[Senate Hearing 106-923]
[From the U.S. Government Publishing Office]
S. Hrg. 106-923
FORM OF REAL ESTATE FRAUD KNOWN AS FLIPPING
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HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
SPECIAL HEARING
MARCH 27, 2000--BALTIMORE, MD
__________
Printed for the use of the Committee on Appropriations
Available via the World Wide Web: http://www.access.gpo.gov/congress/
senate
______
U.S. GOVERNMENT PRINTING OFFICE
63-947 cc WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON APPROPRIATIONS
TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington FRANK R. LAUTENBERG, New Jersey
MITCH McCONNELL, Kentucky TOM HARKIN, Iowa
CONRAD BURNS, Montana BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama HARRY REID, Nevada
JUDD GREGG, New Hampshire HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado BYRON DORGAN, North Dakota
LARRY CRAIG, Idaho DIANE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas RICHARD J. DURBIN, Illinois
JON KYL, Arizona
Steven J. Cortese, Staff Director
Lisa Sutherland, Deputy Staff Director
James H. English, Minority Staff Director
------
Subcommittee on VA, HUD, and Independent Agencies
CHRISTOPHER S. BOND, Missouri, Chairman
CONRAD BURNS, Montana BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama PATRICK J. LEAHY, Vermont
LARRY CRAIG, Idaho FRANK R. LAUTENBERG, New Jersey
KAY BAILEY HUTCHISON, Texas TOM HARKIN, Iowa
JON KYL, Arizona ROBERT C. BYRD, West Virginia
(ex officio)
Professional Staff
Jon Kamarck
Carolyn E. Apostolou
Cheh Kim
Paul Carliner (Minority)
Administrative Support
Joseph Norrell
Liz Blevins (Minority)
C O N T E N T S
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Page
Statement of Senator Barbara A. Mikulski......................... 1
Statement of Senator Paul Sarbanes............................... 4
Statement of Chassie Adams....................................... 6
Prepared statement........................................... 7
Statement of Diane Simon......................................... 7
Prepared statement........................................... 8
Statement of Ken Strong, executive director, Southeast Community
Organization................................................... 9
Prepared statement........................................... 13
Prepared statement of Ed Rutkowski, executive director, Patterson
Park Community Development Corporation......................... 15
Statement of Norma Washington, president, Maryland Chapter, ACORN 37
Prepared statement........................................... 37
Statement of Matilda Wonson, member, ACORN....................... 48
Statement of Vinnie Quayle, director, St. Ambrose Housing Aid
Center......................................................... 51
Prepared statement........................................... 53
Statement of Lynne Battaglia, U.S. Attorney for Maryland......... 63
Prepared statement........................................... 65
Statement of Richard M. Mosquera, Special Agent-in-Charge,
Baltimore Field Office, Federal Bureau of Investigation,
Department of Justice.......................................... 67
Prepared statement........................................... 68
Statement of James J. Rowan, Jr., Inspector-in-Charge, U.S.
Postal Inspection Service, Washington Metro Division........... 69
Prepared statement........................................... 72
Statement of Carolyn Krysiak, delegate, Maryland House of
Delegates...................................................... 87
Prepared statement........................................... 90
Statement of Maggie McIntosh, delegate, Maryland House of
Delegates...................................................... 91
Prepared statement........................................... 93
Statement of Samuel Rosenberg, delegate, Maryland House of
Delegates...................................................... 95
Prepared statement........................................... 96
Prepared statement of the Greater Baltimore Board of
REALTORS............................................. 96
Prepared statement of E. Barry Skolnick, M.S., Fair Housing
Director, National Community Reinvestment Coalition............ 108
FORM OF REAL ESTATE FRAUD KNOWN AS FLIPPING
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MONDAY, MARCH 27, 2000
U.S. Senate,
Subcommittee on VA, HUD and
Independent Agencies,
Committee on Appropriations,
Baltimore, MD.
The subcommittee met at 9:35 a.m., in the Maryland Room,
World Trade Center, Baltimore, MD, Hon. Barbara A. Mikulski
presiding.
Present: Senator Mikulski.
Also present: Senator Sarbanes.
STATEMENT OF SENATOR BARBARA A. MIKULSKI
Senator Mikulski. My name is Senator Barbara Mikulski, and
I am the ranking member of the Subcommittee on Appropriations,
called VA and HUD. And we are officially opening the United
States Senate hearing today on the despicable practice called
flipping, where the poor are gouged by the scum and scam
artists, and then there is the defrauding of the taxpayer by
the gaming of the system, therefore leaving us with FHA loans
that the taxpayer needs to pick up.
So we have three things here. We have broken dreams by
people who thought they had the hope of home ownership. We have
the destruction of neighborhoods because of the holding of FHA,
where the Federal Government itself becomes a major slum
landlord. And we have then the taxpayers holding this
liability.
Now, this practice is not only despicable for what it does
to people and to neighborhoods and the taxpayer, but it is also
criminal. It is absolutely criminal, and Federal laws are being
broken and we believe that State laws are being broken.
Now, we in the Senate feel so serious about this that there
are two Senate committees investigating this: the VA, HUD
Committee on Appropriations, and I will describe that in a
minute, as well as Senator Sue Collins' Committee on Government
Operations. So if you are a flipper, do not think this is a
one-shot deal. If you are a flipper and you are listening to
this hearing, this is only one step in many steps that your
United States Senate is going to take to protect homeowners, to
protect the neighborhoods and to protect the taxpayer.
We are absolutely on their side. We will be listening to
testimony from our Federal law enforcement people, the U.S.
Attorney, the FBI, the Postal Inspector, who will be giving us,
where appropriate, the information that they are finding as
they do ongoing investigations, and also recommendations, and
we need to give them the tools to do their job. And last, but
not at all least, we are going to hear from our very talented
members of the general assembly, who are already working at the
State level on the whole flipping issue.
Now, this is a very unusual hearing, not only because of
its topic but because of the fact that appropriations does not
usually hold field hearings. We have a process in the Federal
Government where there is the budget committee and the
appropriations committee. My very esteemed and dear colleague,
Senator Sarbanes, is on the budget committee. He is also the
ranking member on housing and banking. I am on the
appropriations. What is the difference?
He will tell you that as ranking, he sets the Federal
policy. He does the authorizing, the legislative framework. On
the budget committee, President Clinton proposes a budget; the
House and the Senate analyze it. And then it comes to the
appropriations, where we actually put the line items, the money
in the Federal checkbook, to come back to Baltimore, to come
back to Chicago, to come back to Dallas, our great communities.
So we are here today, and I cannot thank Senator Sarbanes
enough for joining me, this is the first VA, HUD field hearing
in 12 years. They do not usually come out to the community. But
we are out in the community, and Senator Bond, the Republican
chairman of the subcommittee, has his very able staff here to
listen to the testimony. He is in Missouri doing his
constituent work. But this is a full and official hearing,
complete with transcript record and so on.
Senator Sarbanes has graciously agreed to join us because
of his own feelings about flipping and because of his desire,
as he will tell you, about the whole authorizing part of it. We
want to thank Senator Bond for allowing me to chair this
hearing, because we are here to get the facts about flipping.
What is flipping? Why is it happening in Baltimore? Is it
happening in other cities? What can be done to stop it? And
what can be done to prevent it?
Businesses and people are being gouged. Neighborhoods are
being destroyed, and it is despicable and it is going to stop.
Over the past 4 years, shocking facts have come out because
of the community leadership. More than 2,000 properties have
been bought and resold within 4 months, at 100 percent profit.
Some of these properties were bought and resold the same day.
More than 10 percent of the FHA mortgages issued in Baltimore
in 1997 are in default. Is it because of the homeowner or is it
because of FHA?
We want to be sure that being able to buy a home is part of
the American dream. But with the flippers, it has become part
of the American nightmare of fraud, deception and manipulation.
This is unacceptable, and indications are that this is
happening all over the country, that this is a virus that is
spreading. And I will tell you, the prevention and the
immunization is going to start right here in Baltimore.
This is a national problem, and we will be looking at
national issues. We believe the best ideas come from the
people, and this is why we are listening to you today. We want
to acknowledge the role that the Southeast Community
Organization, and other housing advocacy groups, through their
Committee on Predatory Lending, played in bringing this to
light. And thanks to the Sun Paper for their investigative
journalism that really highlighted it and enabled me to take
this to my colleagues in the Senate who asked for national
intervention.
Flipping is not just about property. It is about lending
practices. It is about aggressive solicitation. It is about
deceiving the home buyer, gaming their credit, robbing
appraisers, steering people to high-rate lenders, and kickbacks
to mortgage brokers. Under every rock we are finding another
rock. And under that rock we are finding worms and scams.
But we are here today to get to the bottom of it. When
crooked lenders team up with crooked appraisers, with people
who are essentially the initial scam, innocent people are roped
in. Their property values are artificially inflated in
neighborhoods, and it affects the whole neighborhood. It
appears, unfortunately, that our own Federal Government may be
part of the problem.
HUD, Housing and Urban Development, is holding a large
number of single-family homes in an area. Failure to properly
dispose of this inventory may be contributing to this problem.
And in many cases, it appears that FHA is insuring loans that
should have never been made, because of their way of doing
business and also by the way they set themselves up to be
gamed.
As a Senator responsible for FHA's budget, I am responsible
about the financial impact on the FHA insurance fund. And I
know Mr. Quayle will have a lot to say about the liability that
we hold.
We are going to hear first from people who have been
scammed. And we look forward to hearing from Ms. Simon and Ms.
Adams. We really want to thank you for testifying today and
coming forward. It is not easy to come forth and talk about how
you have been gouged and misled. And so we thank you for your
courage in coming forth. You are really going to make a
national contribution. This is not about hazing. We are not
going to put our glasses down and grill you. You are not the
problem. You are not the problem.
And of course we listen to Mr. Strong; Ms. Washington; and
Mr. Quayle, from St. Ambrose Housing, because it is the
community groups that have identified the system. Later we will
be hearing from Ms. Battaglia, our very able U.S. Attorney; the
FBI and the Postal Inspector; and then from our delegates who
are already very busy, working on solutions for flipping.
I would like to now turn to Senator Sarbanes for any
comments that he wishes to make. But I think all of America can
feel very proud of what Senator Sarbanes is doing in his role
in housing and banking. Most recently he has been a strong
champion of preserving the Community Reinvestment Act, as well
as ensuring the proper framework for HUD's core programs. But
in Community Reinvestment, there were those who wanted to
eliminate it altogether, and he was in the front lines,
preserving it. So that if we can invest in prosperity zip
codes, we can invest in those neighborhoods we want to become
prosperity zip codes. And he has been a leading champion of
that. And I can assure you, he is very much on your side on
flipping.
Senator Sarbanes.
STATEMENT OF SENATOR PAUL SARBANES
Senator Sarbanes. Thank you very much, Barbara. I want to
commend Senator Mikulski for holding this important hearing.
I want to welcome the witnesses, a number of whom we have
worked together with over the years on a range of problems.
Like Senator Mikulski, I wanted to express my particular
appreciation for the witnesses who have been victimized in
these terrible frauds that have been perpetrated against them.
I know it is not easy to come forward and tell your story
publicly. And we understand and appreciate your being here. I
have to say to you, your willingness to do so may serve to help
others to avoid the terrible experience you have been through.
So I think you are performing a real public service and we
thank you very much for coming this morning.
The cynicism of the actions of the investors, appraisers,
settlement agents and others involved in the flipping scandals
here in Baltimore is hard to exceed. Home ownership is the
American dream. It is the opportunity for people to put down
their roots and start creating equity for themselves and for
their families. It has been the path to building wealth for
generations of Americans, for ensuring stable communities, good
schools, safe streets.
The flippers play on these hopes and aspirations to defraud
and cheat people. And I think it is contemptible what has been
taking place. We have to do everything we can to make sure the
U.S. Attorney's Office and the other law enforcement agencies
from whom we will be hearing later in the morning, involved in
investigating these crimes, have the necessary resources. And
we need to be sure the public is adequately informed and that
counseling is provided to help people in this city and
elsewhere to avoid these scams.
I also want to touch for a moment not on what is just
clearly some criminal activity, but also on another problem
that is very troublesome. And that is predatory lending.
Predatory lenders target people with a lot of equity in their
homes. They underwrite the property without regard for the
ability of the borrower to pay the loan back. They make their
money by charging extremely high origination fees and by
packing other products into the loan, including up-front
premiums for credit life insurance or credit unemployment
insurance, et cetera. They get large commissions out of that.
Those premiums for those products are financed into the
loan, increasing the loan's total balance, so the borrower
finds themselves in extreme financial trouble right from the
beginning. Then, when trouble hits, the predatory lender will
often offer to refinance the loan.
Unfortunately, another characteristic of those loans is
they have prepayment penalties. So by the time the refinancing
takes place, with all the fees repeated and the prepayment
penalty concluded, the lender/broker makes a lot of money out
of the transaction and the owner has been stripped of their
equity in their home, and often the home itself.
So they find someone, and then they just kind of pull
everything out of it and leave them sort of almost destitute.
Unfortunately, most of these practices which end up leaving
people in dire financial straits, such as those that are
affected by flipping, we do not have adequate legal safeguards
to deal with them. Taken together, flipping and predatory
lending I think are a frontal assault on homeowners all over
America.
And I want to commend Senator Mikulski again, because I
think this hearing is a very important step in trying to find
solutions. Let me just address the FHA. And I know there have
been concerns about creating high rates of foreclosures which
contribute to the destabilization of neighborhoods. FHA, of
course, is a program designed to push home ownership rates to
higher levels. Actually, a GAO study has shown that the vast
majority of FHA borrowers would not be able to become
homeowners without this government program. And we need to keep
that in mind.
Unfortunately, a number of bad actors have used FHA
insurance to make bad loans that end up in foreclosure. FHA, we
have done our best to make them aware of this problem. I think
they are becoming increasingly sensitive to it. HUD has now
begun a program, called Credit Watch, which is designed to
uncover bad lenders, to remove them from the FHA programs.
Since it began, they have tried to terminate about 40 lenders
from the program. But this action is being challenged in the
courts.
So we need, I think, some legislation to, in effect,
strengthen HUD's ability to terminate the bad lenders. And we
are working on some legislation of that sort now, which we hope
to be able to introduce in the near future. This would give an
underpinning to Credit Watch and enable it actually to work the
actually the way it is supposed to work.
I look forward to the testimony this morning. This is a
very well-structured hearing. And I know we have a busy morning
ahead of us. I am very pleased to join Senator Mikulski and I
thank the witnesses for appearing.
Senator Mikulski. Thank you very much, Senator Sarbanes.
We wish to acknowledge our very able staff that are here. I
note you brought Jonathan Miller, from the Senate Banking
Committee, to participate. My own staff is Paul Carliner and
Sean Smith. And Senator Bond has his able staff, Mr. Kim, who
is here.
We are going to turn to our witnesses now, but before we do
I want to acknowledge that there are many in this room who
would also like to have given testimony but, because of time,
we could not. For anyone who has any information they would
like to submit for the record, at the conclusion of this
hearing, Mr. Smith--Sean, do you want to stand up, please--will
take that, and we will enter it into the record.
We know that the professional Realtors have a whole
approach to this, and we welcome them submitting their written
testimony for the record. We know that Ed Rutkowski, has
written a rather detailed memo on what has happened north of
Patterson Park, and we will be putting that in the record. And
there will be other things we are going to do. So even though
not everybody might be before a microphone, we want to be sure
that if anyone has views, we would be happy to include them in
the record.
Now, I would like to turn to our panel. And what I would
like to suggest is we just go straight down, starting with you,
Ms. Adams. And if you would introduce yourself and give your
testimony, and then Ms. Simon, then Ken, then Ms. Washington,
and then, Vinnie, I am going to ask you to be the wrap-up.
Ms. Adams, would you please proceed.
STATEMENT OF CHASSIE ADAMS
Ms. Adams. Good morning. My name is Chassie Adams, and I
live at 610 North Robinson Street, Baltimore, Maryland. I work
for Carlton Data Processing as a data entry operator. I have
been employed there for 7 years. I am a single mother with two
children, and I attend Mount Pleasant Church. I am here before
you today because I purchased a home from Robert Beeman. Buying
this house was the start of some difficulties that continue
until this day.
I was renting a three-bedroom house in the section
Patterson Park of Baltimore when I was introduced to Mr.
Beeman. I met him through a personal referral, and he explained
to me that I could buy a renovated house for $500 down. Because
he had been referred to me through someone I trusted, I felt I
could trust him to be true to his word.
I spent one day riding around with him, looking at houses.
He showed me property that he owned and was going to renovate
to suit my tastes. After some thought and talking to family and
friends, I decided to buy the house. I told Mr. Beeman that I
wanted to buy the house on North Robinson Street. And Mr.
Beeman told me he would take care of everything. He told me he
would arrange for the financing, contact a settlement agent,
and even help with straightening out my credit. I explained
that I had some debts that might affect my credit status, but
he told me that was no problem.
He said that the bank would pay off my old debts and
include the payment money in the loan. It all seemed too good
to be true, and it was. Shortly after settlement, I started
calling Mr. Beeman about things that still needed fixing.
Sometimes he responded with quick, patch-up repairs that did
not correct any of the problems. Other times he would not
respond at all, or he would have me contact one of this staff,
who mostly just took messages.
I realize now that I should not have moved into the house
prior to all of the repairs being completed. I did so because
Mr. Beeman assured me that he would complete the repair work.
The work was never completed. There are leaks from bad
plumbing, hazardous wiring and other things that need to be
corrected.
Additionally, I was forced to file for Chapter 7 bankruptcy
partly because those accounts that were supposed to be paid off
at settlement were not. By the time my mail caught up with me
at my new address, all the accounts were in collection. I had
to seek protection from the courts, and this continues to be a
problem.
I obtained a $56,000 mortgage on a property that was sold
to me for $84,000. This same house has recently been
reappraised for $35,000.
Senator Mikulski. Ms. Adams, could you repeat those numbers
again, please?
Ms. Adams. I obtained a $56,000 mortgage on a property that
was sold to me for $84,000. This same house has recently been
reappraised for $35,000. Also, I now know that the mortgage
itself was very inappropriate for a first-time home buyer. It
was a 15-year balloon, with 179 payments, at $650, and one
final payment of $52,000, which I am sure would have been
impossible for me to make.
PREPARED STATEMENT
I have applied for a refinancing loan with First Mariner
Mortgage, which will include money to do repairs and pay off
the old mortgage. I hope that this will be the end of all the
hard times and the beginning of regular home ownership.
[The statement follows:]
Prepared Statement of Chassie Adams
My name is Chassie Adams. I live at 610 North Robinson Street,
Baltimore. I work for ________ as a data entry operator. I've been
employed there 7 years. I am single, have 2 children and attend
________ church.
I am here before you today because I purchased a home from Robert
Beeman. Buying this house was the start of some difficulties that
continue until this day. I was renting a 3 bedroom house in the section
Patterson Park of Baltimore when I was introduced to Mr. Beeman. I met
him through a personal referral, and he explained that I could buy a
renovated house for $500.00. Because he had been referred to me through
someone that I trusted, I felt that I could trust him to be true to his
word. I spent one day riding around with him looking at houses. He
showed me property that he owned and was going to renovate to suit my
tastes. After some thought and talking to family and fiends, I decided
to buy the house.
I told Mr. Beeman that I wanted to buy the, house on N. Robinson
Street and Mr. Beeman told me that he'd take care of everything. He
told me that he would arrange for the financing, contact a settlement
agent and even help with straightening out my credit. I explained that
I had some debts that might affect my credit status but he told me that
was no problem. He said that they (the bank) would pay off the old
debts and include the payment money in the loan. It all seemed too good
to be true, and it was.
Shortly after settlement I started calling Mr. Beeman about things
that still needed fixing. Sometimes he responded with quick patch-up
repairs that didn't correct any of the problems. Other times he
wouldn't respond at all, or he would have me contact one of his staff
who mostly just took messages.
I realize now that I shouldn't have moved into the house prior to
all of the repairs being completed. I did so because Mr. Beeman assured
me that he would complete the repair work. The work was never
completed. There are leaks from bad plumbing, hazardous wiring and
other things that need to be corrected.
Additionally I was forced to file for chapter 7 Bankruptcy partly
because those accounts that were supposed to paid off at settlement
weren't. By the time my mail caught up to me at my new address all the
accounts were in collection. I had to seek protection from the court
and this continues to be a problem.
I obtained a $56,000.00 mortgage on a property that was sold to me
for $84,000.00. This same house has recently been re-appraised for
$35,000.00. Also I now know that the mortgage itself was very
inappropriate for first time homebuyers. It was a I5-year balloon with
179 payments @ $650.00 and one final payment of $52,000.00 which I am
sure, would have been impossible for me to make. I've applied for a
refinancing loan with First Mariner Mortgage, which will include money
to do repairs and pay off the old mortgage. I hope that this will be
the end of the hard times and the beginning of regular homeownership.
Senator Mikulski. Thank you very much.
Ms. Simon.
STATEMENT OF DIANE SIMON
Ms. Simon. Good morning. My name is Diane Simon. I live at
3205 Chesterfield Avenue with my husband and my two children. I
have been employed at Blue Cross and Blue Shield as a support
clerk for 10 years. I would like to speak regarding the
purchase of the home I bought from Robert Beeman in November
1997.
At the time, I was renting a two-bedroom apartment in the
BelAir-Edison area. My family needed more room, and I thought
that home ownership was ever present. I felt the time to own a
home had came. And I was introduced to Beeman through a fellow
co-worker, so I figured I would give it a try, because she was
excited and she bought the home and he fixed the home up for
her and she told me a lot about it. And I said, let me call and
give me a try. She gave me his number.
We went out looking for houses with Mr. Beeman. And I did
not particularly care for the area and the houses that
initially were shown. He told me that he owned others, and we
went to 3205 Chesterfield Avenue. I felt the house was nice
enough and I felt that the area it was in seemed stable and
safe. After explaining that he would do all the repairs and
make the house look like I wanted it to, I agreed to purchase
the house.
I did not know anything about financing or mortgages, and
Mr. Beeman reassured me that he could arrange for all the
financing. All I needed was $500 down. And he did take care of
everything. Mr. Beeman brought all the papers that I was to
sign to my house. He set up a closing date less than one month
from the time I first saw the house. The repairs were never
completed. As we neared the settlement date, I wondered if
things would be ready before we closed.
My calls to Mr. Beeman were responded to initially, but the
work was never finished. I decided to move into the house and
trust that he would finish the work. To this day, my roof
continues to leak and I have the need for major plumbing
repairs. There is very low water pressure and I have been told
that this condition should not have passed appraisal.
I have been hesitant to make any repairs myself, because we
just did not know that we would be able to remain in the house.
Additionally, I have since learned that the mortgage I obtained
is not one that has a fixed rate. The initial rate is 10.5 and
can escalate to 17. This means the $65,000 mortgage on a
$77,000 sales price will generate $158,000 in finance charges.
The new appraisal for my house is $50,000, and I am hoping to
refinance the mortgage with First Mariner.
Prepared statement
As a first-time home buyer, I realize now that I should
have sought counsel before buying this house. I just felt that
there was enough protection in the process to ensure that
something like this could not occur. I was wrong. However, I
remain determined to accomplish my original intent, which is to
own a home of my home.
[The statement follows:]
Prepared Statement of Diane Simon
My name is Diane Simon. I live at 3205 Chesterfield Ave. with my
husband and two children. I am employed as a support clerk by Blue
Cross and Blue Shield of Maryland where I've worked for 10 years.
I would like speak to you regarding the purchase of my house. I
bought my house from Robert Beeman in November of 1997. At the time 1
was renting a 2-bedroom apartment in Belair Edison. My family needed
more room and the thought of homeownership was ever present. I felt the
time to own had come and after being introduced to Mr. Beeman by a
fellow worker, I thought I'd give it a try.
I went out looking for houses with Mr. Beeman and I didn't
particularly care for any of the houses that I initially was shown. He
told me that he owned others and we went to 3205 Chesterfield Ave. I
felt the house was nice enough and I felt that the area it was in
seemed stable and safe. After explaining that he would do all the
repairs and make the house look like I wanted it to, I agreed to
purchase the house.
I did not know anything about financing or mortgages. Mr. Beeman
reassured me that he could arrange for all the financing, all I needed
was $500.00. And he did take care of everything. Mr. Beeman brought all
the papers that I was to sign to my house. He set up a closing date
less than one month from the time I first saw the house.
The repairs were never completed. As we neared the settlement date
I wondered if things would be ready before we closed. My calls to Mr.
Beeman were responded to initially, but the work was never finished. I
decided to move into the house and trust that he would finish the work.
To this day my roof continues to leak and I have the need for major
plumbing repairs. There is very low water pressure and I have been told
that this condition should not have passed appraisal.
I have been hesitant to make any of the repairs myself because we
just didn't know that we would be able to remain in the house.
Additionally, I since learned that the mortgage I obtained is not one
that has a fixed rate. The initial rate of 10-50 percent can escalate
to almost 17 percent. This means that my $65,000.00 mortgage on a
$77,000.00 sales price will generate $158,000.00 in finance charges.
The new appraisal for my house is $50,000.00 and I am hoping to
refinance the mortgage with First Mariner.
As a first time homebuyer, I realize now that I should have sought
council before I brought this house. I just felt that there was enough
protection in the process to ensure that something like this couldn't
occur--I was wrong. However I remain determined to accomplish my
original intent, which is to own a home of my own.
Senator Mikulski. Thank you very much, Ms. Simon.
Now we would like to hear from Ken Strong. In addition to
your job at SECO, you are identified with the Coalition to End
Predatory Real Estate Practices.
STATEMENT OF KEN STRONG, EXECUTIVE DIRECTOR, SOUTHEAST
COMMUNITY ORGANIZATION
Mr. Strong. Yes, thank you. I am the Executive Director of
the Southeast Community Organization, an umbrella group in
Baltimore that you, Senator, well know began some 30 years ago,
when a threat to the neighborhoods of southeast Baltimore was
in the form of a Federal highway plan that would have paved
over Fells Point and Canton. Your leadership then helped thwart
that threat to the community. But today, the neighborhoods of
southeast Baltimore are threatened by mortgage scams and
flipping schemes.
I became aware of the problem about a year and 4 months ago
through an attorney, Andrew White Smith, who was representing
over 100 victims of William Beeman and Walter Duersch. And he
thoughtfully asked nonprofit organizations to help the families
that he knew would not be helped alone through the civil law
process and through the courts.
So a number of us in southeast Baltimore came together, Ed
Rutkowski, from Patterson Park Community Development
Corporation; Mike Braswell, from Neighborhood Housing Services,
and others. And as we studied the problem, we quickly realized
that this was not just a problem for southeast Baltimore, it
was a problem really across the city and across the country.
I want to show you a map that illustrates this, if I can.
Once we realized the breadth of the problem, we formed a group
called the Coalition to End Predatory Real Estate Practices.
And this group had citywide participation from housing
organizations, neighborhood associations. We had participation
from government agencies, enforcement agencies from the real
estate industry. And it has been the major forum through which
people have shared information about the flipping schemes and
mortgage scams in Baltimore.
One of our most active participants is Carmen Rositora, a
homebuilder with HUD, a great program. She gave us technical
assistance and produced this map that shows the racial
demography of Baltimore. The more green, the more African
American the neighborhoods. The more blue, the darker the blue,
the more white the neighborhoods are.
And you can see the wide scope of the neighbor of property
sales that increased by more than 100 percent in less than 4
months in a 3- to 4-year period. We have over 2,500 incidents
of this. Not all of them are bad real estate transactions. Some
of them are smart real estate. And there are some exceptions to
the rule. But I would submit to you that the vast majority of
these are the bad actors and the bad characters who wreak havoc
on the neighborhoods.
You will also see here how the concentration of these marks
are in neighborhoods of racial change. The flipping schemes and
mortgage scams are really the modern form of blockbusting in
these neighborhoods, where the scam artists are buying houses
cheaply from whites who are moving out of neighborhoods that
are changing and becoming more African American, and then they
are selling houses at these exorbitant rates, under-repaired,
overvalued and at huge interest rates, and creating a weak
neighborhood from one that had been strong.
And you also see that these real estate creditors are
focusing on African American neighborhoods as well, in west
Baltimore, in northwest Baltimore. They are preying upon some
weaknesses in the housing stock and in the real estate in those
areas, and making them even weaker.
We are going to go from this overview, closing in on one
block, kind of step by step. This helps tell the story about
what is going on here.
Ms. Adams and Ms. Simon talked about Mr. Beeman who sold
them their houses. He and Mr. Duersch are represented by all of
the blue pins on this map. There are more than 130 blue pins
that they have been responsible for that fit very much the
pattern that Ms. Adams and Ms. Simon talked about.
In addition, the other colored pins represent other people
who are doing very much the same kind of thing. And there are
dozens and dozens of them. This is a kind of under-the-table
industry that has been spreading. And we have learned that they
even meet at a restaurant and share information about how to
perpetrate these scams. And there are variations on the theme,
but they all have the same end product.
Some of them do not always end in the victimization of a
new home buyer. And in addition to all of these--and I only
took the areas of the Sixth and Seventh Wards, north of
Patterson Park. There are other neighborhoods here.
Senator Mikulski. Would you read the street names? Because
our records, when we go back, we are not going to know the
Sixth Ward from the Seventh Ward versus the census tract.
Mr. Strong. We are looking at neighborhoods immediately
north of Patterson Park, from about Wolf Street over to Conklin
Street, and from Baltimore Street--
Senator Mikulski. Identify them. Your southern boundary is
what?
Mr. Strong. The southern boundary is Baltimore Street.
Senator Mikulski. The northern boundary is?
Mr. Strong. The northern boundary is Egger Street.
Senator Mikulski. Western?
Mr. Strong. The western boundary is Broadway.
Senator Mikulski. Eastern?
Mr. Strong. And the eastern boundary is Conklin.
And there are hundreds, several hundred, examples of these
scams right here.
In addition to these pins, because there was not room on
the map--
Senator Mikulski. It looks like a virus, does it not?
Mr. Strong. It does. This is a slightly broader area than
the one previously described. It includes some of the area of
Highlandtown immediately east of Patterson Park, from about
Eastern Avenue on the south, up to Baltimore Street on the
north, and from Hagen Street on the east to Linwood on the
west.
Senator Mikulski. Let us get a better look.
Mr. Strong. This is 178 pins that are all a circle of
friends. They buy a house for $20,000 and they sell it from the
right hand to the left hand on the same day for around $60,000.
We believe, and we are not positive but there is an
investigation going on into this now, that they then get a
mortgage for 75 percent of that value and have about $25,000 in
profit at the end of the transaction. And they pocket too much
of it, not enough to keep the higher mortgage payments going,
and they have to repeat this over and over again, like a Ponzi
scheme.
It is going to fall apart from its own economic weight or
from law enforcement activity. And it will be a whole new wave
of vacant housing in neighborhoods that are already in stress.
So all of these pins are in addition to the other pins on the
map.
In the areas of Patterson Park, in neighborhoods north and
east of Patterson Park, we have had the highest concentration
of flipping and mortgage scams anywhere in the city. And
Baltimore may have the highest in the country.
Now, we are going to look at a neighborhood area that is a
little closer in, a smaller area. This is Monument Street and
McKeldery. And the western boundary is North Kenwood and the
eastern boundary is North Decker. And on this map, all of the
yellow-colored areas are property flips. And you can see how
many there are on certain blocks that totally destabilize a
block.
