A complicated mortgage deal involving a crumbling Orlando condo complex has sparked a federal investigation and could leave taxpayers on the hook for millions of dollars.

The mess has emerged because Catalina Isles was financed well above market prices with mortgages guaranteed by the federal government.

Many of the units were appraised at close to $200,000 apiece just two years ago, far more than an average Orlando condo at the time. They are worth less than a tenth of that now, and the values keep dropping.

The owners, many of whom bought the condos with the promise that they would not make down payments or monthly mortgage payments, are elderly and poor. Their units are falling apart, but they don't have the money to move elsewhere � much less write a check for repairs.

"After I got in, I wished I hadn't," said Christine Morris, a retired 72-year-old housekeeper and resident whose roof and sliding-glass door continually leak. Already, one of the 89 units is boarded up and condemned, three others have been cited by Orlando for code violations and a dozen or more sit empty. Code-violation fines start at $25 a day. The situation at Catalina Isles, which fronts Interstate 4 near John Young Parkway, has

prompted an investigation by the federal Department of Housing and Urban Development, which holds more than two dozen notes worth $3.5 million at the complex.

How it happened

How Catalina Isles came to be this way goes back to 2007, when South Florida developer Angel Lage bought what was then called Lafayette Square Apartments for $5.2 million. It was condemned in 2000 and emptied out.

Previous owners then made necessary improvements and rented the apartments, but it was still considered low-cost housing when Lage purchased it. He painted, made minor fixes and then started selling the apartments as condominiums.

Some of the buyers were homeless or living in public housing, and most were surviving on meager Social Security checks, food stamps or odd jobs. They borrowed money from Lage's mortgage company to purchase the condos.

Lage then helped the buyers get what's known as reverse mortgages from HUD. Proceeds from those federally backed home loans paid off the mortgages Lage initially made.

Lage, who paid an average of about $56,000 for each unit, typically made $20,000 to almost $64,000 on each sale, not including transaction fees and other related costs.

Reverse mortgages allow owners to live in their homes mortgage-free. The notes are set up to last 80 years or more. When the owner dies or moves, the unit or house is sold, with the proceeds paying off what remains of the loan.

But reverse mortgages only work if the unit is worth more than the mortgage. That is far from the case in Catalina Isles.

Lage hired appraisers in 2009 who declared the one-, two- and three-bedroom units, all less than 1,400 square feet, to be worth $145,000 to $192,000. Those numbers came in even though the midpoint price for all Orlando condos was $52,900 in 2009.

Those very same Catalina Isles units now are listed as being worth $8,900 to $15,250 on the tax rolls.

'It's a gift'

Lage no longer owns the complex; he sold it off unit by unit. He said he made every deal strictly by the rules and, in fact, ended up losing money on Catalina Isles when overheated real-estate prices began plummeting.

"The market dropped on us," Lage said.

Lage says the people living at Catalina Isles do not know how good they have it.

"It's a gift," he said of their condos. "They should thank me. I guess they don't understand what I did for them."

He said the units could fetch monthly rents of as much as $700, while owners there pay no more than $144 for monthly association fees because of the way the units are financed.

Lage said the problem is that some of the Catalina Isles residents do not understand that owning the units means they are responsible for repairs and maintenance.

Among those who got a condo was Essie Mae Scott. She was 84 and suffering from Alzheimer's, according to her legal guardian and daughter Deena.

The Scotts were living on Social Security checks of $486 a month and food stamps when Silver Knights Investment Corp., controlled by Lage, gave the mother a mortgage of $119,000 to buy a three-bedroom condo in 2008.

Four months after he loaned Scott the money to buy the unit, Lage connected her with Value Financial Services. That Miami-based company approved a HUD-backed reverse mortgage that paid off Lage for the $119,000 he originally loaned to Scott, plus an additional $12,292 for Value Financial and other companies that serviced the closing.

Value Financial officials did not return repeated calls from the Orlando Sentinel.

Alex M. Taboas, of ATO Appraisal Service in Miami, valued Scott's condo at $192,000 for the reverse mortgage. The company was dissolved last year, and Taboas could not be reached for comment.

The deal, repeated several times with other buyers and often employing Value Financial Services, rested on a federally approved appraiser's certifying that the unit was worth more than enough to pay off the original loan provided by Lage.

Several residents said appraisers overestimated values, and that led to the units being overleveraged by the federal government.

"Without that appraisal, nothing could be done,'' said Paula Kittrell, who lives in a unit that had been purchased with a reverse mortgage by a now-deceased family friend.

Sunrise Home Appraisals of Casselberry, which had an FHA-approved appraiser, found Kittrell's unit to be worth $145,000 last year. It now has a market value of $8,900 on the tax rolls.

Former Sunrise President Robert Ousnamer, newly retired from the now-defunct company, said specifics about appraisals are confidential. But generally speaking, he said, the market has been in such turmoil during the past three years that pegging values has been difficult. Sunshine appraisers always used comparable sales to arrive at a value, he added.

"The market was all over the place. We were all tearing our hair out trying to stay as accurate as we could," he said. "I can tell you this about the people in my office: We never do anything without being able to back up what we do."

A national issue

Across the nation, HUD, which is funded by federal taxes, faces a looming bill for reverse mortgages on property that lacked the equity needed to pay off the note. In 2000, the agency paid $2.7 million in such reverse-mortgage claims. By last year, that tab grew to $76 million. And, for this year, it exceeded $129 million through September.

At Catalina Isles alone, HUD is on the hook for $3.5 million in loans for 28 condos that are worth only $317,650 on the tax rolls.

HUD is now investigating some of the sales, appraisals and mortgages at the Orlando complex. HUD spokesman Lemar Wooley would not discuss specifics, including whether Lage or the appraisers are a target of the probe.

When values collapse on homes that were supposed to be worth enough to eventually repay a reverse mortgage, the FHA holds both the approved lender and approved appraiser equally responsible "for the integrity, accuracy and thoroughness of the appraisal," Wooley said.

"The federal government would have a number of avenues to pursue, including prosecution, if fraud were determined," Wooley said.

Code enforcement steps in

The biggest worry for Orlando is that Catalina Isles will end up just like it did when it was called Lafayette Square: condemned as too dangerous for residents.

Mike Rhodes, Orlando's code-enforcement chief, was around when Lafayette Square was shuttered in 2000 because leaky roofs virtually destroyed the place.

The city tries to find temporary shelter for the people who are displaced, but the experience is traumatic for everyone, Rhodes said. Residents who left publicly subsidized housing to move into Catalina could now spend years on waiting lists to get back into similar apartments.

Leaky windows, plumbing and roofs are vexing the complex again.

"They [the residents] certainly aren't in the best housing conditions that we would hope for them," Rhodes said.

His board has heard four cases from Catalina Isles, including one in which it condemned a unit. More undoubtedly are on the way, city officials fear.

Rhodes' biggest worry is that failures in one unit � a burst pipe or faulty electrical outlet that sparks into a fire � will harm adjoining condos.

"The domino effect," Rhodes said, "can be pretty significant."