BUILDING EMPIRE ON A SHAKY FOUNDATION: MARKUPS OF DISTRESSED PROPERTY CAUGHT UP WITH MCA FINANCIAL

Even by the modest standards of its west-side Detroit neighborhood, the house at 9195 Schaefer Road is no palace.

One story. No basement. Exterior of asphalt shingles, some missing. A tiny lot. Heavy bars on the windows that speak volumes about the area’s safety.

A unit of MCA Financial Corp. bought this property in July 1996 for $10,500 but somehow figured that by 1998, it was worthy of $64,800 in mortgages.

According to documents on file in U.S. Bankruptcy Court, 9195 Schaefer is typical of many transactions that eventually caught up with MCA Financial Corp., creating a bankruptcy that’s now estimated to cost banks, investors and creditors more than $100 million.

Timothy Skillman, MCA’s acting chief operating officer under state conservatorship, used 9195 Schaefer as one of four examples of how MCA used a bewildering thicket of corporations and limited partnerships to buy distressed property, mark it up steeply, make mortgages on the inflated price and then use those mortgages as collateral for loans from banks, insurance companies and pension funds.

The example was contained in a report Mr. Skillman filed last month with the U.S. Bankruptcy Court.

Former MCA Financial Chairman Patrick Quinlan says he is unaware of any pattern of widespread multiple mortgaging of properties, though he hasn’t seen the report and thus couldn’t comment.

According to a title search requested by Mr. Skillman, Mortgage Corp. of America, a unit of MCA Financial, bought the house at 9195 Schaefer on July 31, 1996, for $10,500. MCA sold the property the same day for $24,000 on a land contract to one of its subsidiary limited partnerships.

Then on Oct. 22, 1996, according to Mr. Skillman’s report, the same property was granted by quit-claim deed by Mortgage Corp. of America to Sterling Bank and Trust, which was trustee for a trust made up of real estate investors. That put the limited partnership in the position of making its land-contract payment to the trustee for the investors.

3 mortgages in 7 months

Then on Jan. 16, June 29, and Aug. 5, 1998, the limited partnership mortgaged the property to MCA three times, for $21,600 each time. MCA borrowed $21,168 from Chase Bank of Texas and $21,168 from a real estate subsidiary of brokers Paine Webber Group Inc. based on two of the mortgages.

According to Mr. Skillman’s report such transactions were common for MCA and its subsidiaries. Last week, he wouldn’t comment on how MCA could justify placing three mortgages totaling $64,800 on a property it had bought for $10,500.

The Detroit city assessor’s office lists 9195 Schaefer’s state equalized valuation at $6,050, meaning the city pegs its value at $12,100.

In a report filed with Mr. Skillman’s, the commissioner of the state Financial Institutions Bureau, Patrick McQueen, says there’s evidence “some investor pools did not contain all of the land contracts and/or mortgages required to be in such pools and that many of the land contracts and/or mortgages had been pledged to more than one person.”

Mr. McQueen says the Birmingham, Mich., turnaround company Conway MacKenzie & Dunleavy, hired by MCA management just before the company shut down, told him, “This problem was substantial and pervasive.”

Mr. McQueen says it still isn’t known just how many of MCA’s loans were pledged improperly to more than one creditor.

“We simply don’t have it documented yet, but we certainly have evidence of wrongdoing,” he says. “Any evidence we get will be turned over to the U.S. attorney and the state attorney general.”

Mr. Quinlan says he didn’t run MCA Financial subsidiaries Mortgage Corp. of America and MCA Mortgage Corp. day to day. Members of the Wells family had those duties, he says.

seized by state

“The company did about 15,000 mortgages a year, so I guess anything is possible,” Mr. Quinlan says. “But I have no knowledge of this.”

Lee Wells, former president of Mortgage Corp. of America and MCA Mortgage Corp., has an unlisted telephone number and could not be reached for comment. Lee Wells’ father, C. Thompson Wells Jr., and his brother, David Wells, did not return telephone calls left at their home answering machines. C. Thompson Wells Jr. owns about 14% of MCA Financial’s stock, according to the company’s most recent proxy, and David Wells, a former loan production executive, owns 4%.

MCA closed Jan. 22, leaving thousands of tenants and home buyers in chaos. The Financial Institutions Bureau seized the company Jan. 28, and state-appointed conservator B.N. Bahadur placed it in Chapter 11 bankruptcy Feb. 10.

The major MCA companies have filed their bankruptcy schedules, the detailed snapshots of their businesses as of the time of filing. The news in them isn’t good for creditors.

MCA Mortgage Corp. listed $280.8 million in liabilities against $398,760 in assets. Mortgage Corp. of America listed $117.6 million in liabilities but only $664,535 in assets.

Mr. Skillman says in his report: “I currently estimate that the parties in interest in these cases will experience total losses of at least $100 million. I believe that a significant portion of that amount will be losses for investors in the pools.”

The schedules also listed several MCA executives as having drawn out major amounts of cash from the company in its last year. Among them: former MCA Mortgage Corp. senior vice president Rory Ballard, $301,203; Lee Wells, $245,866; former Mortgage Corp. of America Treasurer Keith Pietila, $205,604; D. Michael Jehle, Mortgage Corp. director, $205,151; and former Mortgage Corp. vice president Daniel O’Connor, $171,000.

Crain News Service