One outcome of this is the pink areas outlying here that,
in my testimony, are described geographically. And these areas
the State Department of Assessments and Taxation has said so
many flips occurred, so many overvalued properties that people
living within this area, collectively, were paying close to a
million dollars more in property taxes than they should have.
And they are taking steps to correct it, but look at all the
other neighborhoods around that they have yet to get to that
are facing that same kind of overtaxing because of overvalued
predatory real estate.
In addition, on this map there are dots on certain
properties, in properties that are colored in pink or orange.
Those properties represent the HUD inventory. These houses were
acquired in one of the most recent transactions from HUD. And
it is often where a scam artist or flipper will get a property
cheaply at a HUD auction. And then they sell it quickly at a
greatly inflated rate, often based on fraudulent appraisals,
sometimes to another investor, sometimes to an unfortunate
buyer, with all of the promises and the tales of woe that you
have heard from Ms. Adams and Ms. Simon repeated over and over
and over again.
One thing that we have seen quite clearly is that houses
remain way too long in the HUD inventory. They deteriorate in
value and just physically. And when you examine the HUD
inventory, many of the houses are in there for a year vacant
and having such a negative effect on the community, and it
takes so long to turn over.
Senator Mikulski. Ken, we are going to have to move along.
There are two more panels.
Mr. Strong. I am going to wrap up real quickly.
Senator Mikulski. We want to be able to get to the Q&A, as
well.
Mr. Strong. This is the block we are going to visit this
afternoon. And I will save more of this for the field visit to
the 600 block of North Robinson Street. But there are several
vacant houses, houses that were appraised at $85,000. This is
Ms. Adams' house, at $84,000. These prices are more than twice
the real value of houses in that neighborhood. And,
collectively, it is ruining this block and this community. We
will talk more about that this afternoon.
I want to call your attention to a letter that is at the
very end of your packet of testimony that I just received at
the end of last week. It is from Conti Mortgage Corporation.
Conti Mortgage Corporation is a subprime lender who has been
involved in many of the Beeman and Duersch cases. They could be
called a predatory lender.
They have sent this letter to people who have mortgages
through NHS, and have said that they want to offer new mortgage
reduction programs, and that they are going to be offering this
restructuring concept free and that it will tie into the home
value guarantee program that Ed Rutkowski and the Able
Foundation have put together. We suspect that this is just a
churning of good loans into bad loans. And they have targeted,
again, the neighborhoods of Patterson Park. It is mentioned in
this letter. This is the kind of thing that we need to stop,
with your help.
Prepared Statement
And no where in the HUD budget is there a line or a program
that redresses the problems that we have seen here today. And
they are in New York and Chicago, in California, in Buffalo. It
is a national problem and we need national solutions to it.
Thank you.
[The statement follows:]
Prepared Statement of Ken Strong
Senator Mikulski and Senator Sarbanes, thank you for inviting me to
testify this morning on a matter of critical importance to our
southeast Baltimore Community, our city, state, and nation. My name is
Kenneth Strong. I am the executive director of SECO, the Southeast
Community Organization, and the president of SCDC, the Southeast
Community Development Corporation. Seco and SCDC are sister non-profit
organizations who for more than a quarter of century have worked hard
to protect and uplift the neighborhoods and the residents of southeast
Baltimore. It was the threat of federal highway plans that gave birth
to SECO thirty years, as both of you, especially Senator Miklulski,
well know. Today the most serious threat to the survival of southeast
Baltimore neighborhoods is the proliferation and concentration of
predatory lending and predatory real estate practices.
Mortgage scams and flipping schemes have wreaked havoc on several
neighborhoods in our area, particularly those north and east of
Patterson Park. I became aware of the scope of the problem fifteen
months ago through an attorney, Andre Weitzman, and called non-profit
allies together to see how we could assist victims of the scam and put
an end to these practices. We quickly learned that neighborhoods and
families throughout the city were similarly preyed upon. So we formed
the coalition to end predatory real estate practices and widened our
circle of concerned professionals. Participants in the coalition
meetings have included community development corporations, fair housing
agencies, providers of legal services, city, state and federal
agencies, and various industry representatives. The coalition has been
the central forum where information about mortgage scams and flipping
schemes is shared and where ideas to end these practices are spawned.
It is a diverse and open forum; therefore I don't purport to speak for
all participants.
Mortgage scams, flipping schemes, and predatory real estate
practices cover a multitude of sins and come in various forms. What
they have in common is that they are designed to defraud someone. In
many cases it is a low-income first time home buyer, most often an
African-American family. In other cases, investors are defrauded. In
still other cases buyers and sellers are in collusion and it is lenders
and government insurers who are defrauded. Another common aspect of all
the scams is that they are based on dishonest and inflated appraisals.
And the all too common outcome is abandonment, foreclosure, vacancies,
and the destruction of neighborhoods. To illustrate the extent of the
problem and how it rests on inflated values, we have prepared some maps
and picture boards. The first map shows houses that were resold for 100
percent or more of their original price in a very short period of time.
While not every dot on this map is a scam transaction, my research and
the research of coalition participants, suggest that the vast majority
of them are. Later today we will visit the 600 block of North Robinson
Street. The idea that houses on this block were appraised and sold for
$70,000 and $80,000 or more is absurd. Recent, independent appraisals
commissioned by defrauded lenders determined that these houses weren't
worth half that amount. Along the 300-600 North Robinson Street
corridor, we have identified 25 suspicious real estate transactions,
sales that have the earmarks of flipping schemes. It will be self-
evident this afternoon what happens to the houses, the block, and the
neighborhood in the wake of mortgage scams.
The size of the problem depends on how you guage it. Several months
ago, I reviewed a cross section of housing transaction data provided by
the Maryland Department of Assessments and Taxation. I estimated that
over 2,500 transactions from 1996-1999 in Baltimore City fit the
profile of a probable scam or flipping scheme. More recently I have
examined the record of real estate transactions in just the sixth and
seventh wards of Baltimore City, areas north of Patterson Park; there
were over 1,000 sales in short periods of time where the price went up
by more than 100 percent.
Bottom line--it is a very large and pervasive problem. One indice
of the problem and how it has grown is reflected in the number of
foreclosure petitions filed in Baltimore city. Four or five years ago
that number averaged 1,000 to 1,500 a year. In 1999 the rate was 5,000
or more a year, over three times as many. Foreclosures also provide
feedstock for predators who buy properties cheaply at auction.
The second point I'd like to make is that real estate predators
prey especially on neighborhoods where racial change is taking place.
And the impact of their schemes and scams is as devastating as the
blatant blockbusting a few decades ago. To illustrate this fact, we
have two maps. One shows the spread of suspicious sales transactions
against the racial demography of the city. The diparate impact on
African-American neighborhoods and the concentration of such sales in
neighborhoods on the fault line of racial change is evident.
The second map shows 178 transactions all conducted among a close
circle of incestuous buyers and investors. This maps does not reflect
the dozens of other operators with similar sales profiles, but smaller
volumes, who have inflicted their harm on these same neighborhoods. One
of our coalition members, Ed Rutkowski, wrote a book about this area
called ``The Urban Transition Zone'', analyzing this phenomenon. Due to
the tremendous impact of mortgage scams and flipping schemes, I have
recommended that city, state and federal agencies recognize the
neighborhoods of Patterson Park as a special impact area and work with
us on a program with substantial resources to ameliorate that impact.
Such a program could also then be applied in Belair-Edison, southwest
Baltimore, Waverly and other neighborhoods particularly undermined by
real estate predators.
I have heard some people say that the victims of mortgage scams and
flipping schemes are really accomplices and not really deserving of
assistance. While this is undoubtedly true in some instances, it does
not describe the vast majority of homebuyers SECO and other coalition
members have come to know. SECO staff and volunteers visited over 50
families caught in the vice of these practices and conducted in-depth
interviews. We found many hard-working heads of households working for
low wages who wanted to achieve the American dream for themselves and
their children--to own a home. They were duped by people who said they
could make that dream come true. They were sold houses that were
cosmetically repaired and in some cases dangerous. Documents at
settlement were falsified documents; in some cases their signatures
were forged or zeroxed from another form. In many cases the
documentation of a second mortgage was never shown to them. Even when
fake gift letters or phony down payments are arranged to qualify for
FHA financing, they are being coached by professional predators who say
this is how it's done. They are surrounded by sellers, brokers, title
company officials and others in a process they've never experienced
before. Don't blame the victims, please; it isn't fair in the vast
majority of cases.
In our examination of this problem, coalition members have come up
with a number of legislative reforms and ideas. It is undoubtedly a
complex problem requiring a complex response. City, state, and federal
agencies all need to examine themselves to see if there are any ways
that they are enabling predatory lending and real estate practices. We
need every level of government to identify and fund recovery plans for
neighborhoods most heavily afflicted by these practices. We need law
enforcement at every level to focus on the criminals and bring them to
justice. We need consumer protection actions that yield restitution for
victims to the fullest possible extent. We need non-profit agencies to
strengthen the standards and conduct of home ownership counseling with
a focus on thwarting predatory practices and we need to expand
resources for such education and counseling. The greater Baltimore
Board of Realtors has focused on the need for more public education
about home buying and home ownership; I applaud those efforts.
In terms of federal agencies and legislation, there are a number of
approaches that I would ask you to consider.
1. Foreclosure moratoriums--Once we have identified sellers,
mortgage brokers, and lenders who have engaged in a pattern of
fraudulent transactions, there should be a moratorium on foreclosures
involving those houses. The displacement of families and all the
secondary impacts of those dislocations ought not to proceed. During
the period of a moratorium the families, non-profit agencies,
government agencies, and the private sector can devise creative
solutions. We are witnessing just such an outcome for clients of Mr.
Weitzman who are eligible for conventional loans and monies for home
repairs through the creative problem-solving efforts of First Mariner
Bank, the Abell Foundation, and Southeast Community Development
Corporation.
2. Restrict the maximum mortgage broker fee which is now 8 percent
of the mortgage amount. It encourages the inflation of housing prices.
Charging the maximum fee is not justified in most cases and its
imposition is a form of price gouging of consumers.
3. Eliminate the ``yield spread premium'', the additional fee that
brokers receive for placing a loan at a higher rate than the buyers are
eligible to receive.
4. Credit watch--HUD's efforts to control lenders with
unconscionable default rates or other substandard practices needs to be
reinforced. A federal judge has questioned HUD's authority to ban bad
lenders. We have joined HUD in an amicus brief to override the judge's
objections. We may need regulatory or legislative fine-tuning for HUD
to exercise the better controls.
5. We applaud the initiatives of U.S. Attorney Lynn Battaglia and
Maryland Attorney General Joseph Curran who have made mortgage scam
investigations top priorities for their offices. We recommend that
attention be paid to the coordination of investigations and
prosecutions. We also recommend maximum consideration of restitution to
victims or the creation of property receiverships in the community as
endpoints of law enforcement.
6. Predatory lending--Attached to my testimony is draft legislation
which a sub-group of the coalition put together aimed at controlling
the predatory nature of high interest loans in general. It takes a
class of loans above a certain percentage of the prime rate and says
that in that class of lending the public needs extra protection. It
prohibits certain kinds of lending measures, such as balloon payments
and negative amortization. And it requires of lenders that extra
measures be taken to insure that borrowers have the capacity to repay a
loan. Lending with a total disregard to repayment capacity is a
prescription for failure and foreclosure; it is predatory in nature.
North Carolina has such a law. We should examine if anything along
these lines can be addressed at the national level.
7. We would like to see HUD and FHA put at least as much money and
effort into examining how aspects of their programs have contributed to
this problem as they put into touting the overall success of what they
do. Ed Rutkowski of the Patterson Park Community Development
Corporation has submitted testimony outlining a tale of two FHAs, one
largely successful in suburbia and strong neighborhoods, the other a
dismal failure and a contributing factor to urban blight.
8. Reform the way in which HUD manages and disposes of its
properties. HUD houses that stay vacant for a year or more are part of
the problem not the solution. Eventually the houses so deteriorate in
value that speculators and perpetrators pick them up cheaply for
nefarious purposes and a cycle of victimization starts again.
Properties should be made more quickly and easily available to
competent non-profit developers.
Some members of the coalition say that absolutely no new
legislation is needed. I personally disagree with that stance. Under
current laws, a grotesque real estate market has developed in parts of
Baltimore City that is utterly detrimental to all honest efforts at
community development. Under current laws, we allow incentives for
brokers to gouge consumers both in terms of fees and interest rates. At
high interest rates we allow practices that are predatory in nature.
These practices must come to an end and the kinds of legislative
reforms discussed above as a whole will help to close the door of real
estate profiteering.
I want to end my testimony by referring back to one of the maps.
Behind these pins live three hundred children. In these houses we have
seen higher levels of lead paint poisoning and cases of asthma. On thus
the coldest day of winter thus far, some of these houses were without
heat. Some of them still have dangerous electrical systems, holes in
the roof and rats in the basement. The American dream of home ownership
turned into a nightmare for these families. Theirs is a legacy of
continued discrimination and victimization at the hands of greedy
individuals who have little or no conscience. It is intolerable. We
need your help to end this nightmare.
PREPARED STATEMENT OF ED RUTKOWSKI, EXECUTIVE DIRECTOR, PATTERSON PARK
COMMUNITY DEVELOPMENT CORPORATION
My testimony focuses on two aspects of the current flipping crisis:
the unrecognized and unacknowledged existence of two markets for
homeownership, and the unchecked phenomenon of ``investor-to-investor''
flipping and mortgage schemes.
TWO REAL ESTATE MARKETS FOR HOMEOWNERSHIP: IMPLICATIONS FOR HUD/FHA
There are two real estate markets in this country as outlined in
the table on the following page. The primarily suburban market can be
characterized as ``healthy,'' while its counterpart, the primarily
urban market, can be characterized as ``weak.'' The ``healthy'' market
also includes gentrifying and wealthy urban neighborhoods, and the
``weak'' market also includes deteriorating first ring suburbs of
cities like Baltimore.
Too little attention has been paid to this dichotomy, especially by
HUD and FHA who play dominant roles in both markets. HUD policies and
programs frequently have profoundly negative effects on communities
with weak real estate markets. Examples include an overwhelming
emphasis on homeownership without sufficient regard for loan quality,
programs like Section 8 that concentrate poverty, and policies on
property disposition that do not take into account the neighborhoods in
which the vacant houses exist. These issues are covered more thoroughly
in other testimony, and in our book, The Urban Transition Zone--A Place
Worth a Fight.
My testimony concentrates on the fact that HUD/FHA apparently does
not recognize the fact that there are two markets, nor does HUD/FHA
address the consequences of that fact. Programs, policies and practices
that work well in one market do not necessarily work well in another.
As an example, when questioned at Senator Sarbanes' hearing, Mr.
Matt Franklin stated that overall foreclosure rates for FHA-insured
loans were 3 percent per year. While that is an exemplary figure, that
statistic neglects the fact that in some Baltimore census tracts, FHA-
insured foreclosure rates exceed 25 percent (source: National Training
and Information Center, NTIC, in Chicago--October 1998 data). As a
consequence, the 3 percent overall rate masks the very real problems
which contribute to, and result from the high foreclosure rates in some
city neighborhoods.
Those problems have been discussed in detail in other testimony and
include outright fraud with sad consequences for its victims and
lenders, large numbers of vacant houses, acquisition of large numbers
of properties by irresponsible absentee investors. Indirect
consequences include increased middle class flight and further
deterioration of urban neighborhoods.
As indicated in the second table on the following page,
consequences of high foreclosure rates on FHA-insured loans mirror the
consequences of similar foreclosure rates for subprime loans. That is
to say that because of the high volumes of loans, FHA practices have
the same negative effect as subprime loans. Further, to the extent that
HUD's disposition processes are inadequate, the consequences can be
even worse.
It is essential, then, that HUD/FHA recognize and deal with the
distinction between these markets in the following ways:
Track and aggregate foreclosure rates separately for the two
markets by identifying census tracts in which high foreclosure rates
exist.
In communities with high foreclosure rates, implement stricter
regulations that will prevent fraud. These have been suggested in other
testimony, and include more frequent audits of lender practices, more
frequent review of loans made, and increased accountability of
appraisers. However, HUD must avoid the ``one size fits all'' when
underwriting loans in these communities. Otherwise, legitimate loans
will not be made to deserving borrowers who do not match the ``suburban
type.''
In some communities with high foreclosure rates, there is capacity
to partner with HUD to improve housing stock through non-profit
organizations like the Patterson Park CDC. HUD's Asset Control Areas
are a good beginning. However, further possibilities should be
examined, such as partnerships that renovate properties while still
under HUD ownership. Other flexible arrangements should be studied and
implemented.
Subsidize neighborhood redevelopment in fragile urban neighborhoods
with high foreclosure rates. As matters stand, insurance premiums from
healthy markets subsidize excessive losses in weak markets. It would be
wiser to subsidize neighborhood redevelopment to prevent high
foreclosure rates.
Consider the possibilities using the neighborhoods around Patterson
Park as an example. In an area of approximately 3,000 houses, we
believe that in the recent past there have been about 50 FHA
foreclosures per year. If HUD loses $25,000 per foreclosure, that
represents a loss of $1,250,000. There is every reason to believe that
the number of foreclosures could be reduced to 10 per year: there were
less than 5 total foreclosures (including non-FHA) in 1989. Ten
foreclosures per year would net HUD a savings of $1,000,000 per year.
According to our records, in 1999 the average HUD foreclosure
occurred at a price of $54,000. HUD sold at an average price of
$32,000, not including various discounts. This would indicate that the
average cost to HUD of these foreclosures was well in excess of
$25,000.
Implement a pilot program to test this idea in several cities/
communities. That is, for the next ten years, invest directly at least
$1,000,000 per year in community-based organizations to determine the
extent to which foreclosures can be reduced.
Finally, conduct an analysis of each real estate market:
``healthy'' and ``weak.'' Use that analysis, in conjunction with the
advice of local practitioners to develop insurance programs and housing
strategies that actually suit those markets. This would avoid the ``one
size fits all'' approach that does not work today.
INVESTOR-TO-INVESTOR FLIPPING AND MORTGAGE SCHEMES
In the recent publicity about ``flipping,'' most attention has been
paid to fraud involving flipping of homes from investors to first time
homebuyers. Less publicity has been paid to schemes which defraud
lenders in transactions between two investors. This is not a problem
related to the circumstances described above--these loans are rarely
insured by FHA. However, this is an important issue that must be
diligently investigated and prosecuted by appropriate authorities.
Many of these kinds of transactions occur in transitional
neighborhoods where market appreciation is weak or non-existent. In
fact, property values are often falling. In addition, rents are often
low and stagnant, and the economic circumstances of tenants often
dictate frequent tenant turnover with consequent high operating costs.
In this environment, it is very difficult, if not impossible to
make money as a responsible landlord. Therefore, a number of investors
have developed a scheme in which money can be taken out ``up front'' by
creating a mortgage based on an appraisal that overstates the value of
the property. In order for these schemes to work, there is some
evidence that outright fraud is a necessary component. The following
paragraphs highlight the mechanics.
A typical transaction:
--A buys a property for $9,000, plus $2,000 in settlement costs
--A performs cosmetic rehabilitation for $6,000, now having $17,000
invested
--A sells to B for a contract price of $47,000, based on an
overstated appraisal
--A helps B secure a mortgage for $37,000, possible with less than 80
percent loan-to-value (LTV)
--A issues a (possibly) uncollectable $10,000 second mortgage to
secure the deal, or uses fraudulent or forged documents to
demonstrate a $10,000 down payment
What happens at settlement?
--Lender provides $37,000
--A gets $27,000 as the ``real'' purchase price, netting $10,000
--B nets $5,000 in a ``cash back'' arrangement
--Settlement fees are $5,000, netting the mortgage broker $2,500 in
``excess'' settlement fees (a typical settlement should not
exceed $2,500)
What happens over the course of a year?
--A repeats this process 30 times (10 times for each of 3 B's.),
making $300,000
--B repeats this process 10 times, making $50,000
--The mortgage broker repeats this process 90 times (3 times for each
of 3 investors), making $225,000
In 90 transactions (three A's, nine B's and one mortgage broker),
$2,025,000 is pulled from the community and lenders before any value is
given back by way of housing stock renovation and loan repayment.
What is wrong with this picture? There are a number of reasons to
suspect outright fraud. The transactions require appraisals that are
unsupported by the real estate market and the level of rehabilitation.
The lender is defrauded because it is lending $37,000 on a $27,000
house. B is defrauded because the cosmetic rehab will require
maintenance beyond that supported by the rent (though B may well buy a
BMW with the ten $5,000 ``cash backs'' from these transactions, thereby
leaving himself insufficiently capitalized to have a successful rental
portfolio).
Finally, the neighborhood is hurt because it will very likely have
a nuisance tenant (B is not likely a good property manager), and
eventually a vacant house when B defaults. At least in Baltimore, the
neighborhoods in which this scheme is prevalent are also neighborhoods
in which foreclosure rates are high. There is some evidence that
concentrations of Section 8 families exist, in these neighborhoods as
well. The linkage of these factors in declining neighborhoods argues
for additional financial and other resource support for these
neighborhoods.
QUESTIONS FOR UPCOMING COMMITTEE HEARINGS
appropriations committee hearings on hud appropriation
Do certain census tracts show very high foreclosure rates?
Are HUD houses in those census tracts sold primarily to investors?
In 1998, how much did HUD lose due to foreclosures in high vs. low-
foreclosure census tracts, say tract 602 (25 percent foreclosures for
loans made between 1987 and 1997) vs. tract 104 (5 percent
foreclosures)?
Is HUD doing anything to restore neighborhoods damaged by highly
foreclosure rates?
Are there sufficient safeguards for loans insured by FHA,
especially in high-foreclosure census tracts?
Do census tracts with high FHA foreclosure rates also have high
Section 8 concentrations?
If so, would that implicate HUD in neighborhood deterioration?
banking committee hearings on oversight
Are FHA-insured leaders sufficiently regulated, especially with
regard to appraisals, underwriting criteria?
Is the subprime market sufficiently regulated?
Andre R. Weitzman and Associates,
Baltimore, Maryland, March 22, 2000.
Hon. Barbara A. Mikulski,
U.S. Senate, Washington, DC.
Dear Senator Mikulski: An aggressive review of FHA lending
performance in Baltimore City is sorely needed and, under your
leadership, I am confident that is precisely what will happen.
I have been working on this issue for the past two years, alone for
much of that time, but for the past year in association with the
Coalition to End Predatory Real Estate Practices under the capable
leadership of Ken Strong.
Ken has advised me that he forwarded a lengthy report to your staff
that I wrote for the Coalition last April. In advance of the hearings
to be held next week I would like to touch on a few points that have
come up during litigation that I have handled, and that have come to my
attention through various interactions with members of the Coalition.
In addition, I enclose an outline of the causes of ``flipping''
that was prepared and submitted with my appearance before Mayor
O'Malley's transition committee on housing. Also enclosed are certain
pages from the HUD manual for lenders on FHA loans that I will mention
below.
OVERSIGHT AND QUALITY CONTROL
Enclosed are 10 pages from HUD's Directive No. 4060.1--Mortgage
Approval Handbook Chapter 6 Quality Control Plan. I obtained this
document from HUD's website. Based on testimony from loan officers
during pending litigation, it is a document that is required to be
retained and updated in every lenders office that originates FHA
insured loans.
The directive mandates the creation and maintenance of a written
quality control plan, sets standards for selecting loan packages for
review, and prescribes reporting requirements.
Most critical to this directive is Section 6-4 (appearing at page
6-7)--Guidelines for Selecting Single Family Loans for Loan Origination
Quality Review (highlighted for your convenience).
This section creates twenty ``Red Flags'' that should alert lenders
to questionable loans. In the thirty some sets of loan documents that I
have reviewed, at least six red flags appear on the face of the
documents, yet none were reviewed and none were turned down.
It seems inconceivable that over 1,000 bad FHA loans could have
been made to low income first time home buyers in Baltimore City if
lenders had followed the directive for conducting quality control
reviews.
Given that most flippers do multiple transactions with the same
lender, the repeated appearance of red flags should have alerted
lenders to look more closely at transactions originated by the same
seller.
However, an inference can be drawn from the high volume of bad
loans completed in such a short time that goes beyond mere negligence.
Given the highly questionable nature of these loans, lenders may have
consciously chosen to ignore the need for corrective measures, which,
if reported as required, may have jeopardized their inevitable claims
under the FHA insurance fund when defaults and foreclosures would
occur.
I am unaware of whether any of the FHA financed flips that went to
foreclosure and generated subsequent insurance claims were ever denied
coverage by HUD, or ever even investigated.
FORECLOSURE TIME BOMB
Flipping, both subprime financed and FHA financed, has exacerbated
the explosion of foreclosures filed in Baltimore City. St. Ambrose has
done research that shows the number of foreclosure petitions filed in
Baltimore City has risen from an average of 1,000 petitions per year to
over 5,000 petitions just since 1995.
FHA financed loans are slower to go into default and foreclosure
than are subprime financed transactions, mostly because of the lower
payments due under FHA loans and slightly better credit qualification
of the borrowers.
However, the grossly inflated appraisals supporting the FHA
financed transactions makes it likely that any future transfer of the
property can only be accomplished by foreclosure. I reach this
conclusion on the assumption that prices obtainable in the ``true''
market will not increase sufficiently to cover the amount of debt
placed on these homes by the phony market under which they were
purchased.
At some point property must be transferred, sometimes because of
unforseen circumstances such as death, divorce, or even marriage. At
that point a house worth only $40,000 (or less) in the market for home-
owner to home-owner sales cannot be sold if the principal balance on
the mortgage exceeds $50,000.
Baltimore will continue to have a high default rate on FHA loans as
circumstances catch up to the victims over the next several years,
unless loans are modified to reflect true market values of the
properties.
TAX CONSEQUENCES
In many instances I have been able to obtain loan modifications for
victims, reducing their indebtedness by 50 percent or more. In those
instances lenders issue an IRS Form 1099 and treat the loan reduction
as a forgiveness of indebtedness. It is my belief that if the reduction
is in connection with settling a disputed claim or lawsuit, then
consideration is given making the reduction non-taxable.
There are thousands of low income families nationwide who are in
the same position, but who are likely to be unfairly taxed on
reductions of loan balances that were fraudulently inflated. through
flipping schemes.
DISPOSAL OF HUD HOMES
Among the worst of the collateral effects on neighbors and
neighborhoods caused by flipping is the increase in vacant ``HUD''
homes, and the inordinate length of time required to re-sell the
property. At a minimum a HUD home is vacant for at least a year. The
impact on adjacent home owners can be devastating in terms of property
value, neighborhood appearance, and public safety issues.
STRENGTHEN HOME OWNERSHIP COUNSELING AND EDUCATION--CREATE A RIGHT OF
RESCISSION
In instances where home ownership counseling is mandatory, it is
often done hastily and on the eve of settlement when counseling is
least effective.
I have suggested a method for increasing the effectiveness of home
ownership counseling without necessarily increasing the funds required
to provide counseling.
A standard can be established, based on the income level of the
borrower or the availability of public money to subsidize the
transaction, under which mandatory counseling must be obtained during a
set period of time that would be co-extensive with an absolute right to
rescind and cancel the transaction being afforded to the buyer/
borrower. If the counseling is not obtained, then the public subsidy
could be withheld, or the loan made ineligible for FHA insurance.
This concept is similar to the right of rescission provided by the
Truth-In-Lending Statute, and would protect both the low income buyer
and the public from abuses such as we have seen in our recent
experience.
A further requirement for mandatory counseling must be that the
counseling agency is wholly independent of the seller and the lender,
and receives no financial support from persons whose economic interest
is adverse to the buyer.
Thank you for taking the time to consider these comments. I am
available to you or your staff for any further assistance that you may
need.
Respecfully submitted,
Andre R. Weitzman,
Lawyer.
*Subprime financing is usually accompanied by a seller second
mortgage to make up the difference in the first mortgage and the sale
price. The seller seconds are usually undisclosed to the buyer and
never collected on. The seller seconds are typically released without
consideration when the purchase money loan is refinanced.
It can be assumed that all properties are appraised for the sale
price prior to settlement.
Many FHA financed transactions received SELP loans through Empower
Baltimore or the Baltimore Department of HCD.
There are numerous other suspicious sales based on price, but the
acquisition price and date was not available from the records reviewed.
Department of Assessments and Taxation
CITY ASSESSMENTS REDUCED DUE TO REAL ESTATE FLIPPING
Property assessments on homes in several neighborhoods in East
Baltimore will be reduced an average of 24 percent, as a result of a
reassessment done to evaluate the impact of real estate flipping in
Baltimore City. The neighborhoods, near Patterson Park, have been the
recent focus of high levels of fraudulent real estate transactions.
All real estate in Maryland is normally reassessed on a three-year
cycle, However, due to many published reports detailing cases of
fraudulent real estate transfers in Baltimore City, the Director of the
State Department of Assessments and Taxation recently ordered an out of
cycle review of certain neighborhoods two years before their scheduled
reassessment. The Department analyzed current real estate sales and
existing sales listings, after excluding transactions that appeared to
be inflated above market value. The review concluded that several
neighborhoods in the Patterson Park area were currently assessed above
market value.
Reassessment notices will be mailed to the 3,728 affected property
owners on December 27th as part of the larger three-year reassessment
mailing. Assessed values for these properties currently average $46,973
and will be reduced to an average of $35,950. The new date of valuation
will be January 1, 2000 and the changes will be effective for the tax
year beginning July 1, 2000.
For further information contact the State Department of Assessments
and Taxation at (410) 767-4881.
Detail of Areas Receiving Special Reassessment
Assessment Neighborhood 06.01.01 (Area Description--North of
Baltimore Street, East of Lakewood Avenue, West of East
Avenue, and South of Pulaski Highway):
Number of Accounts Adjusted............................... 1,033
Current Average Value..................................... $45,271
Adjusted Average Value.................................... $34,879
Assessment Neighborhood 06.01.02 (Area Description--North of
Baltimore Street, East of Wolfe Street, West of Lakewood
Avenue, and South of Fayette Street):
Number of Accounts Adjusted............................... 982
Current Average Value..................................... $45,024
Adjusted Average Value................................... $36,732
Assessment Neighborhood 07.01.01 (Area Description--North of
Madison Street, East of Luzerne Avenue, West of Edison
Highway, and South of Eager Street):
Number of Accounts Adjusted............................... 492
Current Average Value..................................... $42,354
Adjusted Average Value.................................... $34,475
Assessment Neighborhood 26.01.06 (Area Description--North of
Baltimore Street, East of East Avenue, West of Haven
Street, and South of Pulaski Highway):
Number of Accounts Adjusted............................... 648
Current Average Value..................................... $46,768
Adjusted Average Value.................................... $35,991
Assessment Neighborhood 26.01.07 (Area Description--North of
both sides of Lombard Street, East of Highland Avenue,
West of Haven Street, and South of Baltimore Street):
Number of Accounts Adjusted............................... 573
Current Average Value..................................... $50,018
Adjusted Average Value.................................... $37,695
--------------------------------------------------------------
____________________________________________________
Total All Areas:
Number of Accounts Adjusted............................... 3,728
Current Average Value..................................... $46,973
Adjusted Average Value.................................... $35,950
National Training and Information Center,
Chicago, Illinois, November 2, 1999.
Ken Strong,
South East Community Organization, Baltimore, MD.
Ken: Thanks for the opportunity to present the FHA foreclosure
information to the coalition. You have a diverse group that seems
dedicated to making something happen to put an end to the property
flipping in Baltimore.
