A Year Later, Losses Pile Up in Complexes Ravaged by Swindle

Little more than a year has passed since the first foreclosure notices started showing up on 81 North County condo units wrapped up in a massive real estate scam. Since then, the complexes have been reeling from the effects of vacancies and plunging property values.

Many of the old renters were evicted. Banks assigned representatives to assess the damage and re-sell the condos. Squatters descended on vacant units and have been kicked out. The complexes’ homeowners associations have struggled under the weight of delinquent dues.

All this stems from the swindle orchestrated by Bay Area man Jim McConville. In the span of several months in 2008, McConville picked up those units from distressed developers and orchestrated their sale to more than 20 straw buyers — people who’d rented their identities to him in a complex scam that was the subject of a voiceofsandiego.org investigation last year.

The dust is finally starting to settle, though signs of the swindle’s impact remain. A few yellow “WARNING” posters on vacant units prohibit vandals, thieves and trespassers. Lockboxes hang from doorknobs on units that haven’t sold yet. The finely coifed headshots of real estate agents beam down from posters perched in vacant units’ windows.

And the financial losses have continued to grow.

All of the 81 condos from the Sommerset Villas, Sommerset Woods and Westlake Ranch complexes involved in the scam have been repossessed. Twenty-four have yet to find new buyers. But the other 57 have resold for prices drastically lower than the mortgages were worth, let alone the initial purchase prices.

The U.S. taxpayer is paying for the mounting losses. Across the complexes, the cost to taxpayers is at least $7.8 million.

When the units were just in the beginning stages of foreclosure, it was too soon to tell whether the government-sponsored mortgage companies, Freddie Mac and Fannie Mae, had definitely purchased the shaky loans. Now that the units have gone back to the bank and resold, public records clearly show the majority of these units had mortgages that were sold to Fannie and Freddie — now largely owned by taxpayers.

Take Sommerset Villas. The 26 units previously owned by McConville’s straw buyers that have resold as foreclosures have sold, on average, for 71 percent less than the purchase prices in 2008. And some have been worse: A 480-square-foot studio apartment that sold for $265,000 in 2008 sold in October for $47,000 — an 82 percent drop.

That’s added up to at least $3.8 million in losses for Fannie and Freddie so far in just that complex. Add to that estimate a $2.7 million loss in Sommerset Woods, and a $1.3 million loss in Westlake Ranch, according to an analysis of property records.

There’s more where that came from, as 24 units are still left to be processed and resold as foreclosures. And legitimate homeowners in these spots have abandoned their own units in the wake of their neighbors’ plunging values, exacerbating the losses. Even more, there are all sorts of insurance payments, taxes and other fees that add more to the bill for Fannie Mae and Freddie Mac.

Michael Lea, a former Freddie Mac chief economist, said Fannie and Freddie’s only way to avoid some of those losses is to track down the original lenders that made the loans. But if they’re out of business, as at least two appear to be, the government-controlled mortgage giants must eat the loss, he said.

“In that sense it becomes Fannie’s and Freddie’s loss, and therefore the taxpayers’ loss,” Lea said.

McConville couldn’t be reached Thursday, and a Freddie Mac spokesman declined comment. Amy Bonitatibus, a Fannie Mae spokeswoman, didn’t comment on specific losses, but said the company “takes mortgage fraud very seriously” and continues to “pursue aggressive enforcement against incidents such as this.”

Local real estate broker Joe Southwick sold a unit in Sommerset Woods last month and is tasked with selling a couple more distressed units on behalf of Freddie Mac

“The poor people — the for-real buyers that got caught in that — they’re looking around saying, ‘I paid [$380,000] for this and they’re going out the door for [$150,000] now,’” Southwick said. “The ones that aren’t in foreclosure are making the decision to just move on.”

Though the distress is still prominent, the complexes are progressing in their long haul toward stable ground. New buyers and investors are picking up the low-priced units to live in or rent out. Some balconies now are peppered with plastic toys and tricycles, others with lawn chairs and barbeques. In the courtyard of Sommerset Villas, green grass has replaced the brown spots of last spring. The tennis court and pool are clean, and the “Nature Preserve,” a small section of grass and plants near the back of the complex, is nearly living up to its name.

Sarah Pylkki has been renting a studio in Sommerset Villas for $900 a month for about a year. Pylkki has friends who bought units around the corner at Sommerset Woods who’ve been so walloped by plunging prices in the surrounding units that they’ve given up and gone into foreclosure themselves. But she said all of the tumult in her complex has at least one silver lining.

“With all of the empty units,” she said, “it’s nice and quiet.”

Please contact Kelly Bennett directly at kelly.bennett@voiceofsandiego.org with your thoughts, ideas, personal stories or tips.