, and even the same banks that lent the plaintiffs money to buy lots won't lend there now.
The new lawsuit adds to two complex scandals: the alleged mortgage fraud and another surrounding the federal investigation into former Gov. Mike Easley.
Easley and his wife, Mary, got a $137,000 discount from the developer of a Cannonsgate lot he bought in 2005, a discount Easley didn't disclose. The former governor has not been charged with a crime; nor is he involved in either lawsuit. Several people linked with him, though, have come under scrutiny for their ties to the developer of the two North Carolina subdivisions, R.A. North Development Inc., of Matthews.
Randy Allen, a political ally of Easley and president of R.A. North, developed the project. His brother, Gary Allen, ran the company that sold lots in Summerhouse and Cannonsgate.
Attorneys for the Allens said Wednesday that their clients had developed and marketed high-quality projects for years and always treat their customers fairly. Randy Allen's attorney, James Wyatt of Charlotte, said his client had spent millions to ensure that the developments had the highest quality infrastructure.
Why did prices drop?
He and Gary Allen's attorney, Stephen Smith of Raleigh, said the lots had plummeted in value for the same reasons real estate had nearly everywhere.
"There's no doubt that today's real estate market and prices are totally different than what we saw in 2005-06," Smith said. "The fact that the recession drove land prices down doesn't mean anyone was defrauded."
Spokeswomen for two major banks that are among the lenders being sued, BB&T and Bank of America, declined to comment this week, saying the banks hadn't yet been served with the lawsuit.
Earlier suits filed
Several attorneys in North Carolina and Virginia, including O'Connor, had filed at least four earlier suits on behalf of more than 200 other property owners in the subdivisions. They claim that middle men, primarily the Virginia firm Total Realty Management, conspired with the developers, lending agents, appraisers and others to improperly inflate the price of lots that TRM sold as investments.
Some of the inflated prices, they claim, were built upon multiple fake sales by TRM of the same lot, with the value, on paper at least, jumping with each sale, until finally it was sold to an unwitting buyer. That "multiple flipping" - which in some cases doubled the apparent value of the lots in a matter of months - helped persuade potential buyers that they could make quick profits, according to the suits. It also gave appraisers who were in on the alleged scheme the ability to use the values to put inflated values on other lots.
When the real estate bubble burst, land prices plummeted on the coast. In this case, though, the value of the property fell much further than it would have without the alleged mortgage fraud, according to the new lawsuit.
In one case, a lot that just two years ago was deemed good enough collateral for a $369,000 loan sold recently for $45,000 at a foreclosure auction to the lender, who then got only $12,500 for it in a cash transaction, said Binkley, the Michigan lawyer.
In many cases, Binkley's clients say they got deals that covered the first year or two of payments, but now find themselves shelling out monthly payments for something they believe has little or no value.
P. Jeffrey Ewert, a Charlotte neuropsychologist, said he bought a waterfront lot at Cannonsgate a few lots down from Easley's, in part because the developer was from Charlotte and had a good reputation. Also, Easley's decision to buy there looked like a reliable stamp of approval, and he was told it was a surefire investment.
"I was told there was no risk involved and they would be able to flip the lots quickly when we were ready to sell," he said.
Ewert said he bought the lot from an employee of the developer's sales company, Mace Watts, and Watts' wife, for $649,000. Only later did he learn, he said, that Watts had bought the lot from the developer for $400,000 shortly before.
Watts didn't return phone calls seeking comment.
May walk from loan
Ewert's deal included prepaid mortgage payments for the first year, but lately he has been paying more than $2,000 a month. He is now planning to walk away from the loan and ruin his credit because he can't afford it and doesn't feel any moral responsibility to a lender he believes knew about the fraud.
"It's just throwing good money after bad," he said.
His lot was one of the most expensive in Cannonsgate. Now, after a similar lot sold for $175,000, he figures it's worth little more than one quarter of what he paid.
The earlier civil suits alleging fraud are still under way, though the Allen brothers have agreed to a confidential settlement with the largest group of plaintiffs, about 130 people represented by the McLean, Va. law firm Pesner Kawamoto Conway, according to an attorney there, Jill Pisner.