On the FHA front you are in a unique position because Senator
Sarbanes is the ranking Democrat on the Senate Banking Committee, the
committee that oversees HUD and the Federal Housing Administration.
This position is strengthened by the fact that Sarbanes may be wanting
to please community groups after being part of a financial reform
negotiation that essentially guts the Community Reinvestment Act. The
following are possible avenues that the coalition could take toward
preventing FHA foreclosures and HUD abandonment through Sarbanes.
Homebuyer Protection Plan (FHA appraisal reforms)
Have the local HUD office present their plan for ensuring the
implementation of the Homebuyer Protection Plan.
Ask the local HUD office to investigate appraisers that are
involved with fraudulent appraisals. These appraisers can be taken off
the FHA approved list. We have been successful in doing this in
Chicago.
Credit Watch (Lender Monitoring)
Because this program is under attack by the mortgage bankers it is
extremely important that Senator Sarbanes knows that community
organizations support this HUD effort and that they want HUD to
continue to develop legal strategies that cutoff lenders with extremely
high default rates.
Foreclosure Prevention
Push Sarbanes to advocate for a moratorium on foreclosures for
families who bought over appraised homes with FHA loans and have HUD be
aggressive in pushing lenders for Loss Mitigation tools to restructure
loans for families. We were able to keep hundreds of families in their
homes through the agreements we reached in Buffalo and Chicago.
Property Disposition
Push Senator Sarbanes to create Asset Control Areas in Baltimore
neighborhoods that have community development corporations with the
capacity to redevelop large numbers of HUD properties. Ed Rutkowski
from Patterson Park seemed especially interested in bringing this pilot
to his area.
If you have any questions about these avenues or want to talk about
other ideas that you are considering, please feel free to give me a
call. Also, I would suggest that you have a conversation with Jason
Kiely from our office about what groups around the country are doing on
the issue of predatory subprime lending. He has quickly become a
national expert on the issue and is organizing around a state bill that
would tighten the screws on predatory mortgage brokers and subprime
lenders.
Sincerely,
George Goehl,
Housing Director.
[From City Limits, November 1999]
The Harlem Shuffle
(By Kemba Johnson)
After spending the last two decades buying and fixing up houses for
Long Islanders, Larry Nelson decided this spring that it was time to
get into the nonprofit housing business. Launching the Alliance for
Individualized Ministries (AIM) and signing up for a federal loan
program for rehabbing old dilapidated buildings, Nelson thought only of
creating cheap, decent housing for poor families in and around
Hempstead. He never imagined he'd be making someone else rich.
Then a contractor friend told him that he knew some people who
could help Nelson become a nonprofit development expert. There was just
one catch: Nelson would have to go a little farther afield--to Harlem
and Brooklyn, in fact. ``They told me there were brownstones that I
could pick up and help people get affordable housing,'' Nelson recalls.
Within the month, a real estate lawyer named Andrew Graynor had set
Nelson up with a mortgage company in Farmingdale, Long Island, and a
real estate appraiser in Melville. The contractor friend also
introduced Nelson to one of Graynor's clients, a real estate investor
named Howard Finger, who found 10 brownstones for him to buy in Upper
Manhattan and Brooklyn. Nelson says Graynor even gave him $5,000 per
property to cover business expenses. For Nelson, the deal sounded
great: He would buy the buildings, rehab them immediately, and transfer
the mortgage to new buyers soon after.
But he soon found out that Graynor's generosity wasn't quite what
he bargained for. In fact, it came at a high price: hundreds of
thousands of dollars. That's the profit that Finger's real estate
company, No Exit Place Realty Corp., made when it sold Nelson the
buildings. No Exit Place bought each townhouse cheaply, passing it on
to Nelson within a day or two at a substantial markup. In August No
Exit Place bought 52 West 126 Street for $130,000, then sold it to
Nelson the next day for $262,000. In another transaction, 66 West 126th
Street, the realty paid $130,000 and sold it the same day to Nelson for
$206,000. (All sale prices in this story are calculated based on
property transfer taxes.) So each time he bought a building, Nelson was
on the receiving end of someone else's property flip--and each time, he
paid handsomely for the privilege.
All the elements of the deal, from loan to realty company to
appraiser to mortgage lender, fit together neatly. Nelson was getting
his buildings through insured loans backed by the Federal Housing
Administration, courtesy of a unique program that combines both
purchase price and rehab costs into one insured mortgage. In
consultation with the appraiser, the mortgage company approved loans
large enough to meet No Exit Place's steep asking prices, even though
the buildings needed extensive work and had been on the market for much
less just days before.
Nelson soon figured out that it wasn't such a great deal after all.
``As a nonprofit organization I really lost money when I should have
gone to the seller and not used the middleman,'' Nelson says ruefully.
``It's totally legal, but it just didn't sit right. There was a lot of
money to be made.'' By May, Nelson was fed up with No Exit Place,
Graynor and the contractor friend who started it all. He decided to get
out of the deal, demanding that they sell off the properties for him
immediately.
``We sell property at a fair market value,'' Finger responds.
``Right now market value is $250,000 and $260,000, and I sometimes sell
under fair market value.''
Graynor, too, says that his real estate clients sell within the
going market rate--they just happen to find great deals when they buy
property. ``[Nelson] may not be getting the same deal that my client
got. That is the nature of real estate investment,'' Graynor says. ``No
one is forcing them to buy.'' Asked whether he recalls providing
$50,000 to Nelson, Graynor responds, ``I honestly do not know.''
As a former businessman, Nelson isn't opposed to realtors earning
healthy profits--it's just that markups of up to 100 percent are a bit
more than healthy. His goal was to build affordable housing, but buying
these buildings at pumped-up prices meant that his buyers would have to
assume high mortgages. The last thing Nelson wanted to be doing in
Harlem and Brooklyn was creating housing that residents couldn't
afford, and this deal made him feel like a conduit between realtors and
obscene profits. ``[These profits] should be channeled to people who
need affordable housing, not lining their pockets,'' he complains. ``In
this case, AIM doesn't walk away a winner. I walk away a supplier.''
In this case, what turned Nelson from a developer into a supplier
was FHA's 203(k) loan program. The program, designed to promote home
ownership for poor and middle-income people, is set up to help
individuals and certain pre-approved nonprofits afford the risky,
expensive project of rehabbing old housing. With the U.S. Department of
Housing and Urban Development insuring the loans, the program makes
mortgages easier to get in neighborhoods where that's not always
simple. It has exploded in recent years: In the New York area, there
are nearly 10 times as many 203(k) loans today as there were three
years ago.
But for real estate operators, 203(k) has also been easy pickings.
In 1998, three Brooklyn-based nonprofits enrolled in the loan program
discovered that they had been burned by their mortgage companies, which
promised them one-stop housing rehabs but instead hooked them up with
overpriced buildings and shoddy construction. Left holding
uninhabitable housing and high mortgages they can't pay, the nonprofits
are now in the process of defaulting on 300 properties and $60 million
in loans. HUD has launched an investigation into the deals.
Meanwhile, three other out-of-town nonprofits in the program,
Family Preservation Center, Word of Life Ministries, and St. Stephen's
Baptist Church, are still fixing up dozens of Harlem buildings. With
every building, Graynor's realty clients paid tiny sums ranging from
$20,000 to $165,000, and the nonprofits paid much higher prices days or
weeks later--up to $365,000. ``They have a nice little network going,''
Nelson says. ``What they did to me, they're doing to the next nonprofit
and ones after that.''
Three years ago, HUD banned for-profit investors from this program,
citing problems with profiteering and corruption. Now, City Limits has
learned, for-profit interests are once again profiting mightily from
203(k). The result: overpriced properties in poor neighborhoods, quick-
flip speculation, and, in Brooklyn, a chain of expensive defaults.
``This is so big and such a mess, it'll take [HUD] years to figure this
out,'' says a HUD official close to the Brooklyn investigation. ``By
that time there will be so many [nonprofits] in default.''
In the process, a HUD program that is supposed to bring new
affordable housing to neighborhoods like Harlem and Bed-Stuy has so far
primarily made money for the middlemen. Nonprofits that know little
about housing get sucked into expensive, complex and risky rehab
projects. The loan program has allowed outsiders to cash in, jacking up
housing prices and producing $400,000 brownstones and $1,000 rentals
that few neighborhood residents can afford. The 203(k) program is
supposed to bolster home ownership. Instead, the invasion of the Long
Island realties, backed with government money, is pushing housing out
of reach--and turning Harlem into a cash machine.
The federal housing program that made all this possible was devised
to plug a hole in the housing finance market, one that makes it hard to
renovate old buildings in poor and moderate-income areas. Generally, a
developer who wants to buy and fix up a decrepit building has to get
two loans: one for the purchase and one for its rehabilitation. But
banks are often reluctant to make a double loan on a building that
needs a lot of work, especially in neighborhoods like Harlem, explains
Matthew Lee, executive director of the Bronx finance industry watchdog
Inner City Press. Says Lee, ``The bank thinks, `What do we get if you
don't pay--a run-down house?' ''
So 203(k) essentially works like an insurance fund, making bankers
feel more comfortable with these risky loans by putting a government
promise behind their cash. Under the program, banks and mortgage
companies hand out purchase and rehab loans in one mortgage package of
up to about $400,000. Construction must be completed within six months,
which is also when the first mortgage payments come due. From a bank's
point of view, the greatest virtue of the program is that if a buyer
defaults, the lender gets paid back in full--including costs--from an
FHA insurance fund.
The program has been around since 1961, but only recently has it
caught on. Nationwide, the program grew from an average of 3,000 loans
in the early 1990s to 17,000 in 1996 alone. Locally, it has exploded.
In New York City, Westchester, Long Island and Rockland County, there
were 134 loans in 1996. Last year, there were 1,128. It will probably
get bigger. HUD has been pushing the program with a national promotion
tour.
But as early as 1996, HUD's auditors found that the program is
``highly vulnerable to waste, fraud and abuse by investors and
nonprofit borrowers.'' HUD researchers studied 203(k) loan records from
seven states and found abuses in every one of them. Lenders failed to
make sure rehab work was completed. Appraisers overpriced property.
Nonprofits got overwhelmed, trying to restore too many homes at once.
Some contractors, realtors and agents insisted on unusually high fees.
The auditors concluded that the problem with 203(k) rests in its
design, which puts too much responsibility for oversight on lenders. As
the program is structured, lenders have little incentive to watch the
shop, and plenty of reasons to make lots of loans. First, they make
their money through the fees and closing costs they get for each loan
completed. Second, they're guaranteed a refund from the federal
government if anything goes wrong. Also, the auditors found the program
was ripe for abuse by profit-seeking investors, who could make money
whether or not the project ultimately succeeded. Spurred by the report,
in late 1996 HUD barred for-profit property investors from the 203(k)
program, as it already had done with some other FHA loan programs.
But in New York City, for-profit investors have apparently found a
way back into the loop. ``They have recreated an opportunity for
themselves to make a lot of money,'' charges Ginnie Phillips, executive
director of Helpline Soul Rescue Ministries in Crown Heights. Her group
is one of the Brooklyn organizations now defaulting on their 203(k)
loans. As profiteering players return, New York is now seeing practices
alarmingly similar to the abuses HUD described in its report.
Phillips' journey into real estate hell began with a phone call in
1997. Mortgage Lending of America invited Helpline to buy homes in
eastern Brooklyn. The organization had just been accepted to HUD's list
of approved nonprofits for the 203(k) program, but had done only small-
scale housing redevelopment.
Mortgage Lending of America vowed to take care of that, introducing
the nonprofit to Tri-Metro, a realtor in Ozone Park, Queens, which
would buy properties for Helpline and arrange for contractors to rehab
them. ``They contact the nonprofit and promise to set them up in an
affordable housing program,'' recalls Phillips. To sweeten the deal,
Helpline would get $5,000 in administrative reimbursements from Tri-
Metro each time it bought a building with its FHA line of credit. There
was just one catch: In the same written agreement with Tri-Metro that
guaranteed Helpline the cash, Phillips signed a statement saying she
wasn't allowed to see the buildings before or during construction.
The deal was tempting: armchair housing rehab, with a bonus to
boot. Besides Helpline, at least two other groups in Brooklyn bought
into the idea. Once the realtor selected the houses for purchase,
Mortgage Lending of America sent its outside appraiser, CLA Inc., to
green-light the sales price and rehab estimates for the buildings--99
of them in all. The longer Helpline worked with the lender and the
realtor, the more expensive the homes became, starting at $70,500 in
September 1997 and peaking at $275,000 at the end of 1998.
Subsequently, a UPN 9 News investigation in June found that these
buildings appeared overvalued. For one five-unit fixer-upper at 706
Essex Street in Brownsville, the group paid $275,000; Channel 9 found
that the median price for 40 homes sold in the area that year was
$150,000.
For Phillips, agreeing not to see the homes was her biggest
mistake--and the detail her realtor relied on. She says Mortgage
Lending of America refused to let her see the appraisal records and
closing documents, and her request to get a new appraiser was rebuffed.
``We were shut out of the process,'' Phillips says. ``We were unhappy
and could not get any information.''
So in late 1998 Phillips hired her own lawyers and broke her
contract with Tri-Metro. When she eventually saw the properties,
sagging floors and leaky pipes were recurring motifs. Walls were easily
punctured, tubs were not supported by the bathroom floors and a tiled
shower wall was easily removed, showing daylight through the cracks.
Helpline's independent appraiser and HUD officials who later saw the
houses said most of the homes were overappraised--some by as much as 50
percent. Neither Mortgage Lending of America nor CLA returned repeated
calls from City Limits.
To repair hundreds of such houses would have been extremely costly,
so Helpline and the other nonprofits braced for default. A HUD
investigation ensued, and an official close to the investigation tells
City Limits that perhaps only 40 percent of the rehab money went into
the property. The rest went to fees and other charges, payable to Tri-
Metro and its subcontractors.
Including Helpline's buildings, there are about 300 properties in
Brooklyn now defaulting on 203(k) loans. The federal agency is trying
to stem the tide: In September, it barred Mortgage Lending of America
from the FHA loan program, citing its high default rate--16.8 percent,
compared with the 5 percent average for metropolitan area FHA lenders.
But the same HUD official, who asked not to be identified, believes
there are already many other defaults waiting in the wings. He
estimates that by the time HUD repays all these flops, the agency will
be out by about $1 billion.
HUD's insurance fund is supposed to take run-of-the-mill defaults
and the occasional scandal in stride. It's replenished with a 0.5
percent annual charge passed on to every 203(k) borrower. But any
substantial rash of defaults could ultimately lead to an increase in
insurance premiums, says HUD. And nonprofits that use 203(k) have other
concerns. ``If there are investors using the program under the guise of
nonprofits, it could lead HUD to place more restrictions on the
nonprofits,'' says David Beer, director of housing development at
Neighborhood Housing Services, which has rehabbed nearly 70 buildings
through 203(k).
Since Channel 9's story, another five nonprofits with nearly 200
more properties in New York have reported that they've been stuck with
poorly rehabbed properties in 203(k) deals. ``Nonprofits usually have
been victims because they don't know enough,'' Phillips laments.
``They're literally being exploited until they wake up and are left
with buildings they can't sell.''
Drew Graynor was able to transform Larry Nelson into a nonprofit
developer at a blistering pace. The $50,000 that Nelson's organization
got from Graynor for his 10 properties helped Nelson prove to HUD that
his group had emergency cash reserves on hand. ``He is the man,''
Nelson says of Graynor. ``He arranged everything, my banks loans and
everything. He introduced me to the mortgage company.''
But the mortgage company that Graynor brought in, Executive
Mortgage Bankers Ltd. in Farmingdale, was no peach. Like Mortgage
Lending of America, it appears on the National Training and Information
Center's list of the 50 worst lenders in New York City, for one big
reason: the company's 11.4 percent loan default rate. Executive
Mortgage, in turn, brought in CLA to validate the high asking, prices
on Howard Finger's 10 buildings. That's the same appraisal company that
vouched that Helpline 's shabby homes were worth top dollar.
CLA's evaluations were crucial to Nelson's 203(k) deals. In
estimating market values, appraisers are supposed to consider the sales
prices of comparable nearby properties. If the building in question was
itself recently sold, that price also is a key indicator of value. But
Finger had paid much less for these properties than he charged Nelson a
day or two later, and the high resale prices were all backed up by CLA
as the appraiser.
CLA and its owner, Chris Liano, is a common link between Helpline,
Nelson and Family Preservation and the other Harlem 203(k) nonprofits.
It was Liano's company that okayed the highprofit flips that enabled
realities to cash in, charging FHA approved nonprofits far more than
the realities paid for each building.
In 203(k), as with most other FHA programs, appraisers are supposed
to keep a watchful eye on the mortgage process. Their assessments
should ensure that prices don't get out of hand and could keep the
resulting projects affordable.
Now, facing hundreds of defaults in Brooklyn, HUD is investigating
why New York mortgage lenders have been so generous with its money--and
whether their appraisers played a role in overextending the lenders.
``This is an issue in New York that we have been looking into-whether
or not property was properly appraised,'' says John Frelich, director
of Quality Assurance in the Philadelphia HUD office, which oversees
203(k) for the Northeast. ``The concerns are of high intensity within
New York. The New York region is a high-volume 203(k) area and a high-
volume area for nonprofits.''
When contractors showed up one morning last February to start
converting the single-room occupancy residence at 58 Edgecombe Avenue,
they did what they normally do: turned off the electricity and water,
ripped down the doors, and started demolishing the bathrooms. It would
have been a typical job if not for one thing: six men lived there.
Residents say they were roused from their beds by hammers knocking at
their doors around 8 a.m. and summarily thrown out.
Unlike the other tenants, who went off to work, Benny Brown had
nothing to do but worry and wait for his Veteran's Assistance check to
come in the mail. He spent the rest of the cold winter's day wandering
the neighborhood, sitting on a park bench, and ultimately going to the
hospital with an anxiety attack. The subway served as his home the next
night. A day later, he ended up at a city shelter, where he still lives
today.
Brown says that ever since the new owner, Family Preservation,
bought the building in November 1998, no one collected his $300-a-month
rent. ``They didn't want the money,'' he says. ``They just wanted
everybody out.''
After the eviction-by-hammer, Family Preservation found itself on
the expensive end of several lawsuits. In the first settlement three
tenants got $27,000 each. Brown got $39,000 a few months ago. Lawyers
from the SRO Law Project who represented the tenants were jubilant--
illegal eviction cases usually bring a couple thousand dollars, at
best. Then the city Department of Housing Preservation and Development
piled more liabilities on Family Preservation, winning a court order
for $33,284 in civil penalties and the concession that the building be
reinstated as a low-income SRO for at least two years.
How did a nonprofit come to have $153,284 to pay for one building's
worth of mistakes? And just as important, why didn't Family
Preservation know people were still living at 58 Edgecombe, which it
planned to convert into a four-apartment townhouse?
Sam Stith, Family Preservation's property manager, partly blames
himself--but mostly he fingers his realty, a Mineola company called Fix
Realty, run by Frank Boccagna. At the time that Family Preservation got
into the 203(k) business, it was a small 3-year-old organization with
little experience in housing--most of its work had been in providing
case management for mentally retarded children and their families.
Benny Brown got evicted for the simple reason that Stith hadn't yet
seen any of the Harlem buildings that Family Preservation had bought,
even though the nonprofit had begun buying them in March 1998. ``We had
no idea. We're a hands-off operation--that was the problem,'' Stith
told City Limits at the time. Fix Realty sold the brownstone to Family
Preservation for $345,000, and, Stith says, the realtors promised that
the building was vacant. And Fix Realty also arranged for the gut
rehab.
``We trusted other people,'' says Stith. ``Ignorance is no excuse
for the law, but we didn't know.'' As for the money, Stith says his
``investors''--whom he refuses to name--paid the settlements and
penalties just to make the unfortunate situation go away.
There was something else Fix didn't tell Family Preservation. Two
months before the nonprofit bought the building, Fix had acquired it
from an estate for $150,000. This wasn't the only building that Family
Preservation bought from Fix. On September 17, Fix bought 355 Pleasant
Avenue for $165,000; the next day it sold the property to Family
Preservation for $310,000. On October 1, Fix bought 51 Bradhurst Avenue
for $27,000, selling it to Family Preservation the next day for
$215,000. Each building was in need of a gut rehab.
The same players reappear in all of Family Preservation's deals.
Mortgage Lending of America set up the nonprofit with 203(k) loans. CLA
appraised the properties, allowing the mortgage company to approve
loans at or near the maximum allowed by FHA at the time. Fix Realty's
law firm was also the same one Nelson had dealt with in his 203(k)
loans: Graynor & Graynor, on Mineola Boulevard in Mineola, Long Island.
During 1998, Family Preservation ended up buying at least a dozen
Harlem properties using FHA loans, from 10 different sellers. Seven of
these sellers--including Knarf Realty, Cazzo Realty, Ring Realty,
Marfra Management and NMAD Realty-are clients of Graynor & Graynor.
In more than a dozen cases that can be documented with real estate
records, these buildings were flipped: bought by realtors and then sold
within days at much higher prices to Family Preservation. One
transaction was an impressive double flip: 34 West 126th Street was
bought by 1 Exit Place Realty-which shares its address with No Exit
Place--on May 7, for $88,000; 1 Exit Place sold it to Cazzo on June 18
for $135,000; and on June 19 Cazzo sold it to Family Preservation for
$250,000. In every case, Family Preservation took out its loans from
Mortgage Lending of America.
Meanwhile, Fix, Knarf (which is also run by Boccagna) and Cazzo
were flipping Harlem properties to two other nonprofits, St. Stephen's
Baptist Church and Word of Life Ministries of Freeport, Long Island. In
six cases that can be documented, the transactions told the same story:
Mortgage Lending of America handed out loans for buildings that had
doubled in price overnight. For example, in June 1998 St. Stephen's
bought 57 West 119th Street for $215,000 from Knarf. The realtors had
paid $85,000 for it one day earlier. Cazzo Realty bought a widow's
brownstone at 336 West 145th Street for $20,000 in April, selling it to
Word of Life a week later for $225,000.
But Stith says it's not a problem that his nonprofit paid these big
markups. He suggests it's part of the cost of doing business. Let's say
there's a building on the market for $90,000, he proposes. ``If an
investor pays [to buy it], whether out of his pocket or through a loan,
and he sells it for $200,000, and it becomes housing, it's a win-win
situation.''
Stith acknowledges that ``we overpaid for some buildings'' but says
that his brownstones will ultimately be worth $400,000. Once the work
is finished, Family Preservation expects to rent its apartments out for
$700 to $1,000 a month, earning stable income for years to come. ``You
can make a profit out of the rent, hold onto it for five to six
years,'' Stith says.
But the bills are already coming due. It's been more than six
months since Family Preservation bought the properties, and the
organization now owes mortgage payments to banks even though its
buildings are still undergoing reconstruction. Stith isn't worried
about that, either. He reports that his ``investors'' are covering the
mortgage payments. And Mortgage Lending of America doesn't have to
worry about the payments--like most smaller lenders, the company
quickly sold the loans to bigger banks for an immediate return on the
investment passing along FHA's insurance guarantees with the loans.
Family Preservation's business strategy doesn't make sense to
Martin Hayott, a longtime Harlem resident who has traded in brownstones
for many years. When one of his run-down holdings, 166 West 123rd
Street had become ``more headache than pleasure,'' he unloaded his
albatross on Knarf Realty in August at what he thought was a good
price, $60,000. Knarf sold it to Family Preservation a day later for
$250,000, making $190,000 instantly. Family Preservation's FHA loan
amounted to $327,400, leaving just $77,400 for gut-rehab work.
Hayott isn't mad about the deal--just puzzled. By his reckoning, it
would cost at least $200,000 to make the place livable. On that block,
with other vacant buildings nearby, the investment seemed like a bad
idea to him. ``Who would even spend $250,000 on that particular street
and this particular time?'' he asks. ``Whoever bought that building
will never make that money back in their lifetime.''
Harlem's other nonprofit housing developers, including the
formidable Abyssinian Development Corporation, also scoff at the notion
of paying $200,000 for a dilapidated brownstone. With that kind of
price tag, and another $200,000, they estimate, for a gut-rehab, the
finished product would be far too expensive to either sell or rent
affordably. Developers and brokers say a more reasonable price for a
brownstone in need of gut rehab in early 1998 was about $150,000. But
when Family Preservation's shopping trip began around that time, it was
paying an average of $256,000 a pop. Given FHA loan restrictions, that
left the organization with an average of $58,500 per property for a
complete rehab job--framing, wiring, plumbing and all.
Stith refuses to say how much his organization is spending on each
rehab, or how he intends to meet any cash shortfalls. ``I know we're
going to make [the money] back,'' Stith insists. ``I've done the
numbers. That's not even a problem.''
As it recognizes that 203(k) has become a feeding trough, HUD has
just recently begun to do something about it. In June, its
investigators started snooping around New York, looking into the
mechanics of loans and appraisals and inspecting how much money has
been set aside for rehab, how long rehabs have taken and how
contractors were paid.
That same month, the agency unleashed a set of reforms aimed at
cracking down on problem appraisers. Under new rules, appraisers must
assess 80 specific features in each property, taking some of the
subjectivity out of the process. HUD will retest all its appraisers,
subjecting them to spot reviews in the field, and they now face stiffer
penalties for infractions. Finally, a new computerized monitoring
system will reg-flag suspicious loans and appraisals.
Lenders are also coming under scrutiny. Under HUD's new ``credit
watch,'' lenders with three times the FHA default for a region will
face getting suspended or barred from the program. Already, 33 lenders,
including Mortgage Lending of America, were barred in late September
from, making FHA loans.
Perhaps most important, the agency released a new proposed rule in
September that would prohibit realty companies that sell to nonprofits
from giving them money in connection with those sales, like the fees
paid to Helpline and AIM. ``We don't want sellers to induce nonprofits
to buy properties [from them] by giving them the down payment''
explains Brenda LaRoche, director of processing and underwriting in
HUD's Philadelphia office.
In part, the measures simply reinstate old safety checks that HUD
had abandoned. The agency used to prevent collusion by insisting on a
blind appraisal process, where appraisers were selected at random to
review prospective FHA loan purchases. That policy was revoked in 1994.
And the measures don't necessarily go to the heart of the problem
with 203(k): that the foxes are guarding the henhouse. HUD uses spot
reviews to inspect about one in 10 loans for improprieties nationwide.
But it's the mortgage lenders that are entrusted to check nonprofits
and individuals for credit-worthiness, ensure that the construction
work is completed, and choose reputable appraisers. Under the new
reforms, that won't change. From the agency's point of view, looking
over everyone's shoulder-from lender to contractor is just too
expensive.
But FHA has already seen how quickly rampant abuse can crush the
sweet dream of homeownership. During the late 1960s and early '70s HUD
was hit by a rash of scams connected to its Section 235 loan program,
through which the agency subsidized mortgage payments and, as it does
now with 203(k), insured lenders against default Those vulnerabilities
led to many of the same problems now racking 203(k), including
overappraised property and shoddy construction. Poor New Yorkers and
low-income home-buyers in cities across the nation abandoned their
homes in droves. Fully 18 percent of the homes ended up in default; in
Sunset Park alone 100 houses sat vacant. By 1973 the program was
pulled.
HUD would do well to heed the lessons it learned then. Strict
oversight is expensive-but so are the alternatives.
[From The Chicago Sun-Times, September 11, 1998]
FHA Blocks Foreclosures on 100 Rehabbed Homes
(By Leon Pitt)
A six-month moratorium is being imposed on foreclosures of homes
purchased with federally insured mortgages from a Northwest Side real
estate broker accused of shoddy repairs.
Ira Peppercorn, deputy general secretary of the U.S. Housing and
Urban Development Department, announced the moratorium Thursday at an
Austin neighborhood meeting.
The suspension affects 100 homes in the Austin and West Humboldt
Park neighborhoods purchased between 1992 and 1996 through Easy Life
Real Estate, housing activists say.
A class-action lawsuit is pending against Easy Life, 4101 W. North,
alleging the company knowingly sold shoddily repaired homes to first-
time buyers at above market prices.
Peppercorn, HUD's second-in-command, told about 200 people at the
neighborhood meeting about the suspension of foreclosures. At the
gathering, some owners of Federal Housing Administration-insured homes
cited a litany of structural and systems faults they said had been
hidden from them.
To help stave off additional foreclosures, Peppercorn said a
housing specialist would be assigned to Chicago to work with homeowners
in default to try to restructure their loans.
During the moratorium, no homeowner who bought through Easy Life
will lose his or her property because of failure to pay the mortgage.
Peppercorn said HUD would also reopen an investigation into Easy
Life, as well as the practices of appraisers and lenders of the 100
percent FHA-backed mortgages nationwide. He promised to return to
Chicago Oct. 2 for a meeting with a Humboldt Park community
organization.
Easy Life officials could not be reached for comment Thursday
night.
Before the meeting at Circle Christian Ministries, 118 N. Central,
Donald Brown said he bought a supposedly rehabbed two-flat home that
had been burned out in the 1000 block of North Parkside Avenue. ``I was
told I was getting a good deal.''
Brown, who said he ``fortunately is not in default'' on his FHA-
backed loan, said ``there was nothing good about the deal I got. I have
to pay a $1,200 a month mortgage and constantly shell out to fix stuff
and have not yet earned any equity,''
Burned siding was painted over, warped and rotting floors were
covered with carpets and uneven walls left gaping holes at the joints,
Brown said.
Betty Raper, whose son bought a home in the 4800 block of West Race
in 1992, said instead of being a dream house, it's been a ``nightmare
ever since'' because the roof leaks and the plumbing and electrical
systems are faulty.
ContiMortgage Corp.
To: __________, ____ S Lakewood Ave., Baltimore, MD 21224
Property Owners:
Canton, Highlandtown, Eastern Avenue
RE: MORTGAGE REDUCTION NOTIFICATION: Neighborhood Housing Service: ID
5630871-H-3-00
Dear William: Due to the recent increase in real estate value of
homes in your area our records indicate that your account: Neighborhood
Housing Service: ID 5630871-H-3-00 may now qualify for a new mortgage
reduction programs and low interest home improvement loans. Pre-
approved, with the authorized financial institution can be completed
normally within 72 hours.
In conjunction with the redevelopment efforts of the Patterson Park
Communities, free property evaluations and financial restructuring
concepts will be offered to property owners FREE during the months of
March and April 2000. This information will contribute to maximizing
the benefits of the new Home Value Guarantee now offered to qualified
homeowners.
Due to the number of inquiries generated by the current lower rates
available, No Second Notice will be Issued to Property Owners
Concerning this Program. It will be each property owner's
responsibility to guarantee that they have been notified of the lowest
rates available for their mortgage.
Your account has been assigned to Hal Weiss, our senior account
executive for the Patterson Park Redevelopment Project. Please contact
him at your earliest convenience to review the financial options now
available. Mr. Weiss can be reached at his office Monday through Friday
at 410-339-6718.
Sincerely,
Ashlyn Hood,
Program Director, ContiMortgage Corp.
Senator Mikulski. And we are going to ask for your
recommendations. Excellent panel. That letter will be included
in the record. Thank you for that. And I am also going to ask
if you give us snapshots of the presentation. That is just
shocking. Instead of a dream, it is despair.
Now, let us turn to Norma Washington, from ACORN. We
welcome you, Ms. Washington.
STATEMENT OF NORMA WASHINGTON, PRESIDENT, MARYLAND
CHAPTER, ACORN
Ms. Washington. Thank you. My name is Norma Washington. I
am President of the Maryland Chapter of ACORN. I was going to
read a prepared statement, but I think I am going to let one of
my members tell her story instead. Because the impact of this
is going in a lot of different directions. I am going to let
you hear her story, because this has gotten to the point where
her children are being threatened with being taken from her
because of this kind of stuff.
Senator Mikulski. Ms. Washington, may we have your prepared
statement?
Ms. Washington. You sure can.
[The statement follows:]
Prepared Statement of Norma Washington
Good Morning. My name is Norma Washington, I am the President of
Maryland ACORN.
There are many reasons ACORN has been involved in fighting real
estate flipping and predatory lending. It started when we investigated
all the vacant houses in our neighborhoods. In just a 10 square block
area in the Walbrook section of Baltimore where I live, we found over
200 vacant houses. And guess who owns many of these vacant houses? ...
Mortgage lenders.
So we asked: ``Why do these lenders own so many vacant houses that
should be filled with families instead of drug dealers?'' We looked for
people with loans from these lenders and found that the costs and terms
of their loans were so outrageous, that foreclosure is a foregone
conclusion.
We've talked to hundreds of homeowners in poor and minority
communities in Baltimore and their stories show a consistent pattern of
families without access to decent credit who are trapped in high-fee,
high-interest rate loans. And these loans are devastating our
neighborhoods.
Many of these victims, while going through foreclosure, have joined
ACORN to fight predatory lending. They want to see major reforms in how
these companies do business.
While the problems of real-estate flipping and predatory lending
are industry-wide, FHA must do its part by not working with lenders and
appraisers that exploit vulnerable families either inside or outside of
the FHA program. I call your attention to our written testimony, which
includes stories from victims of predatory lenders that are
participating in FHA.
In recent years, HUD has taken many steps to address abuses by FHA
lenders. These efforts need to be closely monitored and, in many cases,
strengthened to ensure the greatest impact. On some issues, HUD may
need additional authority from Congress.
The most central improvement needed in the FHA program is to change
FHA participation from being a right enjoyed by any lender to a
privilege that lenders must earn by meeting established standards.
HUD's Credit Watch program moves towards this goal by cutting off
lenders with extremely high loan default and claim rates but these
standards should become more stringent. Also, while HUD should continue
to review complaints about lenders, it should increase the number of
regular reviews it conducts of FHA lenders.
To ensure HUD's reviews accomplish their intended goals, the
Mortgage Review Board process, which disciplines noncompliant lenders,
needs to be more effective. The current process results in endless
delays before the Board can enforce any penalties, and the penalties
often amount to a slap on the wrist.
Many families have also suffered because they received inflated
appraisals on FHA-insured loans. Congress needs to examine FHA's
appraisal reforms, which include better reporting of appraisal
information to FHA and to FHA borrowers. Efforts to improve the
identification and monitoring of poorly performing appraisers should
also be examined.
Finally, the repeated horror stories of families being stripped of
their wealth and forced into foreclosure, point to the dire need for
strong consumer protections in the home loan market. Those stories
reflect on the gross inadequacy of the federal Home Ownership Equity
Protection Act, or HOEPA (hope-ah), a half-measure passed in 1994 in
response to predatory lending abuses. New legislative proposals to
protect consumers are circulating on Capitol Hill, and we need our
Maryland Senators, both Senator Sarbanes and Senator Mikulski, to
become more active in the fight against predatory lending.
I'll now turn it over to Matilda Wonson, who received an FHA loan,
to tell of her experiences.
ACORN has long documented the absence of traditional lenders in
lower-income and minority communities and fought to make loans
available in those areas. In recent years, however, a new variation on
this problem has emerged; to fill the void left by redlining, a new
breed of subprime lenders is aggressively marketing high cost loans.
Too often, instead of helping homeowners build equity, these lenders,
charging high rates and fees and sometimes engaging in outright fraud,
are stripping families and communities of the equity in their homes. In
our research on home mortgage data, we have found that subprime lenders
target the people least able to afford these loans--the residents of
lower-income and minority communities.
Through community outreach, Baltimore ACORN has found over 50
victims of predatory lending. Most of these people were victims of
either real estate flipping where homes were grossly overvalued to
produce high profits for brokers and lenders or home improvement scams
where service were never provided or grossly overpriced. The enabling
loans occurred both on FHA and VA loans and on conventional loans. For
FHA and VA-insured loans, the losers are the borrowers the insured
loans were designed to help and often the insurance funds themselves.
Bloated appraisals and prepayment penalties prevent borrowers from
refinancing their loan to a lower rate or borrowing on equity to make
needed repairs. Lenders are more likely to make risky loans since they
are insured. As a result, foreclosures have skyrocketed and our
neighborhoods are filled with vacant houses, compounding current blight
problems.
Unfortunately, the problems of predatory lending have only been
brought to light by the widespread devastation caused by real estate
flipping in Baltimore. While the business practices of realtors and
appraisers in real estate flipping need to be addressed, solutions at
the federal level need to be found both inside and outside of the FHA
and VA loan programs.
WHAT IS SUBPRIME OR PREDATORY LENDING?
Lenders grade prospective borrowers based on their perceived
credit-worthiness, with the perfect credit candidate receiving a grade
A credit rating and people in bankruptcy receiving a D rating. Anyone
receiving a credit rating of A- or below is considered a subprime
applicant. Credit ratings are developed from a borrower's credit
history, primarily drawn from reports from the major credit bureaus
(such as Equifax) and typically assign each applicant a specific credit
score. Financial institutions use these credit scores to determine
whether or not they will make a loan, and at what interest rate.
Although credit scoring systems are cloaked in objectivity, the
systems have their own biases, which result in substantial inequities.
One of the most critical problems is that a credit score is based on
each individual's past history of repaying loans. But if your
neighborhood does not have any banks offering reasonably-priced loans
or you have been the victim of past discrimination by banks on their
loan decisions, you have not had the same opportunities to build up a
positive credit history as applicants in other neighborhoods or with
different characteristics. If you have only loans had access to high-
cost loans regardless of your credit-worthiness, you will naturally
have been more likely to default on those loans than someone with
access to reasonably-priced loans, giving you a lower credit score.
Most credit scoring systems produce the same effect by weighing past
repayment of a prime loan much higher than past repayment of a subprime
loan.
In addition, the credit reports on which scores are based often
have errors and omissions, and these occur more frequently in the case
of lower-income applicants. Because credit scoring systems are
proprietary, we can not know what their criteria are. Our experience
suggests that the systems contain hidden biases resulting in scores
which reflect an applicant's resemblance to a typical middle class
model more than their actual credit worthiness.
Even more dramatically, while some borrowers in the subprime market
are genuine credit risks, there is overwhelming evidence that many
lower-income and minority borrowers have been pushed into this market
only because lenders are not offering them prime loans. Instead,
lenders see an opportunity to make more money by charging higher rates
and fees. Recent studies by Freddie Mac and Standard & Poor's have
found that from 20 to 30 percent of borrowers who receive subprime
mortgages could have qualified for a traditional mortgage at the lower
rate offered by banks to A borrowers. ACORN's experience suggests that
with the assistance of a moderate amount of loan and credit counseling,
the portion of borrowers who qualify for A loans would be much larger.
THE GROWTH IN SUBPRIME LENDING
Recent studies on mortgage lending by ACORN and the Urban Institute
have found continuing, and in some respects even increasing,
disparities in the availability of prime conventional loans to white
and minority applicants. Despite low interest rates in recent years,
the lending gap to African-Americans and Latinos has not narrowed.
Where minorities and lower-income families are shut out of mainstream
lending, predatory lenders have stepped in to capitalize on lower-
income and minority families and their unmet need for capital.
Subprime lending is growing at a remarkable rate. According to a
HUD working paper, subprime lenders increased their share of
conventional loan applications from 1.4 percent of all conventional
loans in 1983 to 10.2 percent in 1998. Subprime loans for home
purchases increased by 56.3 percent from 1993 to 1998, compared to an
increase of only 16.4 percent for conventional products. Inside
Mortgage Finance estimates that subprime mortgage originations amounted
to $150 billion in 1998, up from $125 billion in 1997. Subprime lending
overall, including home equity and refinance as well as purchase loans,
has grown even faster. Every year since 1993 has seen annual growth of
more than 40 percent in total subprime loan originations.
Banks and other A lenders bear responsibility for the spread of
subprime lending by virtue of their continued redlining of lower-income
and minority neighborhoods. In many cases the connections are even
closer. The same banks that are failing to meet the demand for prime
loans in lower income and minority communities own half of the
country's largest subprime lenders, which are targeting those same
neighborhoods. Some subprime lenders, like Norwest Funding, share a
name with their parent bank; for others like Citigroup's Commercial
Credit, the connection is less immediately evident. A less direct, but
still crucial, link between banks and predatory lending is through the
securitization of subprime loans by banks, which provides the financing
that makes expansion of subprime lending possible.
PREDATORY LENDING PRACTICES
Subprime lenders have become predators by charging interest rates
unrelated to risk to communities that are desperate for access to
credit, as well as by loading on additional fees and other costs. Calls
to various subprime lenders confirm that their best interest rates are
at least 9.5 percent for `perfect credit' although most people receive
still higher rates. For example, IMC Mortgage self-reports that over 50
percent of their loans were originated to people with grade A credit
and that these A credit borrowers received an average interest rate of
9.9 percent. These higher interest rates represent a significant drain
on lower-income families and communities; the chart below illustrates
the impact of these interest rates on the total cost of the loan based
on an average subprime interest rate of 10.5 percent.
------------------------------------------------------------------------
Total cost Total cost
------------------------------------------------------------------------
Loan Amount \1\......................... $50,000 $100,000
Monthly and............................. 367/mo. 734/mo.
Total Payments at Prime 8 percent....... 132,000 264,000
Monthly and............................. 457/mo. 915/mo.
Total Payments at Predatory Rate 10.5 165,000 329,000
percent................................
Difference in Monthly and Total Payments 33,000 65,000
Over 30 Years..........................
------------------------------------------------------------------------
\1\ Based on a 30-year loan with values rounded to the nearest thousand.
Predatory lenders also take more money up front by charging high
closing costs. Such costs may include charging duplicate fees, inflated
broker fees, fees that lack a clear description, costs that have no
relationship to services being performed, and higher than actual fees
to record the loan to the county land records office. Often, closing
costs (which are more comprehensive that origination fees, which set
the HOEPA fee threshold) run up to 8 percent-15 percent of the loan
amount, significantly higher than the average of 3 percent-5 percent
for the same work performed at bank closings.
Many predatory lenders cash in on closing fees by repeated
refinancing of loans, a practice often called `Flipping.' Each time a
loan is refinanced, closing costs are again imposed and often financed
into the loan.
Predatory lenders often also extend high loan-to-value (LTV) loans,
including loans for more than the value of the house used as
collateral. These loans are risky because the collateral does not cover
the loan in the event of default. Perhaps even more damaging, loans
with LTV's above 100 percent leave the borrower spending years paying
off the additional funds without developing any equity in their home.
Balloon loans, which are structured to include an extremely high
final payment, are another frequent ploy of predatory lenders. On these
loans, the borrower makes monthly payments that cover the interest on
the loan but very little of the principal. After paying off the loan
for many--often fifteen--years they owe a final large balloon payment
only slightly below the original loan amount. Often, borrowers are
unaware of these final payments or of their significance.
ROLE OF GOVERNMENT INSURED LOANS
Community reinvestment patterns reveal a ``decline to subprime.''
As stated previously, banks are failing to provide affordable loans in
lower-income and minority communities. FHA and VA lenders have been
more willing to originate government-insured loans in these
communities. Unfortunately, many of these loans are being made in
violation of program guidelines. We have found FHA loans with faulty
appraisals, extended debt ratios, fraudulent applications, and high
interest rates. Sadly, these lenders market these loans as their best
product. Appendix A includes a sampling of victims who have received
predatory loans from FHA approved lenders.
CONCLUSION
We are a nation with two separate and very unequal financial
systems--one for the rich and another for the poor, one for whites and
another for minorities. This system has a devastating impact on inner-
city communities as redlining and discrimination continue to be
pervasive. While the lack of access to lower-cost credit costs
neighborhoods hundreds of thousands of dollars each year, it also opens
the door for abuse and scandal by mortgage companies, as documented by
groups like ACORN and the media. Rather than strengthen neighborhoods
by providing access to credit, predatory lenders have contributed to
further deterioration of lower-income and minority communities by
stripping homeowners of their equity and charging exorbitant interest
rates leading to foreclosures and vacant houses.
ACORN RECOMMENDATIONS
HUD's Mortgagee Review Board process, which disciplines non-
compliant FHA lenders, needs to be more effective. They need to expand
criteria to suspend FHA lenders beyond high default and claim rates.
Even these rates should have lower levels than the current Credit Watch
program standards.
Congress needs to examine FHA's appraisal reforms to ensure they
are effective in improving reporting by appraiser's to the FHA program
and to borrowers. Efforts to improve the identification and monitoring
of poorly performing appraisers should also be examined.
All lenders which engage in subprime lending should pledge
adherence to a meaningful ``Code of Conduct'' that includes: fair
pricing; full and understandable disclosures of loan costs, terms, and
conditions; a loan review system that rejects fraudulent or
discriminatory loans; making no loans which clearly exceed a borrower's
ability to repay; and refraining from charging fees which bear no
relation to the costs of the services performed.
These lenders should review their loan portfolios and compensate
borrowers whose loans clearly violate this code.
Subprime lenders should develop products which allow borrowers with
a consistent record of on-time payments to move to lower interest
rates.
Lenders which offer prime as well as subprime products should
increase their outreach and loan volume in underserved communities for
their prime loan products. Lenders must establish uniform pricing and
underwriting guidelines for all of their lending subsidiaries, and for
all of the communities in which they do business.
Federal and State law should be expanded to establish minimum
standards which protect borrowers from deceptive or discriminatory
loans. This includes strengthening current disclosure laws: the Truth
in Lending Act (TILA), the Real Estate Settlement Procedures Act
(RESPA), and the Home Owner Equity Protection Act (HOEPA).
Federal and state regulators should increase their scrutiny of
predatory lending practices, including examining the interest rates and
other loan costs along with the distribution of high cost loans.
Regulators must require HMDA reporting by all lenders that make
purchase, refinance, home equity and home improvement loans. Regulators
should also collect data on foreclosures by lender and make it
available for public scrutiny.
Lenders and local governments should fund and expand programs to
provide basic information about lending and enable people to protect
themselves from predatory practices by expanding loan counseling and
home buyer education programs which assist minority and lower-income
families.
Federal, state, and local authorities should devote the necessary
resources to investigating and prosecuting lending abuses.
ACORN is the nation's oldest and largest grassroots community
organization. In the past decade, ACORN has waged campaigns against
bank redlining and discrimination, worked to increase access to credit
for low-income and minority neighborhoods, and fought for greater
community reinvestment by financial institutions. We have won local and
national lending agreements with banks that have increased the
flexibility of their underwriting guidelines and developed loan
products that better meet the credit needs of low-income communities.
Appendix A.--FHA and GSE Approved Predatory Lenders
A SAMPLING OF BORROWER STORIES COLLECTED BY ACORN--MARCH 27, 2000
Borrower stories from the following FHA lenders: American Mortgage
Reduction; American SkyCorp; Associates; Bankers First Mortgage;
Creative Mortgage & Equity; Gelt Financial; Golden National; New
Century Mortgage and WMC.
Borrower stories from the following FNMA approved lenders:
Associates; WMC.
Borrower stories included from the following lenders who sold loans
to FNMA, GNMA or FULMC in 1998: Beneficial; Golden National; WMC.
FHA LENDERS
American SkyCorp
Baltimore
Marshall Skinner bought his home in the Patterson Park neighborhood
of Baltimore. The price of the house was $44,800, greatly over-valued
for a house where the ceiling is leaking and there are holes in the
walls and the floor.
The seller of the house sent Mr. Skinner to American SkyCorp for an
FHA loan. There are many troubling items about Skinner's loan
documents, beginning with many spaces left blank that should have been
filled in. Also the amounts listed on the HUD-1 settlement statement
are different from the costs listed on his other closing documents.
The loan application was also falsified. The amounts for his income
from Social Security and SSI do not add up to his total income. The
loan application also lists $15,000 in assets from furniture and
personal property. However, Skinner didn't own any furniture at the
time of application.
Since his closing costs were high, he received a grant from the
Empower Baltimore Management Corporation through the Department of
Housing and Community Development. On the $44,800 loan, SkyCorp
received over $4,100--over 9 percent of the loan amount. While
Skinner's house needs repairs, he is having trouble locating financing
because his loan amount is so large due to the inflated appraisal.
American Mortgage Reduction
Baltimore
Deborah Claude bought her house on 810 N. Milton Ave. in February
1996 from Mid Atlantic Realtors. She had been renting the house for 2
years with the option to buy. As she began to frequently need repairs,
the realtors pressured her to purchase the house.
She was tired of depending on the landlord to repair things so she
agreed to buy the house for $29,000 with a 10 year loan at 11.15
percent, from Hopkins Federal. The roof started falling in right after
she moved in. After one year, Ms. Claude had to do a lot of repairs.
This included fixing the plumbing, the furnace, and the electrical
wiring.
She went to Advance Remodeling to fix her home. They sent her to
American Mortgage Reduction which offered her a 12.35 percent interest
rate for a 203k loan. Deborah wanted to shop around for a better rate
but the remodeling company told her they would do the repairs only if
she went to American Mortgage Reduction.
Ms. Claude refinanced in June 1997 at the 12.35 percent interest
rate and also had to pay over $4,000 in fees--almost 14 percent of the
$29,000 loan. The lender paid her home improvement money directly to
the contractors without checking to see if the improvements were done.
As a result, the contractors did not complete all the work and Deborah
is further in debt.
Associates
Oakland
Sonya Centeno has an 11 percent interest rate home purchase
mortgage loan with The Associates. She had to pay $1300 in fees and
they made her pay for the previous owner's back taxes and charged her
in monthly back payments back to December even though she didn't move
in until February. After she made the two payments for December and
January, they said she didn't need to and refused to give her money
back. They have been encouraging her to refinance. She has been paying
$761 a month for three years and has yet to make any payment on the
principal.
Philadelphia
Grace Brumskill, a Philadelphia homeowner, received a notice in the
mail from Associates Consumer Discount about a home equity loan. Ms.
Brumskill told Associates that she wanted a loan for $5,000, and they
informed her that she had to borrow a minimum of $10,000. Ms. Brumskill
went ahead and took out the loan for $10,000. Associates charged her
11.5 percent interest, even though her 646 credit score should have
gotten her a lower rate (the average rate for a 30-year mortgage was
under 8 percent in October 1999 when Ms. Brumskill received her loan).
Associates also charged her $2,066 in fees--21 percent of the $10,000
she was borrowing. Included in these fees were $560 for credit life
insurance, which, by financing into the loan, will actually cost Ms.
Brumskill almost $900.
Bankers First Mortgage
Baltimore
Roberta Taylor is an African-American woman in her early 50s
Roberta had been renting her home on Greenmount Avenue for 14 years
when her landlord offered to let her buy the house. Although the home
needed some repairs, her landlord promised they would be fixed. She
received a loan in February 1997 from Banker's First for $30,300 at
13.651 percent interest with a $28,594 balloon payment due in 15 years.
Her settlement statement says she bought the home for $43,500 for which
she got a loan from Banker's First Mortgage. The settlement statement
lists a second mortgage for $7,010, but her sales contract lists a
second loan for $5,510 at 6 percent interest. The second loan showed
interest only payments and the loan was to be forgiven in 5 years.
According to Banker's First, this loan was to cover closing costs.
Her loan amount was $32,625 since she got a renter's credit. The
appraised value was $44,500 and used comparison properties in different
neighborhoods than her house. Roberta paid a 1 percent loan origination
fee and a 4 percent loan discount on top of $690 in other fees to
Banker's First for a total of $2,321 paid to Banker's First. The
appraisal said her house was worth $44,500. According to her loan
officer, he told her how to improve her credit and to come back to see
him in a year to apply for an FHA loan.
Roberta refinanced with Bankers First a year later in April 1998
asking for a lower interest rate. Her loan officer told her that in
order to get a lower rate, she needed a balloon note, a co-signer and a
prepayment penalty. This time, her house was appraised for $49,000.
(both appraisals were done by Elder Appraisals). According to her
settlement statement, she paid 1 origination fee, 5 percent loan
discount and $428 in additional fees for a total of $2,822 paid to
Bankers First and $5,015 in total closing costs. Her loan amount
increased to $39,900 after adding in the closing costs and her second
loan of $2,000. Her loan officer said he negotiated this second loan
down to $2,000 for her, although he later admitted that the entire
second loan would have been forgiven in five years had she continued to
pay it.
Baltimore
Eller Guyton is an African-American woman who had been renting from
Chase Realty for many years when they offered to sell her the house.
She bought the house for $35,400 in October 1997 with a loan from
Banker's First. She received a renter's credit of $14,714 although her
installment contract was dated April 1997 (at $320/month). She paid a
total of $5307 in fees including a 1 percent loan origination fee, a 5
percent loan discount fee, and $728 in other fees to Bankers First for
a total of $2,302. Her loan amount was $26,250 with an interest rate of
13 percent. Eller's income was $782/month at a minimum wage job and her
proposed payments were at $358. Her application falsely lists her
personal belongings as assets worth $20,000. Her credit report dated
October 1997 gives her a credit score of 656.
She refinanced with Bankers First in September 1998 when her loan
amount was $26,902 plus $6,682 in closing costs, increasing her loan
amount to $35,000. This gave her $1,414 in cash for medical bills and
property taxes. Her closing costs were 7.9 percent loan discount fee, a
1 percent loan origination fee, and $404 in other fees to Bankers First
for a total of $3,514, which is over 10 percent of her loan amount. Her
credit report did not give her a beacon score saying ``no qualifying
account present'' and failed to list her current mortgage.
After a couple of heart attacks, Eller is currently unemployed and
in foreclosure.
Baltimore
Harvey Mayo is an elderly African-American man in Baltimore. He was
renting his home when he decided to buy it from his landlord, Chase
Management. Although Harvey didn't know it, Chase had him sign a land
installment contract, which meant he was already buying the house from
them. So he got a loan from Bankers First Mortgage Company, which he
thought was to buy his home. In fact, it was a refinance loan.
Mr. Mayo's good faith estimate from Banker's First is difficult to
understand since the settlement charges printed on the sheet are
crossed out, new amounts are written in, and some of those are crossed
out. However, notations written on the top of this paper indicate his
loan as an ``A'' grade with a loan to value ratio of 85 percent.
Mr. Mayo's loan was for $25,800. He paid Banker's First 6 percent
of his loan in points to receive a 12.5 percent interest rate. The
total amount of money paid to Banker's First was $2,416, over 9 percent
of his loan amount. In addition to these excessive costs, he owes a
balloon payment of $24,652 at the end of 15 years.
On the same day as his closing, Harvey received a notice that
Bankers First was already transferring the servicing of his loan. This
notice said he would not make any payments to Banker's First but left
blank where to send payments to or who would be servicing his loan.
Creative Mortgage & Equity
Chicago
In 1998, Tamar Jordan saw a sign advertising a house for sale in
Chicago. She called and was told that house had already been sold but
there was another one she could look at. Tamar signed a purchase
contract for the house for $115,000 and later discovered it was only
worth $42,000. The person selling the house arranged for her to get a
loan from Creative Mortgage and Equity and Walsh Securities through a
complex financial deal. Ms. Jordan put $5,700 of her own money for the
down payment and the seller, with the knowledge of Creative Mortgage,
put up almost $11,700 to make it appear that Mrs. Jordan was making a
15 percent down payment. Although Creative Mortgage and Walsh charged
Ms. Jordan $8,462 in closing costs and fees, no appraisal was provided.
Now, Ms. Jordan is stuck with a 10.95 percent interest rate on a
mortgage for almost three times the value of her house.
Gelt Financial
Philadelphia
Margaret Thomas, an African-American woman in her sixties, needed
money to pay the property taxes and water bill for her home in
Philadelphia. She heard about a broker firm, McGlawn and McGlawn, which
had gotten a friend of hers a loan. The brokers came to her house with
a representative from Gelt Financial, the loan originator, to have her
sign the loan documents. When Ms. Thomas saw how high the interest rate
was and what the monthly payment would be, she told them that she
wasn't sure she wanted to take the loan after all. They told her that
they didn't want her to be frightened, that was just the way loans are,
and that she shouldn't worry about it.
After they left, Ms. Thomas continued to have reservations about
the loan and called Gelt Financial immediately the next day to revoke
the loan. A Gelt employee, Regina Bolger, told Ms. Thomas that the
representative she needed to talk to was not in the office. Bolger also
told her that she couldn't cancel the loan because she had signed the
papers. Ms Thomas knew that she had three days to revoke the loan and
continued to call Gelt. She was unable to get through to the
representative who had come to her house. When she asked to speak to
Regina Bolger again, she was told that Regina had quit, which Ms.
Thomas found out later was not true. Ms. Thomas was stuck with the
loan, which Gelt immediately sold to Associates. Ms. Thomas has since
lost her job and fallen behind on the payments. Associates has harassed
her in violation of the Fair Debt Collection Practices Act, calling her
before 8 a.m. and every day of the week, and contacting other family
members about her debt.
Golden National
New York
Sheila Small purchased a duplex in Brooklyn, NY with a loan from
Golden National. In order to get an 8.5 percent interest rate, Golden
National charged her $10,000 in discount points. They also charged her
another $8,000 in fees because they considered her a high risk.
Although Ms. Small only earns $8,000 a year as a home health aide,
someone at Golden National wrote on her application that she made over
$50,000. Before she obtained the loan, she told the representative at
Golden National that she had just lost her job. The representative told
her not to worry, that the mortgage would still go through.
New Century
Oakland
Margie Washington received a home equity loan one year ago through
New Century at 9.58 percent interest. She expected to pay $700 a month,
but her lender, Security National, said that because of her credit she
could not get a loan with them. She then sat down with New Century and
they gave her an initial low quote (monthly payments and interest) that
got her interested. They sent it to an underwriter who said they
couldn't go below 9.58 percent. By then she had gone too far and took
the loan that was $20,000 greater than value of her home. She is paying
it back at $1,008/month, more than she can afford, and there is a $60
fee if any payments are 16 days late.
WMC
Oakland
Helen Vargas is a Latino woman in Oakland who has a loan with WMC
that has an interest rate of 19.6 percent. She was quoted costs for a
$12,000 loan but only received $5,000 after they had her sign a blank
piece of paper. She is paying it back at more than she expected to and
they have been encouraging her to refinance. She has had to file
bankruptcy and may lose her home.
LOANS SOLD TO FNMA, GNMA, FHLMC
Beneficial
Oakland
In 1990, Verdena Tucker contacted a lending company off of a
mailing to get a loan for $15,000 on her home to pay off some back
taxes. The lender insisted on an inspector to check her home and told
her that foundation work needed because of a recent earthquake meant
that she would need a loan for over $50,000. Next, based upon a mailing
she received from Universal that said she could get a loan within 3
weeks, she contacted Universal for a loan of $7,100 to pay off her
taxes. From the first day she met with their agent she realized that
she was being preyed upon. They immediately convinced her to include
$7,500 in debt consolidation bringing the loan to $15,000. They then
kept insisting that she take out $5,000 for pocket money and household
bills. She had a deferred loan with the city in the amount of $15,000
and they wanted her to fold this loan into theirs. She said no but they
contacted the City anyway and then told her that the City said they
could add it and subordinate the loan for 30 years. She said no. They
did a credit check on her and said that based upon her credit that the
lowest rate they could give me was 16.75 percent with additional
administrative, appraisal and title search fees of $6,000, making the
loan $25,000.
Five years later she wanted to lower the payments and started
calling around to different companies she had received mail from.
Immediately she received a call from the same lending agent who said he
heard she was looking for a loan and asked why she hadn't called him
earlier. He promised to find a good loan for her and referred her to
Beneficial. He recommended that she get an equity line loan with an
interest rate of 14 percent on what was a $36,000 loan. The package she
got was a $20,000 refinance, and numerous other fees such as a $2,400
administrative fee, a $2,500 finders fee to the agent--all of which,
including the equity line, equaled $36,000.
A few years later, she received a letter from the courts telling
her that somebody from Beneficial was being sentenced for illegal
activities. But she has yet to receive any additional information.
She kept getting 2-3 mailings a day from companies offering lower
rates. Her payments with Beneficial kept creeping up and up, so she
switched the loan to Ameriquest. They consolidated her loans into
$45,000 with a rate of 8.99 percent. She asked them if they were a
reliable company to work with--one that wouldn't disappear on her. The
loan turned out to be a variable-rate loan that has gone up from 8.9
percent to 12 percent. Before her first payment was due they had
already sold the loan to Aurora! She couldn't find where to send her
payment in to, and nobody returned her calls.
Three months later Aurora offered her a refinance package at a flat
rate of 9.5 percent, with a service charge of $100. She thought that
was great, seeing as most of the service charges she had paid have been
much more than that. She has paid over $10,000 in service fees over the
last 9 years, all on an original debt of $7,100.
Oakland
Martha Thornton Rideout had a loan seven years ago with Beneficial
but they didn't tell about the balloon payment that would come due
after 5 years. In the 4th year, they gave her a one-year notice of the
balloon payment which she could not afford. There was also a $5,000
prepayment penalty. She was paying her monthly payments but none of it
was going to the principal amount of her loan.
Appendix B.--Distribution of Loans Made by Subprime Lenders in
Baltimore and Prince George's County Taken From ACORN's Study
``Stripping the Wealth''
BALTIMORE'S LEADING SUBPRIME LENDERS
We identified the ten subprime lenders who originated the largest
number of loans for conventional home purchase, refinancing, and home
improvement in the Baltimore Metropolitan Statistical Area (MSA) in
1998. Amresco; Pacific Shore Funding; FHB Funding; Mortgage Lenders
Network USA; Commercial Credit; The Money Store; Equicredit; Banc One
Financial Services; ContiMortgage and Fidelity Mortgage Decisions.
ALL LOANS
These ten subprime lenders originated 4,277 conventional home
purchase, refinance, and home improvement loans in the Baltimore MSA in
1998. Our analysis of these loans found that they were
disproportionately made to African-American and low-income borrowers
and in minority and low and moderate income neighborhoods.
--African-Americans received a 2.4 times greater percentage of loans
made by the top subprime lenders than loans made by all other
lenders.
--Low-income borrowers received a 3.6 times greater percentage of
loans made by the top subprime lenders than loans made by all
other lenders.
--Moderate-income borrowers received a 2.1 times greater percentage
of loans made by the top subprime lenders than loans made by
all other lenders.
--Low-income neighborhoods received a 6.9 times greater percentage of
loans made by the top subprime lenders than loans made by all
other lenders.
--Moderate-income neighborhoods received a 3.7 times greater
percentage of loans made by the top subprime lenders than loans
made by all other lenders.
--Neighborhoods in which minority residents make up between 50
percent and 79 percent of the population received a 3.1 times
greater percentage of loans made by the top subprime lenders
than they did of loans made by all other lenders.
--Neighborhoods in which minority residents make up between 80
percent and 100 percent of the population received a 6.1 times
greater percentage of loans made by the top subprime lenders
than they did of loans made by all other lenders.
------------------------------------------------------------------------
Subprime
All Other Leading
Lenders Lenders
------------------------------------------------------------------------
Percentage of Conventional Purchase,
Refinance, and Home Improvement Loans to:
African-Americans......................... 10.7 26.1
Low-Income Borrowers...................... 6.3 22.8
Moderate-Income Borrowers................. 13.8 29.0
Low-Income Census Tracts.................. 1.6 10.8
Moderate-Income Census Tracts............. 8.0 29.5
Census Tracts in which Minorities make up 3.3 10.3
50-79 percent of Population..............
Census Tracts in which Minorities make up 4.2 25.8
80-100 percent of Population.............
------------------------------------------------------------------------
While the 4,277 loans made by these ten subprime lenders represent
only 4 percent of all conventional purchase, refinance, and home
improvement loans made in the Baltimore metropolitan area, they
constituted a much larger portion of the overall lending to African-
Americans and minority neighborhoods.
--The top subprime lenders made 20 percent of all the loans made by
Baltimore lenders in census tracts with a minority population
between 80 percent and 100 percent.
--The top subprime lenders made at least 9 percent of all the loans
made by Baltimore lenders to African-Americans.
--The top subprime lenders made 22 percent of all the loans made by
Baltimore lenders in low-income neighborhoods.
HOME IMPROVEMENT AND REFINANCE LOANS
The ten subprime lenders in this study originated 3,809 home
improvement and refinance loans in the Baltimore MSA in 1998. The top
subprime lenders originated home improvement and refinance loans
disproportionately to African-American and low income borrowers and in
minority and low-income neighborhoods.
--African-Americans received a 2.2 times greater percentage of loans
made by the top subprime lenders than they did of loans made by
all other lenders.
--Low-income borrowers received a 3.9 times greater percentage of
loans made by the top subprime lenders than they did of loans
made by all other lenders.
--Low-income neighborhoods received a 7.2 times greater percentage of
loans made by the top subprime lenders than they did of loans
made by all other lenders.
--Moderate-income neighborhoods received a 3.5 times greater
percentage of loans made by the top subprime lenders than they
did of loans made by all other lenders.
--Neighborhoods in which minority residents make up between 50
percent and 79 percent of the population received a 3 times
greater percentage of loans made by the top subprime lenders
than they did of loans made by all other lenders.
--Neighborhoods in which minority residents make up between 80
percent and 100 percent of the population received a 5.6 times
greater percentage of loans made by the top subprime lenders
than they did of loans made by all other lenders.
------------------------------------------------------------------------
Subprime
All Other Leading
Lenders Lenders
------------------------------------------------------------------------
Percentage of Refinance, and Home Improvement
Loans to:
African-Americans......................... 11.3 25.4
Low-Income Borrowers...................... 6.5 23.2
Moderate-Income Borrowers................. 13.3 30.0
Low-Income Census Tracts.................. 1.3 9.4
Moderate-Income Census Tracts............. 8.1 28.2
Census Tracts in which Minorities make up 3.6 10.4
50-79 percent of Population..............
Census Tracts in which Minorities make up 4.3 24.3
80-100 percent of Population.............
------------------------------------------------------------------------
While the 3,809 loans made by these ten subprime lenders represent
only 4.7 percent of all refinance and home improvement loans made in
the Baltimore metropolitan area, they constituted a much larger portion
of the home improvement and refinance lending to African-Americans and
low income borrowers and in minority neighborhoods.
--The top subprime lenders made at least 22 percent of the home
improvement and refinance loans made by Baltimore lenders in
census tracts in which minority residents make up between 80
percent and 100 percent of the population.
--The top subprime lenders made at least 10 percent of the home
improvement and refinance loans made by Baltimore lenders to
African-Americans.
--The top subprime lenders made at least 26 percent of the home
improvement and refinance loans made by Baltimore lenders to
low-income neighborhoods and 15 percent of the home improvement
and refinance loans made in moderate-income neighborhoods.
CONVENTIONAL PURCHASE MORTGAGES
The top ten subprime lenders in this study originated 337
conventional home purchase mortgages in the Baltimore MSA in 1998.
These subprime lenders made their conventional purchase loans
disproportionately to African-American and low-income borrowers and in
minority and low-income neighborhoods.
--African-Americans received a 4 times greater percentage of
conventional loans made by the top subprime lenders than they
did of conventional loans made by all other lenders.
--Low-income borrowers received a 3.5 times greater percentage of
conventional loans made by the top subprime lenders than they
did of conventional loans made by all other lenders.
--Low-income neighborhoods received a 11.6 times greater percentage
of conventional loans made by the top subprime lenders than
they did of conventional loans made by all other lenders.
--Moderate-income neighborhoods received a 6 times greater percentage
of conventional loans made by the top subprime lenders than
they did of conventional loans made by all other lenders.
--Neighborhoods in which minority residents make up between 50
percent and 79 percent of the population received a 4.6 times
greater percentage of the conventional loans made by the top
subprime lenders than they did of conventional loans made by
all other lenders.
--Neighborhoods in which minority residents make up between 80
percent and 100 percent of the population received a 11.5 times
greater percentage of conventional loans made by the top
subprime lenders than they did of conventional loans made by
all other lenders.
------------------------------------------------------------------------
Subprime
All Other Leading
Lenders Lenders
------------------------------------------------------------------------
Percentage of Conventional Home Purchase Loans
to:
African-Americans......................... 8.7 37.1
Low-Income Borrowers...................... 5.8 20.2
Moderate-Income Borrowers................. 15.3 20.2
Low-Income Census Tracts.................. 2.5 28.5
Moderate-Income Census Tracts............. 7.9 47.8
Census Tracts in which Minorities make up 2.3 10.7
50-79 percent of Population..............
Census Tracts in which Minorities make up 3.9 44.8
80-100 percent of Population.............
------------------------------------------------------------------------
While the 337 loans made by these ten subprime lenders represent
only 1.3 percent of conventional home purchase mortgages made in the
Baltimore metropolitan area, they constituted a much larger portion of
the lending to African-Americans and in minority neighborhoods.
--The top subprime lenders made 13 percent of all the conventional
purchase loans made by Baltimore lenders in census tracts in
which minorities make up between 80 percent and 100 percent of
the population.
--The top subprime lenders made at least 5 percent of all the
conventional purchase loans made by Baltimore lenders to
African-Americans.
--The top subprime lenders made at least 13 percent of all
conventional purchase loans made by Baltimore lenders in low-
income census tracts.
SUBPRIME LOANS IN PRINCE GEORGE'S COUNTY
Our findings show that subprime lenders make a disproportionate
number of loans to lower-income and minority borrowers in Prince
George's County. We identified the ten subprime lenders who originated
the largest number of refinance loans in Prince George's County in
1998. These lenders originated 31 percent of all loans made by subprime
lenders in the county in 1998 and over 36 percent of the refinance
loans originated by subprime lenders. 1st Government Mortgage &
Investors Corp.; FHB Funding Corp.; Option One Mortgage Corp.; AMRESCO
Residential Mortgage Corp.; Advanta National Bank; Ameriquest Mortgage
Co.; Pacific Shore Funding; Fidelity Mortgage Decisions; Mortgage
Lenders Network USA; Champion Mortgage Co.
REFINANCE LOANS
The ten subprime lenders in this study originated 687 refinance
loans in Prince George's County in 1998. These top subprime lenders
originated refinance loans disproportionately to African-American and
low income borrowers.
--African-Americans received a 1.4 times greater percentage of loans
made by the top subprime lenders than they did of loans made by
prime lenders.
--Low-income borrowers received a 3 times greater percentage of loans
made by the top subprime lenders than they did of loans made by
prime lenders.
--Moderate-income borrowers received a 2.9 times greater percentage
of loans made by the top subprime lenders than they did of
loans made by prime lenders.
------------------------------------------------------------------------
Subprime
Prime Lenders Leading
Lenders
------------------------------------------------------------------------
Percentage of Refinance Loans to:
African-Americans................... 57.9 78.0
Low-Income Borrowers................ 8.9 26.8
Moderate-Income Borrowers........... 11.9 34.8
------------------------------------------------------------------------
While the 687 loans made by these ten subprime lenders represent
only 4.1 percent of all refinance loans made in Prince George's County,
they constituted a much larger portion of the refinance lending to low-
income and moderate-income borrowers.
--The top subprime lenders made 9.5 percent of the refinance loans
made by Prince George's County lenders to low-income borrowers.
--The top subprime lenders made 7.6 percent of the refinance loans
made by the county's lenders to moderate income borrowers.
Senator Mikulski. Would you have a seat, please, and
identify yourself ?
STATEMENT OF MATILDA WONSON, MEMBER, ACORN
Ms. Wonson. My name is Matilda Wonson. I am a member of
ACORN. And I went to purchase my home back in September of
1998. I saw a number in a window and I called it, at 127 North
Belfield Street, in Baltimore, Maryland. I called and I met up
with an agent from Century 21, a real estate agent. And he
helped me with the purchase of my home. And I went to buy my
home. He helped me look at some houses. And I wondered, how
come I cannot have that house over there? Certain houses I
wanted he told me were not in my price range.
The house he was going to sell me was for $44,000. And so I
looked at those houses and I thought I picked the best one
because it appeared everything looked good. And as we went
along a couple of times, I was reading the paperwork that he
gave to me, and the paperwork said something about house
inspections. So I said to him about the house inspection, I
said, oh, look, I have got to save up more money because he was
telling me to save up money to give to him, and I said, oh,
look, I have to save up another money order for an inspection.
And he said, oh, no, save your money. He said, you have all
those kids, you need to save your money. And I said, but do not
I need an inspection? And he said, do you think that the
lenders would lend you that amount of money to purchase a home
if it was not worth it. And me reasoning in my mind, would the
bank lend me this kind of money, 54--because they end up upping
the price of my house to 54? The house, I found out, was
originally only $14,000. And I reason in my mind, thinking, why
would the bank give me this kind of loan for a house if it was
not worth it? Because he told me that they do an inspection,
too.
So I blame the lenders and I also blame the appraisers.
Because how can you drop by a house and just say, oh, that is
worth it? And even if you suspend their license, they still can
practice it. And I do not think that is fair either. Because
they are hurting a lot of people. They are not building the
communities up; they are tearing it down. They are ripping
people of their self-respect and their dignity.
My kids got caught up in this because I had a neighbor, her
child used to come play with my children. I am the mother of
seven kids, and she saw my house was in need of a lot of
repairs. We had a big argument one day. She has a friend named
Kelly Steinhorn that got involved in it, and they are friends.
So me and her had this big thing. She wrote up a report that
she came to my house because an argument was there, which was
not true.
And so that is how DSS comes into the picture, and also
wrote up that the plumbing is backed up and the house does not
have a furnace. Because she was looking around in my house. And
that she saw the ceiling how it was leaking and falling apart.
She was like, this house is a mess. The kids cannot stay here.
I was like, well, Miss, please do not do this, I said, because
I am a good mother. I just made a choice to buy a house that
was not the right house. I made a wrong choice.
And I feel like the real estate agent, they are supposed to
help you in purchasing a home. I feel like he took advantage
because he had more knowledge than what I had. And so that left
me with all these bills and stuff that I am backed up in my
bills, where I try to get some things done myself, but my
furnace was not working, my kitchen sink was backed up, the
ceiling was leaking. Every time you use the tub, the water
comes down through the ceiling. Or you flush the toilet, the
water would come down through the ceiling.
My front door is splitting down the front. I cannot even
close it because it is splitting it so bad. And I called
George, who is the owner of Century 21, 4 months. He says 6
months, but I say 4 months, after I went to settlement, on
December 21st. I said, this door is splitting down the middle.
He said, well, we will help you until you can get the money to
fix it. So they shot like four screws down the door and that
was it.
The back door, I took it off at the basement. I went to
open it because I was going to throw away an old mattress, the
whole door comes off the hinge. Which I could not put it back
on there because it was not a door that goes to the basement
door, it was a door that would go to a bedroom door. The door
had warped. And he never came back to do anything about that.
The only thing I could do was put plywood up there. And the
plywood was not good enough, because rats--I did not know they
could squeeze through the cracks. So we have rats coming in our
home.
So I explained all these problems to him. The only thing
they did was shot the screws down the door. They never came
back about the ceiling. He told me to call my insurance, the
insurance that I took out on the home. He told me I could call
them. But the real estate agent, he picked out my lender. He
picked out my insurance. He picked out everything. He assured
me, do not worry about anything. He befriended me. And I
thought he was my friend. But he really took advantage because
he had more knowledge.
And all of this stuff that is happening is coming from
where people do not respect one another, they do not love one
another, they do not care about one another. Because if you
have love, ``love'' is an action word, you will not do anything
to anybody. Now I have to go to court. I went Friday for my
kids. And they postponed it until I could see if I could get
more stuff done to the house. I asked for a postponement
because my kids are with their maternal uncle until we can get
something done on the house.
But it just does a lot. They are saying this is to help
people, because we went to a meeting at Sky Court, and they are
saying they are helping the community, when they are really
taking from the community. They are not giving us anything. And
what we do have, they are taking it.
I was a mother who was on welfare. I came a long way. I got
on my feet. I went through the programs they set up. I got me a
job. I did everything that I had to do. And then I said, well,
I made it here, I am going to purchase me a home. That was my
American dream that they took away from me. We cannot even stay
there. They took it away and they made it like, oh, okay, I am
going to sell you this house, whatever, whatever. Even when we
went before the lender, I said, why are you raising the price
of the house? He told me it was because, Matilda, you are going
to want new carpeting and then you are going to want a washer
and dryer in there.
I never got the new carpet. The washer and dryer, there was
one in there that was in there from before, an old one. And the
carpet that was on the floor when I went in there, it had so
much fleas in it I had no other choice but to take it out.
Senator Mikulski. So it has been one thing after another.
Ms. Wonson. It is like a lot of repairs I have had to do on
my home. And then I asked them to face me at the meeting,
because they were trying to tell ACORN that I tore the house
up. How can I tear down a furnace that was supposed to be new?
How can I split my front door down the middle? All this stuff
was supposed to be done when you purchase a home. There is no
one to protect us. Because we are the less fortunate or because
we have less, it does not mean we should live less.
Senator Mikulski. That is right. Well, Ms. Wonson, we are
here to try to protect you. And also this is a very gripping
story. I am going to suggest that after our hearing, perhaps
ACORN and Ken and Vinnie, we could talk with Ms. Wonson,
because she is obviously in a situation not of her making,
facing a protective service situation where she is not the
problem. And let us see if we cannot help her with this
immediate situation. We will come back and ask some more
questions, but we thank you for your testimony.
Now, Mr. Quayle, do you want to come up. And you all do not
have to leave. Let us give Mr. Quayle a chair next to Ms.
Adams. And you stay right there. And, Ms. Washington, you stay
right there. That way we can all have a good Q&A when this is
over.
STATEMENT OF VINNIE QUAYLE, DIRECTOR, ST. AMBROSE
HOUSING AID CENTER
Mr. Quayle. My name is Vincent Quayle. I direct the St.
Ambrose Housing Aid Center here in Baltimore. I have been there
for 32 years now.
I would like to preface this, Senator Sarbanes, by saying I
am a great fan of FHA. Northwood was saved because of FHA. FHA
did wonderful things and has throughout its history. It saved
working-class and middle-class neighborhoods throughout this
country, so I am a great fan of FHA. And I would not want to
hurt FHA. I know we talked about that, and there is a concern
there.
St. Ambrose got into this through our default mortgage
department. Each year, we see about 1,000 families who are
facing foreclosure. We have been doing this for 25 years. And 4
years ago, Frank Fisher, who run the department, came to me and
said, Vinnie, there is something different going on out there
in the communities. People used to lose their homes because
they lost their jobs, they were sick or their marriage broke
up. He said, today, we are getting families who are losing
their homes because they could never afford the house in the
first place. They were in over their head from day one.
So we began to look deeper into the issue. And I just want
to make a few points. Baltimore has the highest per capita FHA
foreclosure rate in the country. In numbers, we are three. Los
Angeles has the highest numbers of FHA foreclosures. And
Chicago last year had 1,200. We had 1,100. So we had 100 fewer
foreclosures last year than the City of Chicago, with its size.
The problem arose because of two changes in FHA policy. One
was, back in the mid- and late eighties, when FHA began
allowing the lenders to underwrite and endorse their own loans.
And I sold under the old FHA. I started out as a real estate
agent. And the industry hated FHA. The lenders hated FHA
because it took 60 to 90 days to get a loan approved. The real
estate brokers hated FHA because FHA would send strict
appraisers out, who would often reduce the sale of a house. And
the sellers hated FHA because FHA made the sellers fix up the
houses before they sold them. They made them put in new
systems.
The current problem then arose when the lenders--now, more
serious than that, in the late eighties, when the lenders took
over the endorsement, FHA still maintained some control,
because they assigned appraisers from a list of approved
appraisers. That changed 4 years ago. FHA allowed the lenders
to choose their own appraisers. And this is when--it is really
the last 4 years that have been a terrible problem here in
Baltimore with FHA.
So what happened, two things happened. FHA abdicated its
oversight responsibility. That is my first point. The second
is, and it has been a problem ever since the beginning, FHA
sells its houses as is. The VA does not. The VA fixes them up.
FHA sells them as is. And that is what leads to destruction of
these neighborhoods.
Senator Mikulski, you know this very well. This is the
Shrine of the Little Flower right here on Belair Road. This is
a tiny, little neighborhood behind it, a tiny, little
neighborhood. It is four blocks by five blocks. But they are
tiny streets. They are short. During the last 4 years that I
have been talking about, FHA insured 193 houses in that
neighborhood. There are 926 houses in the neighborhood. FHA
insured 193. During this same period, 69 FHA homes went into
foreclosure--69 out of 193.
Of course, this is the frightening figure across the city.
In 1991, there were 1,900 petitions to foreclose in the whole
of Baltimore. The petition to foreclose, that is the first step
in the foreclosure process. The family is behind 5 or 6 months,
the attorney for the lender files the petition. Last year,
there were over 5,000 petitions to foreclosure in our city.
There were only 10,000 real estate sales in Baltimore last
year.
Senator Mikulski. That is citywide?
Mr. Quayle. Citywide. So for every two real estate sales, a
house is going into foreclosure. Is that not extraordinary?
And this year, the first 2 months, we are up to 6,000 a
year now. If this continues, we are going to have 6,000 this
year. Something is going on. This is crazy. This is crazy.
So, if you asked me what to do, I have three
recommendations. One is we have got to get some oversight back
at the origination level of the loan. We do not have to go back
to the old system. With technology, there has got to be a way
where we can exercise some accountability up front, before the
loan is made.
The second recommendation is that FHA, given the fact that
we have the highest number, that FHA repair each of its
foreclosed houses before it is resold. Senator Mikulski, I went
out last Wednesday. I looked at 10 houses in the Shrine of the
Little Flower there in that little neighborhood. There were all
in lousy shape, lousy shape. I do not know how they were even
approved when FHA first approved them.
But just to give you an example, those pictures I gave you,
you know our row houses, how between the living room and the
dining room you have these lovely columns and pillars in many
of them. There were four houses with columns and they have all
been removed. Now, one wonders what is going on. Who is going
to buy a house where the decorative features have been removed?
So those homes are going to go to investors and they are going
to become part of the flipping process.
The third recommendation is I really think we should have
moratorium on FHA foreclosures of occupied houses. And let us
go and see if fraud was involved in that case. And if it was,
FHA should deny insurance to the lender. It would save tons of
money.
Right now, back in the fall, in Maryland, FHA was sitting
on 4,200 houses, which represented a loss of $105 million. They
lose $25,000 per house. That is what FHA loses. The two most
recent scams, Ms. Simon mentioned one of them.
Senator Mikulski. They lose $25,000 per house?
Mr. Quayle. Per house.
Senator Mikulski. Can you estimate how many of these houses
are in the HUD inventory in Baltimore?
Mr. Quayle. Well, you know HUD is having trouble. They had
to fire their manager of the houses. Three months ago, Senator
Sarbanes, when you had your hearing, there were 4,200. And
Shirley Bryant, in the HUD office in Philadelphia, tells me
that, since March, she has been getting 500 houses more a
month, since March of 1999, which is a year ago. So she has
gotten another 6,000 houses in the past year.
Senator Mikulski. Mr. Quayle, 6,000 times 25,000 is? I will
not ask the banking committee.
Prepared Statement
Mr. Quayle. I am going to close by saying, in our default
mortgage counseling program, we catch things early. We catch
things early. Ms. Simon mentioned she is on an adjustable rate
mortgage that was going to go from 10 to 17. This is the latest
scam, using FHA loans. They are taking all these single moms
who work at Johns Hopkins Hospital and earn $18,000 to $22,000
a year or they work in nursing homes. They are putting them on
adjustable rate mortgages. And we know these folks' incomes are
not going to go up, but the mortgage rates, we know what is
happening to them. We are going to have tens of thousands more
foreclosures because of it.
Thank you.
[The statement follows:]
Prepared Statement of Vincent Quayle
BACKGROUND
My name is Vincent Quayle and for the past 32 years I have directed
the St. Ambrose Housing Aid Center in Baltimore which operates housing
support programs to help predominantly minority families secure and
maintain homeownership in Baltimore City.
Throughout these years we have worked with over 60,000 families who
were trying to become homeowners or trying to save their homes from
foreclosure. Most of those who did purchase homes and most facing
foreclosure did so using the FHA insurance programs.
I consider myself a great friend and supporter of HUD and of HUD's
FHA programs. From its inception St. Ambrose has received financial
support from HUD for virtually all the housing programs we offer. I
began my career in housing as a real estate agent in 1968 specializing
in the FHA 221-d-2 program which literally saved homeownership in
Northwood, Waverly, Edmondson Village, and dozens of other middle class
and working class neighborhoods in Baltimore and other communities like
Baltimore throughout the nation.
Until the mid-1980s FHA was a staunch defender of the buyer in the
real estate transaction, as well as a staunch defender of itself. Real
estate agents, lenders and sellers hated FHA. They hated the time it
took to bring loans to settlement; they hated the strict appraisals
which often reduced the contract price; and they hated the repairs that
FHA demanded to the major structural systems of the house so the buyer
would not soon be burdened with major repairs.
From the buyers and the neighborhoods' point of view FHA was a
Godsend.
THE PROBLEM: FHA ABDICATES ITS OVERSIGHT RESPONSIBILITY
Baltimore has the highest number of foreclosures per capita in the
nation. In 1993, Senator Mikulski, at our urging, you expressed your
concerns to HUD about the growing FHA foreclosure problem in Baltimore.
(cf. enclosed letter.) Now we are confronted with an epidemic.
In the mid-1980s one of two major changes occurred which altered
FHA's relationship to the buyer and the neighborhoods. Faced with
massive staff layoffs FHA began allowing lenders to endorse or
underwrite their FHA loans. Prior to this FHA reviewed each loan to
assure that all the rules had been followed. At first FHA was vigilant
in looking over the lenders' shoulders but gradually removed even this
oversight. Of course, FHA maintained some control over the loans by
assigning appraisers from its own list of approved and experienced
appraisers.
In 1994 the second major change occurred which we believe removed
FHA's oversight of its own program at the loan origination stage. FHA
now allowed the lenders to choose their own appraisers.
At this point the bad guys descended in droves. The number of FHA
lenders in Baltimore City grew from 58 in 1994 to 107 in 1998 and the
number of FHA loans grew from 2,153 to 3,821. During this same period
the subprime lenders entered the Baltimore market and ``flipping''
became rampant. In 1999 over 2,000 of Baltimore's 10,000 real estate
sales were ``flips''. While there is nothing inherently wrong with a
``flip'', the opportunity for flipping on a large scale would not be
possible in Baltimore, if FHA treated it growing inventory of
foreclosed houses properly. ``Flips'' often begin with FHA
foreclosures.
I would like to make two points. My first point is that since 1994
FHA has been insuring thousands of bad loans in Maryland and
particularly in Baltimore. FHA's abdication of responsibility at the
origination stage of the loans has resulted in tremendous damage to the
wonderful neighborhoods that are the hallmark and pride of this City.
Prior to 1994 families coming to St. Ambrose facing foreclosure
came for three reasons: a loss of a job, illness or a marriage breakup.
Times have changed. Since the door was opened to Direct Endorsers,
folks come to us with mortgage problems that began with the very
origination of the loan. FHA regulations have been circumvented and
ignored. Briefly these regulations require that Buyers live in the
house, have a good history of employment, an acceptable credit history,
a modicum of savings and an income that is sufficient to carry out the
monthly payment. We constantly see in our office flagrant examples of
total disregard for each of these regulations. Cosigners are placed on
the loan in order to qualify the Buyer for the payment and get the loan
approved. Yet the cosigners have no intention of living in the house
nor contributing to the household. When FHA regulations are flaunted,
foreclosures result and neighborhoods deteriorate.
Below are FHA foreclosure statistics from 1996 through 1999 for a
small 4 by 5 block area surrounding the Shrine of the Little Flower
Church in Northeast Baltimore, a typical beautifully manicured working
class neighborhood of 926 row homes that had never seen a boarded up
house until these recent FHA loans fell into foreclosure.
------------------------------------------------------------------------
Number of FHA
Years Number of FHA loans in
loans foreclosure
------------------------------------------------------------------------
1996 thru 1999.......................... 193 69 (36%)
------------------------------------------------------------------------
In four years and three months 28 percent of these loans have
already filed for foreclosure. This is incredible!
As we look at what we are calling ``bad loans'' we see:
--loans that violated longstanding FHA rules and guidelines;
--loans with blatantly false appraisals that inflate the values of
the houses;
--loans with excessive Loan value ratios;
--loans where the borrowers are putting up no money,
--loans with false gift letters;
--loans with false income statements;
--loans where sellers, through questionable nonprofits, are putting
12 percent cash into the deals and asking outrageous prices;
The old FHA protected the buyer, the neighborhoods and itself. The
New FHA has abdicated its responsibility in overseeing the origination
of its loans at great cost to the buyers, the neighborhoods and the
taxpayer.
My second point is that FHA is destroying perfectly sound
neighborhoods through its policy of selling its failures ``as is''.
FHA's refusal to repair its failures to make them attractive to new
homeowners is the single overriding reason why neighborhood like Little
Flower begin the downward spiral. The VA and private lenders with
conventional loans fix up their failures and resell the houses to
homeowners.
Before 1994 the normal FHA portfolio of foreclosed houses in
Maryland contained about 1,800 houses at any given time. By late 1999
FHA's Maryland portfolio had grown to 4,200 houses. Since March 1999,
500 houses per month have been added to this portfolio. Since FHA had
to fire Intown Management, the company handling FHA's portfolio in
Maryland, in 1999, this portfolio is probably approaching or exceeding
6,000 houses. One can imagine the effect of these eyesores on the
surrounding communities.
In early 1999 FHA admitted to losing $25,000 on each foreclosure.
(We believe today's losses greatly exceed this amount per house.) At
Senator Sarbanes' previous hearing on January 18, 2000 with 4,200
houses in its portfolio FHA faced a loss on its Maryland portfolio of
$105,000,000.
In a press release March 8, 2000, FHA congratulated itself on
returning from its insurance fund to the federal treasury in 1999 $1.5
billion ($1,500,000,000). In other words, because of its policy of not
fixing up its failures, many neighborhoods in Baltimore and elsewhere
are collapsing because of FHA's ``policy'' of selling its failures ``as
is'', while FHA turns back to the Treasury $1.5 billion a year in
profits.
FHA, which used to protect buyers and neighborhoods, is now at the
beck and call of the mortgage bankers. The same ``subprime'' lenders
responsible for the flipping phenomenon in Baltimore have moved into
the FHA market because they know there is no oversight over FHA loans
and lenders.
RECOMMENDATIONS
Since Baltimore has the highest number of foreclosures per capita
in the nation we recommend that FHA institute a demonstration project
in Baltimore with three objectives:
1. to review every FHA loan application prior to settlement;
2. to repair each foreclosed house and resell it to a homeowner;
and
3 to declare a moratorium on occupied FHA foreclosures to see if
fraud was involved in originating these loans. Where fraud is found,
FHA should deny the lender's claim on its insurance fund.
To pay for the demonstration project FHA can draw upon a small
portion of the $1.5 billion ($1,500,000,000) it returned to the U.S.
Treasury in 1999.
St. Ambrose will be happy to assist FHA in this effort.
Senator Mikulski. Thank you very much for your testimony.
We did the math on what you just said, the 6,000 houses.
Mr. Quayle. That is plus 48. So we are talking about
10,800.
Senator Mikulski. Let us just take 6,000 for a minute,
times $25,000. It comes out to $150 million. That is $150
million the Federal Government has lost. And when we think
about the number of zip codes in Baltimore, if we could say
what would be a Federal investment of $150 million, this is far
more than even almost its own community development block
grant. So we are going to come back to your question. And we
thank you for that.
We also want to note that, in addition to this excellent
testimony, Ed Rutkowski sends a letter to you, Ken. Mr.
Rutkowski, this is a letter from the Patterson Park Community
Development Corporation, outlining what you see in Patterson
Park. May I submit this for the record, please.
Mr. Rutkowski: Sure.
[The information follows:]
Patterson Park Community Development Corporation,
February 6, 2000.
Ken Strong: Ken, here are my comments on FHA insurance. The central
point of my argument is that there are essentially two FHA programs:
one is successful and is used in successful neighborhoods, e.g. new
suburban developments or gentrifying urban neighborhoods like Canton;
the second is used in declining urban neighborhoods like Patterson Park
and Belair-Edison. Further, FHA administrators use national statistics
to claim success for the FHA program overall. By doing that, they mask
the dramatic negative effects of the ``second'' FHA program.
Before discussing the effects, let me discuss some of the
characteristics of these neighborhoods:
--They have weakening, and in some cases collapsing real estate
markets.
--As a result, property values are actually declining.
--Reliable appraisals are hard to come by for two reasons: there are
wide variations in property values within short distances; and
in old neighborhoods like those in Baltimore City, there are
dramatic differences in house condition.
--The people who live is these neighborhoods are among the poorest
and least educated in the metropolitan area.
Among the negative effects created by these conditions and FHA
insurance are:
--As we have seen in Baltimore, because FHA is not locally
administered, it is relatively easy for scam artists to take
advantage of the poor and uneducated. FHA insurance becomes the
vehicle of choice for selling real estate agents because buyers
do not qualify for conventional loans. The problem was
compounded when FHA allowed lenders to choose an in-house
appraiser.
--In failing neighborhoods, rather than helping the poor create
equity through homeownership, rather the program traps the poor
in failing neighborhoods. Equity actually declines as property
values declines. Settlement expense loans even start the buyer
off with negative equity from the moment of purchase.
--The choices for a homeowner in a failing neighborhood are
difficult. If they decide they have to move, their choices are:
--Default on their mortgage, ruining their credit.
--Rent the house, eventually renting to a difficult, often drug-
addicted tenant; the frequent result is a damaged house which
they cannot afford to repair, and so they default anyway. By
then, the problem tenant has had a tremendous negative effect
on the neighborhood.
--Lenders, especially for loans originated by mortgage brokers, have
no incentive to prevent foreclosures by working with the buyer,
nor do they have any incentive to work out any kind of pre-
foreclosure agreement with a buyer. In the ``successful'' FHA
program, workouts are increasing, again masking the lack of
work-outs in the ``unsuccessful'' program.
--As noted above, the resulting HUD houses are invariably in very bad
condition, often having to be boarded. These are eyesores at
best, and remain so for a very long time because of the lack of
a real estate market.
--In these neighborhoods, there is little if any homeowner market.
HUD houses usually sell to investors.
--When sold to non-profits, like the Patterson Park CDC, HUD bases
its discount on the extent of necessary renovation--the greater
the necessary renovation, the greater the discount. However,
the amount of renovation needed is based on the minimum needed
to make the house habitable. That is not enough to attract a
homeowner. While the nonprofit waits for HUD to reduce the
price to an economically viable level, the vacant house sits.
Let me know if you have any questions.
Regards,
Ed.
Senator Mikulski. I am going to submit this for the record.
I will go to my questions, first, to Ms. Adams and Ms.
Simon, and then I will turn to Senator Sarbanes.
Ms. Simon, when you were brought into this, what were you
actually told? First of all, did you go see this house?
Ms. Simon. Yes. But that was not the first house.
Senator Mikulski. Did you see the house you bought?
Ms. Simon. Yes.
Senator Mikulski. Did you do a walk-through for the house
you bought?
Ms. Simon. Yes.
Senator Mikulski. So you noted that it had problems?
Ms. Simon. Not with the roof or the plumbing. The house was
kind of like well-prepared, the carpet, the painting.
Senator Mikulski. So the cosmetics looked good; it was like
a lot of nice makeup but a lot of orthopedic problems?
Ms. Simon. Right.
Senator Mikulski. And then, when you went to buy your
house, presuming that it looked good and therefore you thought
it was good, and then you were discouraged from getting a home
inspection; is that right? Did you ask for a home inspection?
Ms. Simon. He said he would take care of all of that.
Senator Mikulski. Did you ever see a home inspection sheet?
For example, when I bought where I live, I had a home
inspection sheet that told me what the issues were. When you go
to sell a house and the buyers ask for it, the home inspection
tells you what you need to do before you sell. That is the
paperwork for home inspections. You never saw that?
Ms. Simon. No, ma'am.
Senator Mikulski. Which it should have looked at the roof
and the plumbing and so on. Now, did you see the settlement
document? In other words, did you see a sheet that said this is
what the house cost? I think, in your instance, it was $84,000.
How much did you buy your home for?
Ms. Simon. It was priced at $65,000.
Senator Mikulski. Did you see the price and the fact that
you had this balloon mortgage situation?
Ms. Simon. I did not see the paperwork until I signed
everything and got home and kind of looked over it. I went to
Genesis Mortgage, the title company, and signed those papers.
And then that is when I saw all of the information afterwards.
Senator Mikulski. Now, Ms. Simon, by asking you, I am
really asking the three, so bear with me while I take you
through this step. When you actually signed your papers,
sitting at Genesis, usually, when you are at settlement, you go
through and it is a tremendous amount of paperwork, but you go
through each sheet and it is explained. Did anyone go through
each sheet and explain this to you?
Ms. Simon. Yes, they did.
Senator Mikulski. But you did not realize what you were
signing with the balloon payment?
Ms. Simon. No, ma'am.
Senator Mikulski. So was the balloon payment explained to
you at settlement?
Ms. Simon. He did not explain it this way. He did not
explain it.
Senator Mikulski. So when you walked out, you thought that,
in 15 years, by paying this $600 a month, that in 15 years you
would own this home on Chesterfield Avenue, one of the really
nice blocks in Baltimore? I love Chesterfield Avenue. It is
right on the park, close to St. Francis of Assisi Church and
schools. And it is just a great block. But you thought you were
going to own that house in 15 years?
Ms. Simon. Yes, ma'am.
Senator Mikulski. For 600 and some dollars a month. So you
looked at the monthly payment and years to be paid off. You did
not know there was this balloon at the end?
Ms. Simon. I did not understand it.
Senator Mikulski. Now, Ms. Adams, we will be talking to you
more in the neighborhood, so I will come back.
Ms. Wonson, when you went to buy your house, did you see
the conditions of that house?
Ms. Wonson. It was covered up. I did not know the ceiling
was going to leak until we went to take a bath or flush the
toilet or something like that.
Senator Mikulski. Did you flush the toilet or do any of
that when you did your walk-through?
Ms. Wonson. No, I did not flush the toilet.
Senator Mikulski. Well, most people do not. I am not trying
to make you feel awkward. Most people do not. So when you
walked through, like with Ms. Simon, it looked good?
Ms. Wonson. Yes, it looked nice.
Senator Mikulski. So the appearance was deceptive?
Ms. Wonson. The only thing I asked him is, are you going to
paint this, because I do not like flat paint. But he never did.
Senator Mikulski. But that is another minor thing, whether
you like flat or glossy.
Ms. Wonson. But I am talking about that was the only thing
that I saw, that they had done a fresh paint job.
Senator Mikulski. What happened when you asked, or did you
ask for a home inspection?
Ms. Wonson. Yes. They told me, or he said, well, do you
think that they would lend you this kind of money if the house
was not worth it? Because he told me they do an inspection,
too, the same way I had to pay him $65 to check my credit, I
had to pay them $300, the lenders, to check my credit again.
And I said, well, why do I have to give them a $300 money order
to check my credit? And he said, because they do a thorough
check, too. And so he told me they even do an inspection on my
home also before they give the loan. He said, why would they
give you this loan if the house was not worth it?
Senator Mikulski. So you thought the bank had done the
inspection?
Ms. Wonson. Yes.
Senator Mikulski. Let us go forward to the settlement, then
I will come to Mr. Quayle and Mr. Strong. When you were at the
settlement, that is where you sit there and sign the papers
and, in some ways, you are signing up for the American dream,
but in this case you signed your future away. I mean that is
really what happened. I remember when I did my very first
mortgage, in a very friendly and honest environment, I was so
nervous about taking on this big responsibility. I even
misspelled my name, and I had been signing that name for 28
years when I signed it. So I know how it can be overwhelming
and so on.
Ms. Wonson. I was excited, plus I felt secure and assured
because I had my real estate agent with me.
Senator Mikulski. So you felt you had a protector and an
advocate?
Ms. Wonson. Yes, my agent.
Senator Mikulski. When you were there at the settlement,
did they take you through the cost of your house, the mortgage
that you were going to be paying? Did you truly know what you
were getting into?
Ms. Wonson. When they said I was going to be paying a
different amount, I asked my real estate agent. I said, I
thought you told me I was going to be paying $362 a month. And
he said to me, well, they rolled your insurance and your taxes
in. And so I said, okay.
Senator Mikulski. So nobody explained to you that you had
to do taxes and insurance?
Ms. Wonson. No. And also, some of that paperwork I was
going through, I would be reading it and ready to sign it, and
he would be like, I will explain that to you later, just sign
it, it is for your home. I will explain that to you later. They
were kind of like rushing the process because they had another
settlement right behind me. And my agent, Tom Padgett, and the
lawyer that was with them, who was Rob McFarland, they got into
a big disagreement, so much to the point that they removed
their self from the table. It was over money. They did not want
other people to hear.
And so the lawyer, he ended up sending me $1,500 to get
appliances. But then Century 21 made a mistake and sent me
$1,500. So I do not actually know what the agreement was.
Senator Mikulski. This sounds very complicated. I am going
to go to the policy issues, and then I am going to turn to
Senator Sarbanes and come back to a few policy questions
myself. But in my policy questions, I will be asking both Mr.
Strong and Mr. Quayle and ACORN about the issue about pre-
ownership counseling, so everybody knows how we either mandate
or it is a requirement and, at the same time, we do not want to
shackle the private sector. So I would like for you to think
about that. And we will really also try to get some tips and
insights from our members of the House of Delegates.
Senator Sarbanes.
Senator Sarbanes. Thank you very much.
I would like to get from Ken Strong and Vinnie Quayle and
Norma Washington their profile of the lenders. Ms. Wonson made
a very strong statement that she really was, in effect, very
much influenced by the assertion given to her that they are not
going to lend all of this money if this house is not okay,
right? That is what he told you, and that sounded plausible to
you, right?
Ms. Wonson. Yes, it sounded good to me.
Senator Sarbanes. Now, who is putting out this money and
lending this money at these inflated rates on the flipping and
lending it at, in effect, what seems to be subpar housing, even
if there is not a flipping problem involved? What is your
profile of the lenders?
I ask this question because I met with the Fannie Mae
people the other day, and I have also talked to Greenspan. We
need to figure out some way to dry up the availability of
credit to these lenders to lend for these purposes. Now, what
is your profile of the lenders?
Mr. Quayle. The first thing I would say is there are a lot
of lenders involved in this. And there are a lot on these
foreclosures. They are coming from our Baltimore banks. We did
not think we would see them coming from the Baltimore banks,
but our local lenders are involved in these foreclosures.
Senator Mikulski. So they are both national and local?
Mr. Quayle. Yes. And a lot of the real scams are not from
our banks or savings and loans. They are not at all. We have
never found a case of fraud involving one of our Baltimore
banks or savings and loans. But we have found foreclosures. The
predatory lenders who were involved in these flipping scams
have now gone into the FHA market because of this appraiser. I
think it is because of this appraiser. They can choose whatever
appraiser they want.
But the most startling thing that I heard recently is the
President of Advanced Federal Savings & Loan--I sat at a
committee hearing with him, and we were talking about this
stuff--he said to me, these things are so profitable that we
have pressure on us to get involved in the subprime lending.
That is the scary thing. I mean these are minority savings and
loans, and for the president to say we are not going to do it,
but it is very tempting, that is what I would say.
Senator Sarbanes. Well, let us separate the categories,
though, because there is a subprime lending market that, as far
as I can determine, is legitimate and makes an opportunity to
get credit and to make a home available to people who would not
have it. There is a subcategory of that market that is
predatory and is engaging in practices that ought not to take
place. And they need to be brought to a close. And then, even
worse, these are, in effect, what are criminal offenses through
this fraud we are talking about.
But I am trying to get a handle on who the lenders are in
each of these categories. Who are the lenders who are playing
this game that Ms. Simon and Ms. Adams came up against with the
heavy flipping? Do you know, Ken? You are doing the research
over in that part of town.
Mr. Strong. I do.
Ms. Adams. Conti Mortgage.
Mr. Strong. Conti Mortgage, the same company I referred to,
sending the letter out, looking for refinance opportunities. As
Mr. Quayle said, there are a great many lenders who are
involved in this. You mentioned, Senator Sarbanes, in your
opening, that--
Senator Mikulski. We need to know the categories. He is
talking about the categories. Are these local banks?
Ms. Washington. A lot of these mortgage companies are owned
by the bigger banks, but there are a lot of little mortgage
companies involved in this. IMC is in it. A couple of the real
estate people are in it. It is a lot of little companies.
Commercial Credit is in it. What is the other one? There are a
bunch of them.
They are little, bitty contingents that are in this. And a
lot of them are owned by the bigger banks, that is true. But it
is these little companies that are getting in this because they
are turning the loans over within 10 days. They do not even own
the loan anymore. They have already sold it. There are so many
people involved in this that it is ridiculous. It is really,
really ridiculous.
Mr. Strong. In addition to the national subprime lenders
that is one category, there are brokers who are selling the
loan packages to those lenders who have never seen the house,
who are only going by what is on the paper. Often that
information is fraudulent and trumped up. One of the practices
we learned about is called the yield/spread premium, where the
broker gets an additional fee for placing a loan at a higher
rate than the buyers are eligible to receive.
So that if Ms. Adams qualified for an 8 percent loan, but I
am the broker in this instance and I get her to take a 12
percent loan, when I market that package I get a bonus from the
subprime lender. That is an awful practice and just rewards
people for gouging consumers.
Credit Watch definitely needs to be enforced. Some of the
characters HUD has targeted in its Credit Watch program are the
same people involved in this. One of them has a 17 percent
default rate, their interest rates are so high. They are still
making money when they lose 17 percent of their loans to
default foreclosure. But that is unconscionable to displace
that many families and to have that many bad loans approved and
then backed by FHA.
Senator Sarbanes. And of course none of this focuses on the
people who are meeting their payments that are having it really
shorted out of them. We are talking to people here who really
come close to losing out altogether. But other people take on
these burdens and then they go through an incredible financial
squeeze in order to try to meet them. And of course these
people are reaping the benefits.
In fact, I gather you are saying they reap such benefits
that they can afford an extraordinarily high failure rate. Is
that correct?
Mr. Strong. That is correct.
Senator Sarbanes. Thank you very much.
Senator Mikulski. First of all, thank you. I want to go
kind of go through the chain. And I am just going to focus
really on the advocacy groups here. And in the interest of
time, if you would like to give it a little more thought and
get back to us, we would appreciate it.
First of all, do you think that in loans under $75,000, or
whatever limit, that there should be some type of recommended
or mandatory consumer home ownership counseling?
Mr. Strong. Yes.
Senator Mikulski. And, Ken, what would be your thoughts on
that?
Mr. Strong. Well, through the Coalition to End Predatory
Real Estate Practices, we have had a committee looking at this.
And one thing we recognized is that the quality of home
ownership counseling needs to be upgraded across the board, to
just have a counseling certificate in a very short visit near
the end, close to settlement, in order to qualify.
Senator Mikulski. So what is the recommendation?
Mr. Strong. It is to have higher standards of home
ownership counseling and to require it.
Senator Mikulski. You mean for the people doing it?
Mr. Strong. Yes. We need professional standards in home
ownership counseling. Some is very good and some is not. We
need a high standard of it and a requirement of it. Whenever
government money is involved in the transaction, there ought to
be that counseling.
Senator Mikulski. How about ACORN?
Ms. Washington. ACORN has a housing campaign, and we have
put over 600 people in houses at a market rate. But we have a
very intense counseling program, and we hold their hand from
the time they hit the door until settlement. We are right
there. We go over everything with them. They are not allowed to
sign something that we do not think it is safe for them to do.
Because a lot of the people are paying for mortgages and it is
more than half of their salary. And they are targeting low
income, and it is jamming them. And so we hold their hand from
day one.
Senator Mikulski. Do you think that ought to be mandatory?
Ms. Washington. Yes, ma'am, I sure do. It should be
mandatory across the board. These people, if you ask any one of
them--and you can talk to any of these people--in this pamphlet
right here, they will all tell you that they did not get
counseling, they got befriended and told, I am your friend, I
am not going to let anything happen to you. They never took
them through the steps they should have taken them through.
Because that would have been their loss, absolutely, across the
board.
Mr. Quayle. I have been saying for years that anyone who
gets a loan in excess of 100 percent of the sale price I think
should have counseling before they go out and purchase the
home. I think they should go and have their counseling, and
before they get emotionally attached to a house, get a
certificate that says this family has gone through this
process. Then they can go out with a Realtor.
Senator Mikulski. So rather than set a dollar amount, your
recommendation is 100 percent?
Mr. Quayle. I would tie it into the loan product, and it
would be for the loan, where the buyer--I think it is a
privilege that we, as a country, are giving folks an
opportunity to buy a house, who do not have a lot of money to
put into the deal. So if they are getting a 100 percent loan or
in excess of a 100 percent loan, which is most of our low-
income buyers today, I think they should be going through a
process. They are the vulnerable people. They are the
vulnerable.
Senator Mikulski. Now, let me ask the next question,
because we are trying to wrap it up here. Appraisers, do you
think that all appraisers, that anything for FHA, there should
be some type of mandatory appraiser certification or licensing?
Mr. Quayle. I think FHA should go back and have its list of
approved appraisers and have FHA assign the appraiser to each
deal. What has happened is, once the lenders could choose their
own appraisers, that is when the bad guys descended on the
market.
Senator Mikulski. And that is one of the most direct
punches?
Mr. Quayle. Absolutely. Senator Sarbanes, when the debt
appraisal law went into effect, Baltimore's FHA lenders
increased from 58 to 107. And I will give you the list of those
107. And the bad guys just descended on the market here in
Baltimore when that happened. The old thing worked with the
appraisers. But the problem is the appraiser has to bring it in
at the lender's price or else they do not get paid. Whereas in
the old way, FHA assigned the appraiser, so the appraiser got
paid.
Senator Mikulski. I think those are really excellent
recommendations to getting the prevention. Because one of the
things we are looking at is not only stopping, but also
preventing. Now, will you be on the tour?
Mr. Quayle. I will be on the tour.
Senator Mikulski. Because when we do the walking around up
in the North Robinson Street area, one of the things I am going
to ask you is what is HUD contributing to being a slum
landlord, the way they hold the property, the way they dispose
of the property, and so on? Because my VA, HUD subcommittee
will be holding a hearing on Thursday with Mr. Cuomo, and while
we are talking about the prevention and the gouging of ordinary
people trying to pursue the American dream, we want to look at
HUD, FHA and how they disposed of the properties and what are
they contributing.
It is like asset zones, where, for example, the nonprofit,
like Patterson Park or Northwest Baltimore Community
Development, they could literally buy these houses, renovate
them and put them back in the marketplace, like we saw last
fall when we did a walking around in the St. Elizabeth's area.
Well, thank you very much. And we really appreciate that.
We will be talking with you more when we are out on the street.
And we want to thank you for your testimony.
We again want to thank Ms. Wonson, Ms. Simon, and Ms. Adams
for coming forward. You really have made a national
contribution by telling this story. You are going to enable us
to help many, so we really want to thank you.
Now, I would like to hear from Senator Sarbanes, and I
would like to hear from our law enforcement community. We are
therefore going to ask Ms. Battaglia, our U.S. Attorney; Mr.
Mosquera, the Special Agent-in-Charge of the Baltimore FBI; and
Mr. Jim Rowan, the Inspector-in-Charge of the U.S. Postal
Service.
Ms. Battaglia, we welcome you and we invite you to proceed
to tell us, because what we have noted is that, number one, in
our conversations and in the newspaper, that there have been
several indictments, and that you have investigations underway.
Now, we acknowledge, the committee acknowledges, that a great
deal of your work now is in the Federal grand jury or is a
result of the Federal grand jury and you are unable to share
with us the information because of legal constraints. So if we
ask questions and we are going in directions inappropriate,
please tell us. But what we are really looking at is pattern
and practice and what we can do in terms of stopping the
criminal aspects.
STATEMENT OF LYNNE BATTAGLIA, U.S. ATTORNEY FOR
MARYLAND
Ms. Battaglia. Thank you, Senator Mikulski and Senator
Sarbanes. We are pleased to be here as representatives of the
law enforcement community in Baltimore and in the rest of the
State.
As you know, this problem is not only in the State, it is
across the Nation. And when we are talking about mortgage
flipping, we are talking about a specific type of fraud, when
an individual purchases a low-cost inner-city housing, and then
quickly sells that house, that day or within about 60 days,
which is what we have normally seen, at a substantial profit.
While that is not, per se, illegal, and it is certainly a part
of the American dream also that you have a profit, it does
signal that there is something going on that is less than
aboveboard.
And what we found is that the resale in the fraudulent area
is being accomplished through falsely inflated appraisals--you
asked about those--sham second mortgages, sham deposits, phony
gift letters and loan applications littered with false credit
and financial information. As you noted, the United States
Attorney's Office is deeply committed to prosecuting this type
of fraud, along with our partners in the FBI, as well as in the
Postal Inspection Service. And with the investigators from HUD,
we do that through looking at these materials in the grand jury
process, as Senator Mikulski noted. And as such, we cannot talk
about some of the aspects.
But I would bring to your attention that while we have been
talking about Baltimore City, where mortgage flipping is in
full bloom, we should also be talking about it in Prince
Georges County, where the issue is germinating and looks as
though it is also going to bloom. When we are talking about
mortgage flipping, we have been talking about the fact that
individuals buy these homes from people who are flipping the
houses. We should also be talking about the fact that investors
also buy these properties.
When I am talking about investors, I am talking about
people who buy these houses with the hope that they can make
money from renting them. These are legitimate investors. And
what they do is they go in and they buy the house at a lower
rate and hope that they will be able to rent the house to pay
the debt service.
Now, what happens is the individuals who buy the home, as
you have heard, find out about the home through ads in the
newspaper. And the individuals are lured into this by the
representation that they only have to pay $500 down. What
actually happens is the seller has bought the house for
approximately $10,000 to $15,000 and then makes cosmetic
repairs in the amount of $10,000. That would take it to $25,000
approximately. And thereafter, through false appraisals, phony
lending documents, gift letters and all of that, they induce
the lender to lend at a higher rate.
They may offer the house, as you have heard, at $45,000,
$55,000, $85,000. And one of the questions that you asked was,
do we have local lenders? What we have found in the fraud arena
is that the mortgage brokers get out-of-state lenders to lend
on the amount that the house is offered at. And the out-of-
state lenders rely on the appraisal. They do not come to
Baltimore to actually look at the houses. So they relied on the
false appraisals and the false documents, such as a phony
second mortgage and lend approximately 70 percent of the value.
So that, in the end, the lenders, who are out of State and
who are also the victims in this, have lent at 120 percent of
the value of the house. What happens is if the buyer of the
house, whether it is an investor or an individual, can meet the
payments, the company out of State is not out any money and no
one else is victimized except the individual who has bought the
house. And as Senator Sarbanes noted, they are paying a debt
service that is higher than they should be.
What happens, though, most of the people who buy these
houses, whether they are the investors or the individual
purchasers, they oftentimes find that with the increased amount
of money that they have to pay for insurance as well as taxes,
because oftentimes these amounts are based upon the purchase
price of the house, they cannot pay for these houses.
You have heard about the fact that many of the houses are
in disrepair. But, ultimately, there is a default because they
cannot pay the amount of money that they have to pay every
month for these houses. The loans go into default. The mortgage
company forecloses. And all of this is done because of the
reliance on forged contracts, fraudulent appraisals, phony rent
receipts, phony leases, fraudulent down payments that are
supplied by the seller but appear to be paid by the buyer,
false gift letters and false letters from settlement agents,
stating that they are holding a down payment when in fact they
are not.
The scheme is the same whether we are talking about
investors or individual people. And, ultimately, what happens,
not only in Baltimore but thousands of times across the
country--and we are talking about Newark, New Jersey;
Milwaukee, Wisconsin; in cities all across the country--it is
the same type of scheme. We are talking about a nationwide
problem that my colleagues not only in the FBI and the Postal
Inspection Service are seeing, but at the U.S. Attorney's
Office.
So we are asking, obviously, for your help because of the
fact that the more these loans go bad, the more of an effect
that we have in the same type of way that we had in the savings
and loan industry in the eighties. It is the same type of
scheme that we see. And we see the same type of impact that can
be had not only in terms of the banking industry but in terms
of the people who were victimized. What we saw in the savings
and loan industry was we saw vulnerable retired people and
people who could ill afford to have that happen there, we are
seeing the same type of thing here.
Again, the bottom line is that the sales, whether to
residents, purchasers, or to investors, appear to have caused
fairly stable rental neighborhoods to become destabilized
through the process of what amounts to temporary home
ownership. The destabilization manifests itself in the form of
boarded up and vacant housing, which, as you know, leads to a
crime epidemic in terms of drug dealing. And to make matters
worse, it carries with it the possibility of nationwide
economic disruption.
Prepared Statement
We need to take into consideration the fact that we not
only have stark human dilemmas that you have heard about, but
the potentially drastic national economic consequences. And
that is why we are here today to talk to you about it, and
hopefully we will be able to resolve this issue not only in
Baltimore and Prince Georges County, but throughout the Nation.
Thank you.
[The statement follows:]
Prepared Statement of Lynne A. Battaglia
Mr. Chairman and Senator Mikulski: Property flipping is the term
used to describe the situation in which an individual or entity
purchases a low cost inner city housing unit and then quickly--
sometimes the same day though almost always within sixty days--re-sells
that property at a substantial mark up, While there is nothing per se
unlawful about an immediate turn around at a substantial profit, it is
oftentimes a sound indicator that the re-sale is being accomplished
through falsely inflated appraisals, sham second mortgages, sham
deposits, phony gift letters, and loan applications littered with false
credit and financial information.
The United States Attorney's Office in the District of Maryland is
committed to prosecuting the perpetrators of these crimes and currently
has about 15 open cases. Most of them relate to property transactions
in Baltimore City, though some occurred in Prince George's County,
where we see the problem germinating. Of course, here in the city, the
problem has fully bloomed.
Much of our information has come through the grand jury process,
and as you may know, I am not permitted to disclose publicly grand jury
material. Accordingly, my comments today must, of necessity, be rather
general, With that in mind, let me move on.
The individuals who are purchasing houses are either individuals
who intend to live in the home or, what we refer to as ``investors.''
The investors appear to be primarily working people with some savings
who are enticed into buying blocks of houses--three to ten at a time--
with the understanding that they can receive cash back at settlement
and that the rental income will cover the debt service, all as the
value of the house increases over time. What the investors discover is
that the houses are money pits. Over time, the houses suck more and
more cash from the investor until he simply declares bankruptcy or
otherwise walks away from the properties.
In some cases, an individual is purchasing one house in which to
live. These people often respond to ads in the newspaper in which it is
claimed that for some nominal sum paid as a deposit--like $500--the
person can then purchase a home where the monthly payment is
essentially the same as what the person is now paying as rent. if this
sounds, as the expression goes, too good to be true, it is. In these
situations, the purchaser typically signs a contract for about $45,000.
This is a home that the seller has recently bought for between $10,000
arid $15,000 and made about $10,000 worth of cosmetic repairs.
Unfortunately, many of the lenders will only lend about 70 percent of
the value of the property. In the typical case, 70 percent of the
contract price will not generate enough of a profit for the seller.
Therefore, the seller creates a phony second contract, supported by a
fraudulent appraisal, falsely stating that the sales price is about
$75,000. By so doing, the mortgage company is tricked into lending
about $50,000. That sum covers all of the original contract price plus
all related expenses. Instead of lending 70 percent of the value of the
property, the lender has lent about 120 percent of the value.
It is often the case that the resident homeowner finds that he or
she cannot make the monthly mortgage payments (which, of course, has
been determined on a loan amount that exceeds the actual value of the
property), The property tax and insurance bills are higher than they
should be because the sales price has been inflated. The homeowner
finds that he or she cannot pay these inflated expenses, the fairly
high monthly mortgage costs, and keep the property well maintained.
This leads some of the homeowners to default an the mortgage, declare
bankruptcy, or otherwise walk away from the property.
In both of these cases, the fraud is generally perpetrated through
the use of forged contracts, fraudulent appraisals, phony rent
receipts, phony leases, fraudulent down payments that are supplied by
the seller but appear to be paid by the buyer, false gift letters, and
false letters from settlement agents stating that they are holding a
down payment, when in fact they are not.
Whether we are talking about investors who purchase blocks of
houses, or whether we are talking about an individual who has purchased
the home to live in it, there is an additional consequence which
relates to what the mortgage company does with the loan after the loan
has been made. Many of the mortgage companies sell the loans to large
institutions as investments. These investments appear to be very safe
because they are backed by real property, that is, the homes. However,
when the borrower--whether it is an investor or a single homeowner--
defaults on the mortgage, the investor discovers that the investment
does not have the collateral to cover the loan. If it happened in one
or two, or even a hundred or two hundred cases, the consequences would
not be so bad. The real problem is that it is happening thousands of
times in Baltimore and thousands of times in Newark, New Jersey, and
thousands of times in Milwaukee, Wisconsin, and thousands of times in
cities all over the country. This means that across the country there
are tens of thousands of loans being made with inadequate collateral.
The more of those loans that go bad, the more the large institutions
that own these loans are hurt. In short, we have the makings of an
economic crisis that is similar to the savings and loan crisis of the
1980's.
Again, the bottom line is that the sales--whether to resident
purchasers or to investors--appear to have caused fairly stable rental
neighborhoods to become de-stabilized through the process of what
amounts to temporary home ownership. The destabilization manifests
itself in the form of boarded up and vacant houses. And, to make
matters worse, it carries with it the possibility of nationwide
economic disruption.
It is for all of these reasons--the stark human dilemmas as well as
the potentially drastic national economic consequences--that the U.S.
Attorney's office, the FBI, the Postal Inspectors, and the
investigators from the Department of Housing and Urban Development have
made property flipping and predatory real estate practices a priority.
I would be happy to answer any questions that members of the
Subcommittee may have.
Senator Mikulski. Thank you.
Mr. Mosquera.
STATEMENT OF RICHARD M. MOSQUERA, SPECIAL AGENT-IN-
CHARGE, BALTIMORE FIELD OFFICE, FEDERAL
BUREAU OF INVESTIGATION, DEPARTMENT OF
JUSTICE
Mr. Mosquera. Good morning. My name is Rick Mosquera. I am
the Special Agent-in-Charge of the FBI here in Baltimore. Our
territory covers the entire State of Maryland, as well as the
State of Delaware. And I would like to thank you for the
opportunity to appear here today.
I am here to speak about this crime problem affecting both
the State of Maryland and the City of Baltimore, commonly known
as property flipping. We have heard testimony here this morning
by victims of this criminal practice. We have also heard how
the scheme works, utilizing false appraisals and phony loan
documents to get an unwitting homeowner into their first home.
But, in addition to the first-time victim homeowner, who
else loses in this scheme? In the last 4 years, the Maryland
Department of Assessments and Taxation has identified 2,000
houses in Baltimore City alone that were bought and then sold a
short time later for at least double the first sales price. The
Baltimore Sun reported last August that three lending
institutions, two of them from out of State, have filed two
separate lawsuits here.
One suit claims that the lender has financed $820,000 in
bad loans here in the City, most of which are either in default
or delinquent. On 21 of these loans, the mortgages total
$777,000, yet the total reappraised value of these homes
combined is only $555,000, a difference of almost a quarter-of-
a-million dollars.
In another lawsuit, two lenders have claimed that they were
induced to finance almost 150 fraudulent mortgages here in the
City, many of which were vacant and in disrepair at the time of
purchase. In an interview conducted by one of our agents last
week, a California lender called Baltimore a dysfunctional
market that is very nearly leading the Nation in subprime
foreclosures. This particular lender is currently facing 120
foreclosures in Baltimore, with losses exceeding half-a-million
dollars.
Last December, the Sun reported that Baltimore has one of
the worst default rates in the country on loans insured by the
Federal Housing Administration. In testimony before the
Maryland General Assembly 2 months ago, the Commissioner of
Financial Regulation for the State of Maryland testified that
Maryland ranks fifth in the Nation in mortgage fraud. Only New
York, California, Florida, and Illinois have a larger problem
in this area.
Beginning on July 1st of the upcoming fiscal year, the City
will begin to lose nearly $1 million annually in lost revenues
on more than 3,700 properties that were overvalued through
false appraisals. Who pays for all of this? In a word,
everyone.
The individual buyers pays when they lose their first home.
Senior citizens on fixed income pay when their property taxes
go up due to inflated appraisals on properties in their
neighborhood. Private lenders pay by underwriting bad loans.
The Federal Government pays by insuring these bad loans. We,
the taxpayers, pay when our taxes are spent in cleaning this
mess up.
When out-of-state lenders file lawsuits in Baltimore's
Federal and circuit courts, the lending industry notices. When
our State ranks fifth in the Nation on mortgage fraud, banks
may think twice about financing first-time home buyers in
Maryland. When houses are foreclosed upon and go vacant, drug
dealers notice. In no time at all they become bustling crack
houses and shooting galleries. As a result of the pervasiveness
of this problem, not just in Maryland but across the United
States, this past fall Federal law enforcement joined ranks to
coordinate investigative efforts in this area.
With $18 million in Federal funding from the Congress, six
task forces were formed across the country where the problems
are most acute. One of those task forces is located here in
Maryland. Over 25 investigators and auditors from the HUD
Inspector General's Office, the FBI, the United States Postal
Service Inspectors, and the IRS are involved. U.S. Attorney
Lynne Battaglia has dedicated several of her prosecutors to
this initiative.
In the FBI alone, we have over 20 active investigations
targeting those who we have identified as the most prolific and
egregious violators. These investigations are labor intensive
and time consuming. When you consider that the average mortgage
fraud nets 10 times what is taken in the average bank robbery,
our efforts are more than justified.
Prepared Statement
I believe that due to the support now being provided
through Congress, the synergistic approach by law enforcement
and the aggressive prosecutor strategy by the United States
Attorney's Office, we have great potential for significantly
reducing this criminal practice.
Thank you.
[The statement follows:]
Prepared Statement of Richard M. Mosquera
Good morning. My name is Rick Mosquera and I am the Special Agent
in charge of the FBI office here in Baltimore. Our territory covers the
State of Maryland, as well as Delaware. I would like to thank Senators
Mikulski and Sarbanes for the opportunity to appear here today.
I am here to speak about a crime problem affecting both the State
of Maryland and the City of Baltimore, commonly known as ``PROPERTY
FLIPPING''. We have heard testimony here this morning by victims of
this criminal practice. We have also heard how the scheme works,
utilizing false appraisals and phoney loan documents to get an
unwitting homeowner into their first home.
But, in addition to the first time victim homeowner, who else loses
in this scheme? In the last four years, the Maryland Department of
Assessments and Taxation has identified 2,000 houses in Baltimore City
alone that were bought and then sold a short time later for at least
double the first sales price.
The Baltimore Sun reported last August that three lending
institutions, two of them from out-of-state, have filed two separate
lawsuits here. One suit claims that the lender has financed $820,000 in
bad loans here in the City, most of which are either in default or
delinquent. On twenty-one of these loans, the mortgages total $777,000,
yet the total reappraised value of these homes combined is only
$555,000, a difference of almost a quarter of a million dollars.
In the other lawsuit, two lenders have claimed that they were
induced to finance almost 150 fraudulent mortgages here in the City,
many of which were vacant and in disrepair at the time of purchase.
In an interview conducted by one of our Agents last week, a
California lender called Baltimore a ``dysfunctional market'' that is
very nearly leading the nation in sub-prime foreclosures. This
particular lender is currently facing 120 foreclosures in Baltimore
with losses exceeding half a million dollars. This lender anticipates
that due to all the attention this problem is receiving here, the
Philadelphia market will be targeted next.
Last December, the Sun reported that Baltimore has one of the worst
default rates in the country on loans insured by the Federal Housing
Administration.
In testimony before the Maryland General Assembly two months ago,
the Commissioner of Financial Regulation for the State of Maryland
testified that Maryland ranks fifth in the nation in mortgage fraud.
Only New York, California, Florida and Illinois have a larger problem
in this area.
Beginning on July 1st of the upcoming fiscal year, the City will
begin to lose nearly $1 million annually in lost tax revenues on more
than 3,700 properties that were overvalued through false appraisals.
Who pays for all of this? In a word, everyone. The individual buyer
pays when they lose their first home. Senior citizens on fixed incomes
pay when their property taxes go up due to inflated appraisals on
properties in their neighborhood. Private lenders pay by underwriting
bad loans. The federal government pays by insuring these bad loans. We,
the taxpayer, pay when our taxes are spent cleaning this mess up.
When out-of-state lenders file lawsuits in Baltimore's federal and
circuit courts, the lending industry notices.
When our state ranks fifth in the nation in mortgage fraud, banks
may think twice about financing first time home buyers in Maryland.
When houses are foreclosed upon and go vacant, the drug dealers
notice. In no time at all, they become bustling crack houses and
shooting galleries.
As a result of the pervasiveness of this problem, not just in
Maryland, but across the United States, this past fall, federal law
enforcement joined ranks to coordinate investigative efforts in this
area. With $18 million in federal funding from Congress, six task
forces were formed across the country where the problems are most
acute. One of those task forces is here in Maryland. Over 25
investigators and auditors from the HUD Inspector General's Office, the
FBI, the U.S. Postal Inspectors and the IRS are involved. U.S. Attorney
Lynne Battaglia has dedicated several of her prosecutor's to this
initiative. In the FBI alone, we have over 20 active investigations
targeting those whom we have identified as the most prolific and
egregious violators.
These investigations are labor intensive and time consuming. When
you consider that the average mortgage fraud nets ten times what is
taken in the average bank robbery, our efforts are more than justified.
I believe that due to the support now being provided through
Congress, the synergistic approach by law enforcement, and the
aggressive prosecutive strategy by our U.S. Attorney's Office, we have
great potential for significantly reducing this criminal practice. Most
importantly we are all here committed to ensure that every citizen has
the opportunity to pursue the American dream.
Senator Mikulski. Thank you. It is Bonnie and Clyde now
wearing Feragamo shoes and Italian suits and so on. But it is a
new form of bank robbery is what you are saying.
Mr. Rowan, of the Postal Service.
STATEMENT OF JAMES J. ROWAN, JR., INSPECTOR-IN-CHARGE,
U.S. POSTAL INSPECTION SERVICE, WASHINGTON
METRO DIVISION
Mr. Rowan. Good morning, Senator Sarbanes, Senator
Mikulski. My name is James J. Rowan, Postal Inspector-in-Charge
of the Washington Metro Division of the U.S. Postal Inspection
Service. I appreciate this opportunity to appear before you
today to discuss mortgage flipping investigations and the
impact these schemes have upon citizens of Baltimore, various
financial institutions and the real estate market in Maryland.
I want to thank you for the interest you have demonstrated
by scheduling this hearing to address this problem. Your
efforts provide one more means to educate the American public
to prevent them from being victimized by this scheme.
I would also like to thank U.S. Attorney Lynne Battaglia
for her prosecutorial leadership in this area. Perhaps our best
known remedy is the criminal mail fraud statute, 18 U.S.C.
1341. During the past fiscal year, inspectors responded to
approximately 70,000 consumer fraud complaints, conducted 3,427
fraud investigations, and arrested 1,523 individuals associated
with fraudulent schemes. Because it is essential that the
public have full confidence in the mail, postal inspectors are
intent on preserving the integrity of the U.S. mail through
vigorous law enforcement, public education and crime prevention
efforts.
It is this statute that we have used in the mortgage arena.
The Inspection Service is conducting 13 investigations into
mortgage flipping and other real estate frauds in eight major
cities in the United States. Earlier indications suggest there
is an increase in the number of mortgage-related referrals to
the Postal Inspection Service for investigative attention.
Postal inspectors in Baltimore began an investigation into
so-called flipping schemes after an attorney who was
representing Baltimore City home buyers complained to our field
office and the United States Attorney's Office in 1998. The
attorney represented clients who had purchased properties from
Robert Beeman and Walter Duersch at inflated prices. Based on
the information provided by the attorney and the fact that the
mail was used to transmit documents and checks, we opened an
investigation.
Documents obtained from public records, the individual
victims and company records were reviewed. They were compared
to determine time lines on when certain activities occurred. I
will provide some insight into the Beeman-Duersch, however, due
to grand jury proceedings, I am limited in what I can discuss.
After the initial review of documents, postal inspectors
went to the Maryland Department of Assessment and Taxation,
with the assistance of State Assessor Richard Sause, specific
neighborhoods were identified where properties were being
flipped. Through Mr. Sause's efforts, additional victims and
suspects were identified.
Since the single complaint that initiated the Beeman-
Duersch investigation, postal inspectors have discovered 12 to
15 additional flipping schemes operating in Baltimore. In
addition, we have participated in investigations in Miami,
Chicago, Newark, St. Louis, and other cities across the United
States. We heard from Ms. Adams and Ms. Simon this morning. We
have heard how they were victimized by Robert Beeman. In
Baltimore, postal inspectors reviewed thousands of real estate
transactions. Working with the attorney and community
organizations, postal inspectors found and interviewed over 100
individuals since February 1998.
We have worked closely with Lynne Battaglia and prosecutors
with the United States Attorney's Office. And I am happy to
report, just 3 weeks ago, we presented details of the scheme
that led to the indictments of Robert Beeman and four other
individuals in Baltimore for mail and wire fraud. The details
of this scheme present an image of greed, exploitation and
disregard for low-income families and disadvantaged buyers of
real estate properties in Baltimore.
Through deception and a collaborative effort to
misrepresent the truth, approximately 200 Baltimore families
have been identified as victims of this latest mortgage
flipping bonanza. Our investigations have determined that
approximately 20 to 30 mortgage flippers are operating in the
City of Baltimore. In some cases, individuals engaged in this
enterprise have flipped over 200 homes in a period of 2 years.
With a potential profit of $10,000 to $20,000 per home, these
operators can realize lucrative returns, in the neighborhood of
$4 million.
As active participants in the flipping task force created
by Ms. Battaglia, we work closely with the Maryland State
Attorney General's Office, as well as with other State and City
government agencies. In 1999, an estimated $3 billion was
loaned for mortgages in the Baltimore area. Baltimore has an
unflattering reputation of having one of the highest default
rates for mortgages in the country. We estimate that at least
75 percent of the mortgages are sold in the secondary market.
Often the mortgages are sold without recourse.
Simply stated, a company purchases a mortgage note from a
lending company. And if that mortgage should go into default
for any reason, they simply cannot recover their loss. Our
inspectors have interviewed officials in these companies who
have told us the vitality of their companies have been
jeopardized due to the flipping epidemic. They have echoed a
concern that mortgage companies may not want to touch any
mortgage business in Baltimore due to the flipping problem.
Many buyers that postal inspectors have encountered in this
investigation were forced to default on their loan and walk
away from their house. It should be noted that for many of
these victims, this was their first home. They hoped it would
be their dream home. Unfortunately, for many, it turned out to
be their worst nightmare.
The Postal Inspection Service will continue to provide
investigative resources to this problem. However, additional
preventive efforts are needed to keep home buyers from becoming
victims and to keep Baltimore from continuing the downward
spiral in the mortgage business.
Prepared Statement
Again, I would like to extend my appreciation to the
committee, Senator Mikulski and Senator Sarbanes, for the
opportunity to discuss this problem today.
[The statement follows:]
Prepared Statement of James J. Rowan, Jr.
Good morning Senator Mikulski and Senator Sarbanes. I am James J.
Rowan, Postal Inspector in Charge, Washington Metro Division of the
U.S. Postal Inspection Service. I appreciate this opportunity to appear
before you today to discuss mortgage-flipping investigations and the
impact these schemes have upon the citizens of Baltimore, various
financial institutions, and the real estate market of Maryland. I want
to thank you for the interest you have demonstrated by scheduling this
hearing to address this problem. Your efforts here provide one more
means to educate the American public to prevent them from being
victimized from this scheme. I would also like to thank U.S. Attorney
Lynne Battaglia for her prosecutorial leadership in this area.
The Postal Inspection Service is the primary law enforcement arm of
the U.S. Postal Service, enforcing over 200 federal criminal and civil
statutes. We are responsible for protecting postal employees, the U.S.
Mail, and postal facilities from criminal attack, and for protecting
consumers from being victimized by fraudulent schemes or other crimes
involving the mail. We also work to rid the mail of drug trafficking
and money laundering, mail bombs, and perhaps one of the most
despicable crimes: child exploitation. The Postal Inspection Service,
which employs about 2,100 Postal Inspectors, 1,400 Postal Police
Officers and 900 professional, technical and support employees, has
performed many of these duties for over 200 years and is one of the
oldest federal law enforcement agencies.
A number of statutes enable us to take action against fraudulent
practices involving the use of the mail. Our primary weapons are two
statutes originally enacted over 125 years ago: the criminal mail fraud
statute and civil false representation statute. The public policy that
underlies these statutes remains valid today: The postal system created
by Congress to serve the American public should not be used to conduct
schemes that seek to cheat the public.
The nation's mail service was designed to assure that there was
always a reliable, efficient, affordable, and secure means of
communication for its citizens. Last year, a Harris Poll affirmed that
the American public feels significantly more confident about the
security of mail than they do in telephone or Internet communications.
Even in a world of advanced technology and instant communications, the
people and businesses of this land feel more secure with a hard copy
delivery system that is backed by a U.S. Government guarantee: the
Postal Inspection Service. Our mission is to prevent unscrupulous
promoters from damaging that confidence.
INSPECTION SERVICE JURISDICTION
Perhaps our best-known remedy is the criminal mail fraud statute,
18 U.S.C. Sec. 1341. During the past fiscal year, Inspectors responded
to approximately 70,000 consumer fraud complaints, conducted 3,427
fraud investigations, and arrested 1,523 individuals associated with
fraudulent schemes. Because it is essential that the public have full
confidence in the mail, Postal Inspectors are intent on preserving the
integrity of the U.S. Mail through vigorous law enforcement, public
education, and crime prevention efforts.
When the proceeds of a crime are used to further illegal activity
or are concealed, we have authority under the asset forfeiture and
money laundering statutes to forfeit the proceeds or property acquired
with them. Our first consideration in dispersing forfeited funds is to
return them to the victims whenever possible. Mail Fraud investigations
conducted by Postal Inspectors in fiscal year 1999 to protect postal
customers resulted in voluntary restitution of about $3.8 million,
fines of over $5.6 million and court-ordered restitution of over $602.4
million.
MORTGAGE FLIPPING
The Inspection Service is conducting thirteen investigations into
mortgage flipping and other real estate frauds in eight major U.S.
cities. Early indications suggest an increase in the number of
mortgage-related referrals to the Postal Inspection Service for
investigative attention.
Postal Inspectors in Baltimore began an investigation into so-
called ``flipping'' schemes after an attorney who was representing
Baltimore City home buyers complained to our field office and the
United States Attorney's Office in 1998. The attorney represented
clients who had purchased properties from Robert Beeman and Walter
Deursch at inflated prices. Based on the information provided by the
attorney and the fact the mail was used to transmit documents and
checks, we opened an investigation. Documents obtained from public
records, individual victims and company records, were reviewed. They
were compared to determine timelines on when certain activities
occurred.
I will provide some insight into the Beeman-Deursch investigation.
However, due to Grand Jury proceedings, I am limited in what I can
discuss. After the initial review of documents, Postal Inspectors went
to the Maryland Department of Assessment and Taxation. With the
assistance of State Assessor Rick Sause, specific neighborhoods were
identified where properties were being flipped. Through Mr. Sause's
efforts, additional victims--and suspects--were identified. Since the
single complaint that initiated the Beeman-Deursch investigation,
Postal Inspectors have discovered 12 to 15 additional flipping schemes
operating in Baltimore. In addition, we have participated in
investigations in Miami, Chicago, Newark, St. Louis, and other cities
across the United States.
In Baltimore, Postal Inspectors reviewed thousands of real estate
transactions. Working with the attorney and community organizations,
Postal Inspectors found and interviewed over 100 individuals since
February of 1998. We have worked closely with Lynne Battaglia and
prosecutors with the United States Attorney's Office, and just three
weeks ago, presented details of the scheme that led to the indictments
of Robert Beeman and four other individuals in Baltimore for mail and
wire fraud.
The details of this scheme present an image of greed, exploitation
and disregard for low-income families and disadvantaged buyers of real
estate properties in Baltimore. Through deception and a collaborative
effort to misrepresent the truth, approximately 200 Baltimore families
have been identified as victims of this latest mortgage-flipping
bonanza.
The wake of destruction caused by these schemes has left many
families homeless, saddled with poor credit ratings, and in the case of
those with no place else to go, the owners of homes with significant
mortgage debt in need of major repair. If homeowners attempt to
refinance these properties, they soon realize their home was appraised
at an inflated value, and therefore not eligible for a lower interest
rate or a home improvement loan.
While some efforts to rehabilitate and market homes are undertaken
by legitimate investors, many examples of homes that are purchased and
sold with no interest in redevelopment represent the true nature of
this scheme.
Our investigations have determined that approximately 20-30
mortgage flippers are operating in the city of Baltimore. In some
cases, individuals engaged in this enterprise have flipped over 200
homes in a period of two years. With a potential profit of ten to
twenty thousand dollars per home, those operators can realize lucrative
returns in the neighborhood of $4 million.
As active participants in the flipping task force created by Ms.
Battaglia, we work closely with the Maryland State Attorney General's
Office, as well as with other state and city government agencies.
The mortgage-flipping scheme works like this:
--Flippers target homes that are being sold at auction by HUD or at
bank foreclosure sales. In the Beeman case both auctions and
foreclosure sales were used to obtain properties.
--Before settlement, the flippers are allowed--by HUD and some
banks--access to the property. The flippers show the house to
potential clients, sometimes promising to make cosmetic repairs
to the house. The same day the flippers settle with HUD or the
banks, they re-sell the home for as much as twice the amount
they paid. This sets the groundwork for what is now commonly
known as the ``same day flip.''
--The flippers lure people in easily. They place advertisements in
local newspapers, such as the Baltimore Sun and the City Paper,
stating that the buyer could purchase a house for what they pay
in rent. The flippers seek out first-time homebuyers, often
women, or naive individuals looking for investment properties.
Our investigation revealed ads were placed in local Baltimore
papers in the Beeman investigation.
--In the Beeman investigation, as well as other cases under
investigation, buyers are quoted prices between $40,000 to
$50,000. They are asked to make a modest deposit between $500
to $1,000. The buyer is then asked for some personal financial
information. The flipper advises the buyer that someone will be
in touch.
--After a few days, a mortgage broker calls the buyer and tells him
or her that they have been pre-approved for a mortgage. The
mortgage broker requests a meeting with the buyer to discuss
personal finances. In the Beeman case Postal Inspectors
interviewed people who said a mortgage broker contacted them
shortly after signing a contract with Beeman, advising they
have been pre-approved for a mortgage.
--The mortgage broker shops around to the various mortgage-lending
companies. Many of these companies are from out of state and
are not familiar with the Baltimore housing market. Some of the
mortgage companies are federally insured financial
institutions. This is one of the many phases where loan
packages and checks are sent through the mail, providing
jurisdiction for the Postal Inspection Service to be involved
in the investigation.
--When a mortgage lending company is found, the broker and the
company establish a loan-to-value ratio for the transaction.
This is often termed the ``LTV.'' The LTV is basically the
formula that the mortgage-lending company would agree to in
order to make a loan. For example, the lending company will
tell the broker they want an LTV of 75-15-5. That means they
are willing to finance 75 percent of the mortgage only if the
seller takes a second mortgage of 15 percent and the buyer
places a 5 percent deposit on the property. The lenders,
seeking to ensure the safety of their investments, want the
flippers to have a stake in the house, too. To get around these
problems, the flippers inflate the property value to at least
100 percent over the property's market value so they can
receive more money from the banks.
--The mortgage broker submits a contract to the lenders reflecting a
higher price for the property than the buyer is told about. In
the Beeman and Deursch schemes, the buyers claimed that their
signatures were forged on the contracts sent to the lenders. In
order to secure the loan, the flippers and the mortgage brokers
present the lender with false documents in an effort to show
that the buyer is more credit-worthy than is true. The
documents include fake wage information, phony employment
information, false gift letters, fictitious financial
histories, or fake rent documents.
--The key to the scheme is the appraisal. For the scheme to be
successful, an appraisal, which is supposed to be independent,
must be completed that verifies the home is worth the inflated
amount or the bank won't lend the money. Appraisers work hand
in hand with the flippers. They write appraisals stating that
the property had been ``totally renovated,'' or indicate there
are ``new appliances'' to justify higher prices than other
similar properties in the neighborhood. Appraisers involved in
the scheme would often use properties that had already been
flipped as comparables. The flippers and the mortgage brokers
often ``cooked'' the appraisals themselves by providing the
appraiser with comparables of other already flipped houses.
Sampson Ugorji, a licensed appraiser in Maryland, was often
used by Beeman and Deursch to appraise properties. He is one of
the individuals who has been indicted in this case. On all
appraisal forms there is a section that requires the appraiser
to disclose if the property was sold within the last 12 months.
The clause was specifically designed to prevent the situation
that we find ourselves in today. Appraisers are failing to
disclose that many of the properties have been sold within the
last 12 months.
--The last phase of the scam is the property settlement. Attorneys
who specialize in property transactions often head settlement
companies. In many settlements involving flipped properties,
the buyer questioned certain data on the HUD 1 Form. This form
documents all details of the particular real estate
transaction. The accuracy of the HUD 1 is imperative in
disclosing the true facts of the transactions to the lenders
and government agencies. The settlement attorney assures the
buyer that the transaction is legitimate and that the higher
contract prices were only for ``financing purposes.'' The
buyers give great weight to the information provided by the
settlement attorney because they believe the lawyer is working
in the buyer's best interest. The settlement attorney furthers
the fraud by sending correspondence to the lender saying a down
payment has been made; by signing off on false value
information provided on the HUD 1; by not disclosing
information about the ``arms' length'' of the transactions, or
by lying to the buyers. Mailings of the HUD 1 forms have been
used as counts in the indictment in the Beeman case.
WEAKNESSES IN THE EXISTING PROCESS
There are several weaknesses in the real estate process that
require attention. The public needs to be aware of them and change
needs to be considered. Some of the pitfalls we have seen are:
--Many of the flippers are not licensed real estate agents or
brokers. In essence, anyone can perform these real estate
transactions in an unregulated environment. This is very
disturbing considering that they have made thousands of real
estate transactions without appearing on the radar screen of
any state regulators.
--Appraisers are licensed after completing a test and spending 2,000
hours with a licensed appraiser. The majority of the appraisers
that we've seen do not perform appraisals on high-value
property. There is no formal review by any regulating agency.
It appears that once licensed, they are not evaluated or
regulated. In the absence of a subpoena, there is no way to
track the appraiser to determine if they have been involved
with other flippers or to learn about properties they have
appraised.
--State and local government should develop a database of
transactions to allow for a review of fraudulent or suspicious
real estate transactions. One such program could signal
authorities when a property sale is unreasonable for a specific
neighborhood. For example, a computer program could track
property values, and if a settlement reports a higher-than-
average sales price for the neighborhood, the computer would
flag the transaction for further review.
--The database could also be used to determine if some of the same
flippers purchased multiple properties from HUD. This could
assure the public that HUD is not being used unwittingly in
supplying houses to the flippers. It may also be a tool to
identify potential flippers and prevent them from purchasing
houses through HUD.
CONCLUDING REMARKS
In 1999 an estimated $3 billion was loaned for mortgages in the
Baltimore area. Baltimore has an unflattering reputation of having one
of the highest default rates for mortgages in the country. We estimate
that at least 75 percent of the mortgages are sold in a secondary
market. Often the mortgages are sold without recourse. Simply stated, a
company purchases a mortgage note from a mortgage-lending company, and
if that mortgage should go into default for any reason, they simply
cannot recover their loss. Our Inspectors have interviewed officials in
these companies who have told us that the vitality of the company has
been jeopardized due to the flipping epidemic. They have echoed a
concern that mortgage companies may not want to touch any mortgage
business in Baltimore due to the flipping problem.
Many buyers that Postal Inspectors have encountered in this
investigation were forced to default on their loan and walk away from
the house. It should be noted that, for many of these victims, this was
their first home. They hoped it would be their dream home.
Unfortunately, for many it has turned out to be their worst nightmare.
If you take a walk on North Washington Street or Rose Street, you
will see many vacant and boarded-up homes. Dig a little further and you
will learn that at least one third were involved in a ``flip''
transaction of one fashion or another. Then keep in mind that the
flippers are purchasing the houses from HUD and auction due to
foreclosures. We believe that if prompt action is not taken soon, we
will see the second generation of flipping in the city of Baltimore
within a year.
The Postal Inspection Service will continue to provide
investigative resources to this problem. However, additional prevention
efforts are needed to keep homebuyers from becoming victims and to keep
Baltimore from continuing the downward spiral in the mortgage business.
Again, I would like to extend my appreciation to the Committee, Senator
Mikulski and Senator Sarbanes for the opportunity to discuss this
problem today. I would be happy to respond to any questions that you
have at this time.
Senator Mikulski. Thank you, Mr. Rowan. Thank you, Ms.
Battaglia and Mr. Mosquera. Let me say, first of all, that we
are very proud of you and very proud of the job you have done
on this. And in another forum, we want you to have the tools
that you need to continue this vigorous investigation and your
counterparts on the other task forces continue do so.
Today is not a discussion on the need for your resources,
but we want to send a message to the flippers, loud and clear:
We are coming after you and we are coming after you with every
tool the Federal Government has. And we intend to back our
promises with an appropriation that matches the need to this
very labor-intensive work. And we want to do this not only in
Baltimore but in all the other places where this virus is
starting to spread. So we want very much to hear from you, Ms.
Battaglia. We know that you will be able to guide us in what
you need, as well as the need for the FBI and for the Postal
Service. But we want you to have what you need to be able to go
after these flippers.
And this then takes me to my first question, which goes to
you, Ms. Battaglia. This is a despicable practice. Flipping is
despicable. But the question is, is it illegal? Could you share
with me, number one, what are the crimes being committed, or
where do you believe crimes have been committed where flipping
occurs? And what are the penalties both in terms of prison and
fines in this area?
Ms. Battaglia. Well, there is a number of different types
of crimes that are committed. But the paramount one is mail
fraud. And that is why the Postal Service has been so active in
that arena. Also, in terms of false statements to the
government, in terms of anything that HUD was involved in or VA
or FHA, but the primary tool that we use is the mail fraud
statute. And the fine for the mail fraud statute is $250,000
and 10 years in prison.
You should know, though, that in terms of this, we also are
reliant on the sentencing guidelines. Because, as you know, one
of the things a flipper should know is that there is no parole
in the Federal system. So when somebody is sentenced to a
substantial term in prison, which we are aggressively pursuing
in these cases, they will serve all of the time in a Federal
prison.
Senator Mikulski. Well, this is interesting. And, again, in
the interest of time, I am not going to pursue it. But a 10-
year prison sentence is a pretty stern prison sentence. But
these are white collar crimes and they are going to have a lot
of fancy lawyers, because they are making a lot of money. And
so they are going to weasel and whine and wiggle to get out of
a prison sentence. A $250,000 fine is minuscule compared to the
lucrative profits made in this gouging.
And I would like to discuss with you, separately from this,
what you or other U.S. attorneys or where I should turn for
really increasing the penalties for this. Also, again, does
this violate RICO standards? Now, since we hear they sit around
restaurants and collude and cooperate with each other, is this
a new form of organized crime? I would really welcome your
advice and insights on this. And perhaps we could look forward
to a private conversation.
Ms. Battaglia. Let me also say, Senator, that there are
also mandatory restitution guidelines that may be appropriate
in these cases. One of the things we should note, though, is
that oftentimes white collar criminals engage in what I call
wine, women and song, and basically disperse their funds not
only offshore but basically limit the amount that is available
to the Federal Government for seizure in forfeiture issues or
in mandatory victim restitution.
Nevertheless, with some of the new statutes that Congress
enacted, especially 18 U.S.C. Section 1345, where we have the
opportunity, we try to freeze assets.
Senator Mikulski. That is a very good suggestion.
Mr. Mosquera, first of all, I am going to go to the post
office. Are you also investigating the wire fraud part of this
or is it the FBI?
Mr. Rowan. We work it in conjunction with the FBI or any
other agencies involved in the task force. But we investigate
that, as well, through Ms. Battaglia's office.
Senator Mikulski. I see. And how many inspectors do you
have working on the Baltimore case?
Mr. Rowan. In the Baltimore case, we have two inspectors
assigned to the task force for the City of Baltimore.
Senator Mikulski. And do you feel that both the law and the
penalties are adequate?
Mr. Rowan. I feel that they are. These are very time-
consuming investigations, which is the problem we run into.
Senator Mikulski. So it takes a lot of work and it is a lot
of paperwork to sift through?
Mr. Rowan. Yes.
Senator Mikulski. And, really, we call it the new crime for
the new economy. This is not your J. Edgar Hoover's FBI
anymore. It is a lot of accountants. And it is not everybody in
tan raincoats, running down alleys. Not that that was bad.
Mr. Mosquera. I do not recognize a lot of what we do these
days.
Senator Mikulski. It requires new skills and it is also
very labor intensive. It is really business accounting and
managerial to do that. But, either way, it takes sitting down
and going through each slip of paper, each settlement sheet,
and so on, to see the pattern and practice involved here.
Mr. Rowan. It is. And once you identify at what point that
they break, you can then start focusing on that point and
working the investigation from there.
Senator Mikulski. What about you, Mr. Mosquera, where do
you think is the point that we should intervene here in terms
of prevention?
Mr. Mosquera. Well, I think there has been some comments
about regulating the appraisers, the mortgage lenders. From our
perspective, it would be in the resource enhancement. And,
again, we can get into that later on. The FBI has taken, our
approach to this crime problem, we are in the process of
analyzing the database here in Baltimore, of 13,000 properties
sold between 1997 and 1999 that were bought and sold in less
than a 90-day period. From there, what we have done is we have
basically prioritized the most egregious ones. And we set a
threshold of over 300 flips, properties bought and sold in the
same day.
So, again, we are looking at those areas. We have this
through the appropriations that were given through the housing
fraud initiative. The FBI has received some of those funds. And
that is what we have done with some of the money here in
Baltimore. We have two full-time investigators assigned to the
HUD task force. We have a two additional investigators, one
from our headquarters in Woodlawn and one in our Calverton
office to look at this.
For the whole State and throughout the whole FBI, we are
appropriating nine agents and two financial slots. But, again,
it is kind of like the field of dreams, hoping they will come,
I think the more we uncover. However, I think this is probably
a finite problem. I think, given the notoriety this is getting,
I think Baltimore, in particular, hopefully will turn around.
It is interesting, you mentioned organized crime before.
One of our agents was visiting an out-of-state lender the other
day and he made the comment that Baltimore is like the John
Gotti of flipping. I assume he was drawing an analogy between
how notorious John Gotti was in his heyday to the way Baltimore
is right now. But I believe, again, the approach we are taking,
through law enforcement and through the legislation, that we
are turning the corner on this problem.
Senator Mikulski. Just one other question for Mr. Rowan.
What I would really appreciate is, one, the resources we need
to really pursue this here, but then where, through your work
with your counterparts in your agencies and various other parts
of the country, what are the other top two or three areas that
are the John Gotti of flipping's family. Because if we are not
going to go nationwide--and we are nationwide, but I venture
from what I have heard in your testimony and other sources,
there are like three areas that you are really going to go
after.
Like any virus, we want to stop its spread. And the fact is
you are building up an expertise. So if you are building up
these around the country, we know you will be able to move in
quickly because of the tremendous expertise you have developed
in these very high-profile areas. But, Mr. Rowan, you also
recommend changes in the appraisers.
Mr. Rowan. The appraisers is the key point, because it is
such an important element, and reporting any arm's length
relationship and giving a good assessment on the value of the
home. If they were working in cahoots with the broker in this
case or the flipper, they are going to try to meet their
expectations. More independent appraisals will help fix that
problem.
Senator Mikulski. Senator Sarbanes.
Senator Sarbanes. First of all, I want to be clear with
Lynne Battaglia, what is the range of penalties for the various
crimes you are looking into?
Ms. Battaglia. Well, remember, we are talking about
generally a 10-year term, Senator Sarbanes. However, the
sentencing guidelines, there are Federal sentencing guidelines
that determine the ultimate sentence based upon the offense
record of the individual and the loss that a person or a group
of persons incurred. So it depends upon how much the loss is
and whether the person had a criminal history.
In white collar crimes, the situation generally is that the
defendant or the perpetrator does not have a prior criminal
history in most instances. However, the loss in these
circumstances is relatively high, so you are looking at a
situation where we are going to be asking for jail time in
these situations, albeit, generally, in white collar cases we
never see a 10-year period, even if the maximum sentence is 10
years, as you know.
Senator Sarbanes. Presumably, though, the guidelines
encompass a prison sentence that is within the parameters of
the guidelines; is that correct?
Ms. Battaglia. Yes.
Senator Sarbanes. So the guidelines are not such that the
penalty gets reduced down to a fine and mandatory restitution;
it would still encompass, even if it is less than the maximum
of 10 years, it would still encompass, I would imagine, a
substantial jail sentence. Would that be correct?
Ms. Battaglia. That is correct, Senator. And what we have
found is, over the last few years, in white collar cases, we
have gotten substantial jail time.
Senator Sarbanes. Now, you are in a position, of course, to
recommend to the court, presumably, your own thinking about the
nature of the penalty that should be involved. Even though some
of these people may not have a prior criminal record, the harm
they have done is sort of manifest, where here you actually saw
the victims earlier and heard their testimony. So presumably,
from a prosecutor's point of view, a jail sentence is a
reasonable part of the punishment for this kind of an offense.
Would that be correct?
Ms. Battaglia. Absolutely, Senator. What we have found is,
through the aggressive efforts of the FBI and the Postal
Service, we have been able to amass data in this arena that
helps us build the case for a jail sentence. And we do
recommend it and intend to recommend jail in these
circumstances.
Senator Sarbanes. Now, let me ask about the task force that
has been set up. That task force applies to the entire State,
does it not?
Ms. Battaglia. Yes, it does.
Senator Sarbanes. So those areas where you indicated
earlier, outside of Baltimore, where you thought this problem
was now germinating, so to speak, would be subject to the work
of the task force; is that correct?
Ms. Battaglia. That is correct. And as the Senator knows,
we have a Southern Division with a new Federal courthouse,
where we house 17 assistant United States Attorneys, who are
involved in investigating and prosecuting mortgage flipping.
Senator Sarbanes. Now, who else is in on that task force?
If you could give us the composition of the task force.
Ms. Battaglia. Well, let me tell you, there are two
different types of task forces. We have a U.S. Attorney run
task force, which coordinates all of the activities, or
hopefully coordinates all of the activities in this arena. And
we coordinate of course with the State Attorney General's
office, with the Postal Inspection Service, with the FBI, and
any other actor that is involved in investigating fraudulent
activity. So you can have different types of people or
different types of agencies come in and out. HUD may be
involved if it is somehow related to HUD, as well as any of the
other agencies.
Mr. Mosquera mentioned the HUD task force that was funded
through appropriations through HUD, which has of course HUD as
the major actor. We do not coordinate that task force. We are
an actor on that task force.
Senator Sarbanes. Now, I understand you said you had the
State Attorney General involved on the task force. I think that
is very important, because the regulation of some of these
activities has traditionally been primarily done at the State
level. And of course we are going to be hearing from three very
able members of our General Assembly, who are focused on that
very issue. But I think it is obviously important that the
State law enforcement people be included as a part of your task
force.
Ms. Battaglia. Absolutely. And the City people can be
involved also. We have some really excellent people in the City
who are aware of this. And of course, although we cannot have
activist groups as a part of the task force because of the
issues that involve grand jury secrecy, I have to say that SECO
and all of the other agencies you have already heard from, as
well as the people who brought this to our attention, have been
instrumental in basically not only encouraging involvement from
all of the other actors but bringing us information that has
been instrumental in dealing with these issues.
Senator Sarbanes. Well, I just want to commend you and Dick
Mosquera and Jim Rowan for this cooperative effort you have put
together. I think it is extremely important that our agencies
be working in tandem, as you are now doing, and that
considerable resources are being put into this effort. So I
think it is sending a very, very strong signal. And obviously
you have our backing to the full.
Thank you.
Senator Mikulski. Thank you, Senator Sarbanes.
I, too, want to just reiterate my thanks to all three of
you for what you are doing. Our colleague, Congressman
Cummings, is holding a hearing in another part of the City on
the issue of drugs and how are we going to clean up the streets
and get people to help meet their needs. And this goes to the
kind of work you are doing, whether it is fighting drugs, money
laundering, the despicable use of the Internet to lure children
into predatory situations, and children's exploitation, which I
know you have been involved in fighting.
And my predecessor, Senator Mathias, worked with you over
the years. So you are doing many, many things to serve the
Nation and to protect our community, from terrorism to
predators. And we want to thank you for it. And we really found
this testimony very valuable and very insightful, and we look
forward to making sure you have the resources. Because, again,
we are going to just say to the flippers: We are here.
In other words, this is not a photo op. We are here. You
are there every day in the trenches, doing your investigation,
and we are there in the Senate, in the trenches, making sure
you have the tools that you need. So if you are a flipper, get
out of the business today. If you think you are going to be a
flipper, do not even think about it and do not even go there,
because we will be coming after you.
So thank you. And, again, our heartfelt appreciation.
Ms. Battaglia. Thank you.
Senator Mikulski. Now, let us turn to the members of the
General Assembly, who have been very active in this: Delegate
Carolyn Krysiak, Delegate Sandy Rosenberg, and Delegate Maggie
McIntosh. We also want to acknowledge the very excellent work
of the members' research team in Annapolis. I have here the
background paper done by the Department of Legislative
Services, the Office of Policy Analysis, for the Maryland
General Assembly, outlining the problem. In correspondence to
you, Delegate Rosenberg, and you, Delegate Krysiak, this is
such an excellent summary of the issues and the statutes, both
State and Federal, that are violated. I would like to enter
this into the record, because it is an excellent briefing and
tutorial.
[The information follows:]
Department of Legislative Services,
Office of Policy Analysis,
Maryland General Assembly,
September 17, 1999.
Hon. Samuel I Rosenberg
733 West 40th Street, Suite 105,
Baltimore, Maryland 21211.
Hon. Carolyn J. Krysiak,
364 Cornwall Street,
Baltimore, Maryland 21224.
Dear Delegate Rosenberg and Delegate Krysiak: We are writing in
response to your request to review the issue of real estate
``flipping'', and to suggest appropriate legislative remedies, if any.
THE PROBLEM
Real estate or property ``flipping'' is the practice in which
distressed houses are bought very cheaply and then resold for inflated
amounts by the use of an inflated appraisal to support a loan for a
buyer, Although several variations of this practice exist, a typical
scenario involves an unsophisticated buyer with limited resources, a
poor credit history, and a strong desire to own his or her own home.
The seller offers the buyer, who is unable to secure conventional
financing, assistance in obtaining a loan. This is accomplished by use
of a fraudulent loan application and fraudulent property appraisal.
Once the buyer closes, the buyer has difficulty paying the mortgage and
is unable to refinance because of the inflated original mortgage. The
buyer is then forced to default on the mortgage.
BUYING A HOME
In a typical residential real estate transaction, after negotiating
the sales price and other terms of the sale, the buyer and seller sign
a contract of sale that, among other things, states the purchase price
that the parties have agreed on and provides that settlement will take
place within a specified time period, usually 45 to 60 days. The
contract will often include several contingencies, e.g., a home
inspection contingency that makes the contract contingent on the
receipt and approval by the buyer of a structural and mechanical
inspection of the property and/or an environmental inspection and a
financing contingency that makes the contract contingent on the buyer
obtaining a written commitment for mortgage financing. Under a standard
home inspection contingency, if the home inspection reveals significant
and material defects, the buyer can rescind the contract unless the
seller agrees to make the necessary repairs, However, a buyer in a
``flipping'' scheme relies solely on the seller's statements regarding
the condition of the house. Additionally, not only is the buyer unaware
of his ability to write into the contract a home inspection
contingency, the buyer probably cannot afford to pay a home inspector.
During the 45 to 60 days that the contract is held open, the buyer
will apply for a mortgage loan. In a typical process, if the buyer is
approved for the loan, the lender will lock in an interest rate for a
certain number of days, usually no longer than 30 days. During this
time, the lender may ask the buyer for additional information regarding
income, credit report, etc. As part of the loan process, a lender
requires an appraisal to assess the fair market value of the home, in
order to assure that there is sufficient value in the property to
secure the mortgage loan. The buyer essentially pays for the appraisal
through fees in connection with the loan. However, the buyer generally
does not receive a copy of the appraisal for review.
Once the lender approves the loan, the lender will send notice to
the buyers attorney or title insurance company to schedule settlement.
At this point the attorney searches the title to the property to assure
that there aren't any outstanding liens or defects in the title.
Finally, if the buyer is approved for financing, is satisfied with
the home inspection, and title is clear, settlement will occur.
MARYLAND LAW RELATING TO REAL ESTATE ``FLIPPING''
Maryland law establishes a number of requirements applicable to
sales of real property. Some of the pertinent provisions are discussed
below.
Disclosure or Disclaimer Statement
Section 10-702 of the Real Property Article requires that the
seller of single family residential real property complete and deliver
to the purchaser either a property condition disclosure statement or a
disclaimer statement stating that the seller makes no representations
as to the condition of the real property and that the purchaser will be
receiving the property ``as is.''
Presumably, in a flipping transaction, the, seller completes a
disclaimer, rather than a disclosure, statement.
Notice of Buyer's Right of Selection
Section 17-524 of the Business Occupations and Professions Article
requires that each real estate contract submitted to a party by a real
estate broker, an associate real estate broker, or a real estate
salesperson for use in the sale of a single-family dwelling contain, in
bold-faced type, a statement that the buyer has the right to select the
buyers own: (1) title insurance company, (2) settlement company, (3)
escrow company; (4) mortgage lender; or (5) title lawyer.
However, in most flipping transactions, the seller markets directly
to the buyer; since there is no real estate broker involved, this
requirement would not apply.
Real Estate Appraisers
The provisions of law governing real estate appraisers are
contained in Title 16 of the Business Occupations and Professions
Article. Under Sec. 16-101(b) of the Business Occupations and
Professions Article, an ``appraisal'' means ``an analysis, conclusion,
or opinion about the nature, quality, utility, or value of interests in
or aspects of identified real estate.'' An appraisal includes a
valuation appraisal, an analysis assignment, and a review assignment.
In Maryland, there are two types of appraisers: certified and licensed,
A ``certified real estate appraiser'' means an individual who is
certified by the State Commission of Real Estate Appraisers (the
Commission) to provide certified real estate services. A ``licensed
real estate appraiser'' means ``an individual who has a license issued
by the Commission to provide real estate appraisal services.''
According to the regulations, the main difference between a
licensed and certified real estate appraiser is the amount of education
and appraisal work experience. A current applicant for a license must
complete 90 classroom hours of study and have 2,000 hours of appraisal
work experience, while an applicant for certification must complete 120
classroom hours and 2,500 hours of appraisal work experience for
residential appraisals and 180 classroom hours and 3,000 hours of
appraisal work experience for general appraisals. COMAR 09.19.0203 and
09.19.03.01.
However, the Commission requires licensing and regulates only those
individuals who provide real estate appraisal services for federally
related transactions. Therefore, the majority of residential real
estate transactions do not require that a licensed or certified
appraiser perform the appraisal services.
The Commission may deny a license or certificate, reprimand any
licensee or certificate holder, suspend or revoke a license or
certificate, or impose a fine of not more than $5,000, if the applicant
or licensee or certificate holder fraudulently or deceptively uses a
license or certificate. Additionally, a licensee or certificate holder
may not commit an act or make an omission in the provision of real
estate appraisal services that is an act of dishonesty, fraud, or
misrepresentation if the licensee or certificate holder intends to
benefit himself or another person substantially or to injure
substantially another person. A licensee or certificate holder is also
subject to disciplinary action for failing to exercise reasonable
diligence or for committing negligence or incompetence in developing,
preparing, or communicating an appraisal. See Sec. 16-701(a) of the
Business Occupations and Professions Article.
Mortgage Brokers
A ``mortgage broker'' is a ``person who for a fee or other valuable
consideration, whether received directly or indirectly, aids or assists
a borrower in obtaining a mortgage loan and is not named as a lender in
the agreement, note, deed of trust, or other evidence of the
indebtedness.'' Mortgage brokers are licensed by the Commissioner of
Financial Regulation under Title 11, Subtitle 5 of the Financial
Institutions Article. A license issued by the Commissioner authorizes
the mortgage broker to act as a mortgage lender. Under Sec. 11-517 of
the Financial Institutions Article, the Commissioner may suspend or
revoke a mortgage broker's license if ``in connection with any mortgage
loan or loan application transaction, the mortgage broker commits any
fraud, engages in any illegal or dishonest activities, or misrepresents
or fails to disclose any material facts to anyone entitled to that
information.''
In order to enforce these provisions, the Commissioner may also
issue a cease and desist order and an order requiring the violator to
take affirmative action to correct the violation, including the
restitution of money or property to any person aggrieved by the
violation. If a mortgage broker fails to comply with an order, the
Commissioner may impose a fine of up to $1,000 for each violation.
Finally, if the Commissioner discovers that a business is violating or
evading any rule or regulation adopted under this subtitle or any law
regulating mortgage loan lending, the Commissioner may issue a written
order to stop doing business.
Additionally, Sec. 11-523 of the Financial Institutions Article
contains criminal penalties. Any person who willfully violates this
subtitle, or any rule or regulation adopted under it, is guilty of a
misdemeanor and on conviction is subject to a fine not exceeding $5,000
or imprisonment not exceeding one year or both. A mortgage broker who
``willfully misappropriates or intentionally and fraudulently converts
to the mortgage broker's or to the mortgage broker's employee's or
agent's own use moneys in excess of $300 rightfully belonging to a
borrower, or who otherwise commits any fraudulent act in the course of
engaging in the mortgage lending business is guilty of a felony and on
conviction is subject to a fine not to exceed $100,000 or imprisonment
not exceeding 15 years or both.''
Consumer Protection Act
The Maryland Consumer Protection Act prohibits a person from
engaging in any unfair or deceptive trade practice in: (1) the sale,
lease, rental, loan, or bailment of any consumer goods, consumer realty
or consumer services; (2) the offer for sale, lease, rental, loan, or
bailment of consumer goods, consumer realty, or consumer services; (3)
the extension of consumer credit; or (4) the collection of consumer
debts.
The Division of Consumer Protection in the Office of the Attorney
General may issue an order requiring a person found to have violated
the act to cease and desist from the violation and to take affirmative
action, including the restitution of money or property. The Attorney
General may also seek an injunction to prohibit a person who has
engaged or is engaging in a violation of the act from continuing or
engaging in a violation. In addition, any person may bring an action to
recover for injury or loss sustained as a result of a practice
prohibited by the act. A person who is awarded damages in such an
action may also be awarded reasonable attorney's fees.
Violations of the act are also subject to criminal penalties.A
person who violates any provision of the act is guilty of a misdemeanor
and on conviction is subject to a fine not exceeding $ 1,000 or
imprisonment not exceeding one year or both.
Other Remedies
Most of the lawsuits that have been filed as a result of these
``flipping'' scams allege fraud, conspiracy to defraud, and unfair or
deceptive trade practices. The elements of common law fraud are that:
--that the defendant made a false representation;
--that its falsity was either known to the defendant or the
misrepresentation was made with such reckless indifference to
the truth as to be equivalent to actual knowledge;
--that it was made for the purpose of defrauding the person claiming
to be injured thereby,
--that the injured person not only relied upon the misrepresentation,
but had a right to rely upon it in the full belief of its
truth, and would not have done the thing from which the injury
had resulted if the misrepresentation had not been made; and
--that the person actually suffered damage directly resulting from,
such fraudulent misrepresentation.
federal law relating to real estate flipping
Criminal Charges
Participants in flipping schemes can be charged with various
crimes, depending on the circumstances of the situation and the
available evidence. In U.S. V. Cassiere, 4 F.3d 1006 (1st Cir. 1993),
three defendants were convicted of wire fraud, aiding and abetting wire
fraud (18 USC Sec. 1343), and conspiracy to commit wire fraud (18 USC
Sec. 371) in connection with a real estate flipping scheme and
sentenced to between 24 and 46 months imprisonment. The elements of
wire fraud are: (1) a scheme to defraud by means of false pretenses;
(2) the defendant's knowing and willful participation in the scheme
with the intent to defraud; and (3) the use of interstate wire
communications (e.g,, telephones, fax) in furtherance of the scheme.
In U.S. v. Aubin, 87F.3d 141( 5th Cir. 1996), a defendant in a
flipping scheme was convicted of wire fraud, conspiracy to defraud the
United States (18 USC Sec. 371), and bank fraud (18 USC Sec. 1344). The
defendant was sentenced to five years imprisonment and ordered to pay
nearly $44 million in restitution in connection with the bank fraud
count.
In U.S. v. Chavoux, 3 F.3d 827 (5th Cir. 1993), the defendant was
convicted of conspiracy to defraud the United States, attempted tax
evasion (26 USC Sec. 7201), and filing false tax returns (26 USC
Sec. 7206(l)) in connection with a real estate flipping situation. The
tax charges arose out of the defendant's failure to report the income
from the flipping an his tax returns. He was sentenced to 33 months in
prison.
Real estate flippers could also be charged with mail fraud (18 USC
Sec. 1341 (et seq.)
The Racketeer Influenced and Corrupt Organizations Act (18 USC
Sec. 1961 (et seq.) basically prohibits organized crime. Violators of
RICO are subject to criminal conviction, significant fines and
imprisonment, and forfeiture of money and other property obtained
pursuant to the violation. Injunctive relief is also available. In
addition, victims may sue under RICO. Treble damages and attorney's
fees are recoverable, The Department of Justice can also institute
civil proceedings under RICO.
The Federal Trade Commission Act (I5 U.S.C Sec. 45-48)
Under this act, the, Federal Trade Commission (FTC) is empowered,
among other things, to: (1) prevent unfair methods of competition, and
unfair or deceptive acts or practices in or affecting commerce; (2)
seek monetary redress and other relief for conduct injurious to
consumers; (3) prescribe trade regulation rules defining with
specificity acts or practices that are unfair or deceptive, and
establishing requirements designed to prevent such acts or practices;
(4) conduct investigations relating to the organization, business,
practices, and management of entities engaged in commerce; and (5) make
reports and legislative recommendations to Congress.
Section 5 of the FTC Act is a broad anti-fraud statute similar to
state consumer protection acts. The FTC enforces Sec. 5, focusing
mainly on the issue of whether material misrepresentations were made.
Although it generally pursues Sec. 5 actions only if there is a pattern
of fraud across state lines, the FTC is not prohibited from pursuing
cases arising out of purely intrastate schemes. Injunctions and other
equitable relief (such as disgorgement) are available under Sec. 5, as
well as civil penalties.
Truth in Lending Act (15 USC Sec. 1601 et seq.)
The Truth in Lending Act (TILA) is essentially a disclosure
statute. It requires creditors who regularly extend consumer credit to
disclose essential credit terms, especially the costs of obtaining the
credit, before the credit is extended. Residential real estate sales
are subject to TILA. ``Regulation Z'' is a comprehensive set of
regulations enacted pursuant to TILA.
The following agencies are charged with enforcing TILA:
--Comptroller of the Currency (as to national banks);
--Federal Reserve Board (as to non-national member banks);
--Federal Deposit Insurance Corporation (as to insured banks that are
not members of the Federal Reserve System);
--Federal Home Loan Bank Board (as to savings institutions not inured
by FDIC)
--Bureau of Federal Credit Unions (as to federal credit unions); and
--Federal Trade Commission (as to other lenders).
These agencies may seek injunctive relief and/or civil penalties
against violators of TILA.
In addition, Sec. 1611 of TILA makes it a crime for a creditor to
willfully and knowingly give false or inaccurate information or to fail
to make disclosures required by the act. Violators are subject to a
fine of up to $500 and/or imprisonment of up to one year. These cases
are prosecuted by the Department of Justice. However, few of these
cases are apparently pursued due to lack of resources.
Section 1640 of TILA creates a private right of action for
consumers aggrieved by a violation of the act. Prevailing plaintiffs
can recover actual damages, statutory penalties (approximately twice
the amount of the finance charge in question), and attorney's fees.
However, TILA is of limited value in addressing the flipping
problem for a number of reasons. First, the remedy of rescission for
improper disclosure does not apply to purchase money mortgages. Second,
as long as the calculation of the numbers contained on the forms is
correct, the damages remedy doesn't apply. In addition, TILA only
applies to lenders. Therefore, this act Wouldn't apply to a flipping
transaction unless the creditors had knowledge, which isn't really
being alleged. It would be more likely that a local lender would have
knowledge, since a local lender would be familiar with the
neighborhoods where the properties are located and should know if an
appraisal is inflated.
Real Estate Settlement Procedures Act (12 USC Sec. 2601 et seq.)
The Real Estate Settlement Procedures Act (RESPA) protects buyers
and sellers of residential real estate from unreasonably high
settlement costs by requiring advance disclosure and outlawing certain
kickbacks. Virtually all mortgage lenders taking a first lien on
residential real property are covered. RESPA requires that when someone
applies for a federally regulated mortgage loan, the lender must
deliver to the applicant a copy of a HUD special information booklet to
explain the nature and costs of real estate settlement services. The
lender must include a good faith estimate of settlement charges. RESPA
also provides that a seller may not require a buyer to purchase title
insurance from a particular company, prohibits kickbacks and unearned
fees, limits advance deposits in escrow accounts, and prohibits lenders
from charging fees for the preparation of disclosure statements that
RESPA and TILA require.
RESPA also only applies to lenders. Unless there were referral fees
or kickbacks (i.e., for bringing in business), buyers can't pursue
lenders under this statute. Referral fees and kickbacks would be more
likely in the case of an out-of-state lender, since local lenders would
be more likely to be able to generate their own contacts.
Recommendations
After reviewing the current federal and state statutory provisions
concerning the practice of property ``flipping'' and speaking, with the
various concerned parties, the department makes the following key
recommendations: (1) more aggressive enforcement of existing laws; and
(2) increased public-awareness efforts to educate prospective buyers,
mortgage lenders, mortgage brokers, and appraisers about property
``flipping'' and other similar fraud schemes. However, certain
legislative changes should be considered that may help limit the
occurrence of property ``flipping.''
Counseling for First-Time Rome Buyers
Several legislative proposals have been offered by individuals
familiar with property ``flipping'' occurring in Baltimore City most
notably improving consumer awareness of ``flipping'' and other related
schemes by requiring counseling for first-time home buyers. Several
individuals contacted by the department believe that educating the
consumer is the first step in ridding the City of these fraudulent
housing deals.
There are approximately 20-25 housing counseling agencies across
the State. The Maryland Center for Community Development (MCCD)
provides housing counseling training. Becky Shareblom, the Executive
Director of MCCD, said that the organization makes approximately 300-
400 referrals a year to counseling agencies across the State. The
training manual for the housing counselors provides a detailed
description of the information they provide during a counseling
session.
During the first visit with a buyer, a counselor will ask about the
buyer's income and credit history, why the buyer wants to own a house,
and what the buyer sees as the benefits of becoming a homeowner. If
necessary, the counselor will work with the buyer to clean up or
establish credit or develop a savings plan. The counselor will also
explain the various types of financing, including fixed rate and
adjustable rate. Finally, if the buyer does not know during the first
visit where he or she wants to purchase a home, the counselor is
required to provide the name of at least three to five real estate
agents. The counselor will also provide the buyer with a list of
questions to ask the real estate agent so that the buyer can make an
informed decision.
Sometimes a buyer will come back to the housing counselor with a
pre-approved loan for an explanation of the next steps towards securing
a loan. The counselor would then advise the buyer to get a home
Inspection, the need for an appraisal, and any additional information
helpful to the buyer.
As long as the buyer keeps coming back through the various stages
of the home buying process described above, the counselor will provide
guidance. In rare cases the counselor has even gone to settlement with
the buyer. Although the counselor is trained to strictly provide
information, the counselor will question a buyer or alert a buyer if a
part of the transaction is a concern. For example, an extremely low or
high appraisal is something to discuss with the buyer.
Requiring a first-time home buyer to submit a certificate of
housing counseling at either the contract stage or the loan stage is
feasible. Because the counseling goes through every step in buying a
home, perhaps requiring the counseling at the initial stage would be
preferable.
However, although many first-time home buyers would benefit from a
counseling program, many others do not need such assistance and,
therefore mandating counseling may be burdensome. Furthermore,
mandating unnecessary counseling for thousands of home buyers it could
strain existing counseling resources. The department recommends that
methods of increasing consumer awareness through education be studied
while considering less intrusive legislation. For example, a pending
regulatory change in New York would require a lender or mortgage broker
to disclose to the borrower at the time of the application that the
borrower should consider counseling. This would help steer those first-
time buyers who read counseling to those resources without a statutory
mandate.
Home Inspections
Many individuals familiar with ``flipping'' agree that requiring
home inspections would greatly minimize the problem. In a typical
contract, a buyer will include a home inspection contingency and a
financing contingency. However, the unsophisticated buyer purchasing a
``flipped'' property is generally unaware of this common practice.
A home inspection involves going inside the home to look at the
actual structure and engineering of the house. An appraisal does not
involve going inside a house, but is based on the prices for which
similar houses in the same area have recently sold. Under Sec. 12-121
of the Commercial Law Article, the lender is not allowed to impose a
lender's inspection fee unless needed to ascertain construction of a
new home or repairs or alterations required by the lender. This section
could be amended to allow a lender to impose an inspection fee when the
lender is approving a loan for a first-time home buyer. While the buyer
would ultimately pay for this inspection, the fee would be included in
the loan and the inspection would be concluded prior to signing the
loan agreement.
Mandating a home inspection as part of a real estate contract or
mortgage application would likely require licensing or registration of
home inspectors by the Department of Labor, Licensing, and Regulation.
Legislation during the 1999 Session regarding the licensure or
regulation of home inspectors received unfavorable reports by the House
Economic Matters Committee and the Senate Economic and Environmental
Affairs Committee.
Real Estate Appraisers
The Maryland Real Estate Appraisers Commission requires licensing
and regulates only those individuals who provide real estate appraisal
services for federally related transactions. For loans lacking a
federal component, the services of a licensed or certified real estate
appraiser are not required. Therefore, the Commission has no authority
to regulate these individuals. Because of the significant role played
by appraisers in ``flipping'' scams, the department recommends that the
legislature consider requiring licensure or certification for all real
estate appraisers. In addition, the penalties provided under current
law could be increased to further discourage fraudulent acts by
appraisers. Under current law, the Commission is limited to
reprimanding any licensee or certificate holder, suspending or revoking
a license or certificate, or imposing a fine of not more than $5,000.
To aid the Commission in regulating these additional licensees and
certificate holders, funding for the Commission could be increased to
provide for an investigatory staff, which currently does not exist.
In New Jersey, the Real Estate Appraiser's Act was amended to
require criminal background checks and fingerprinting of appraisers
and, with some exceptions, licensing of appraisers involved in real
estate deals. See New Jersey Public Law 1997, Chapter 401. Under
current law, the Maryland Real Estate Appraisers Commission may require
fingerprinting of a license or certificate applicant, but the
Commission has never done so.
Copy of Written Real Estate Appraisal
In addition, new legislation in Wisconsin also provides that if a
loan applicant so requests, a mortgage banker or mortgage broker must
provide the loan applicant with a copy of any written appraisal report
that the banker or broker holds if the applicant paid a fee for the
appraisal and it relates to the residential real estate that the
applicant owns or has agreed to buy. See Wis. Stat. Sec. 224.75(3)(b).
Under Maryland law, a buyer must request and pay for a copy of the
appraisal. See Sec. 14-104.1 of the Real Property Article. Since a
crucial element of these schemes is an inflated appraisal, the
department recommends that the legislature consider amending state law
to require that a copy of the appraisal be a given to the buyer.
Disclosure of Recent Sale
In Minnesota, a bill pending before the state legislature would
require sellers to disclose in the purchase agreement for one-to-four-
family residential deals the estimated market value used to determine
the property taxes payable in the current year and the past purchase
price for any sale of the subject parcel where there had been a
conveyance within the past six months. Failure to disclose would
subject the seller to an action for damages. Currently, in Maryland, it
takes approximately 60 to 90 days after settlement for the sale and the
purchase price to appear in the tax records, making it difficult for a
buyer to uncover a recent sale of the property. Furthermore, Maryland
law could be amended to require the seller to disclose the previous
purchase price of the house under certain circumstances. For example,
if the re-sale occurs within a certain time limit, or if the buyer is a
first time home buyer, the previous price could be required to be
disclosed. The department recommends that the legislature consider
these changes.
Prohibit Lending Without ``Due Regard to Payment''
A pending regulatory change in New York would prevent lending
without ``due regard to repayment ability.'' This change would prohibit
a lender from making certain home loans unless the lender reasonably
believes at the time the loan is consummated that the borrower will be
able to repay the loan based upon the borrower's current and expected
income, current obligations, employment status, and other financial
resources (other than the borrower's equity in the dwelling which
secures repayment of the loan). Similar legislation also has been
introduced in North Carolina. The department recommends that similar
legislation be considered in Maryland.
Modification of Loan Terms
Property ``flipping'' has also been a problem in Chicago. Although
the Department of Housing and Urban Development (HUD) was not alleged
to be a wrongdoer, the Federal Housing Administration (FHA) agreed to
modify the loan terms for ``flipping'' victims to bring the loan
amounts closer to the actual value of the homes. This action was
brought about by community agitation and media attention.
Decentralizing Enforcement of Consumer Protection Act
Current law provides that the Office of the Attorney General has
the sole authority to seek a cease and desist order to enjoin
violations of the Consumer Protection Act. See Sec. 13-403 of the
Commercial Law Article. Although the Consumer Protection Division of
the Office of the Attorney General has begun to study the ``flipping''
issue, it has been unable to actively pursue ``flipping'' scams due to
a lack of manpower to pursue complaints.
The department recommends that the issue of decentralizing the
power to seek a cease and desist order be explored to include the
State's Attorney's Office, the Baltimore City Solicitor, or the local
county attorneys.
We hope this has been responsive to your request. If you have any
additional questions, please do not hesitate to contact any of us at
410-946-5510.
Sincerely,
Susan H. Russell,
Principal Analyst.
John F. Favazza,
Policy Analyst.
Erin P. Dougherty,
Policy Analyst.
Claire E. Rooney,
Policy Analyst.
Senator Mikulski. I know each and every one of you
personally. I am very proud of what you have undertaken.
Delegate McIntosh, as the senior person and also chair of the
Final Institutions Committee, have you coordinated how you
would like to proceed?
Ms. Krysiak. I think I am going to start.
Senator Mikulski. Okay. And then who will be next?
Ms. McIntosh. I will be.
Senator Mikulski. And then, Delegate Rosenberg, you will
wrap up.
Mr. Rosenberg. I am batting ninth.
Senator Mikulski. Well, you represent southeast Baltimore,
Delegate Krysiak, where we saw all of those blue dots and red
dots, which are little dots of despair.
STATEMENT OF CAROLYN KRYSIAK, DELEGATE, MARYLAND HOUSE
OF DELEGATES
Ms. Krysiak. Actually, I suppose, technically, most of
those dots are just out of my district, but they are part of
our community, and so we are seriously affected by every one of
those.
I really want to thank you very much for this opportunity.
It is quite an honor to do this. It is also kind of sad that we
need to do this. The U.S. Attorney mentioned a couple of
minutes ago the savings and loan scandal. And I have to tell
you that I have very often compared these two situations. The
difference, though, is that in the savings and loan scandal we
had people who were injured because they had money to put into
a bank. They had a little excess money and were able to save. I
think the victims in this case did not ever have that
opportunity. This is their lifeblood. This is their laundry
money, their food money, their living money.
What is sad is that we do not see the same level of
outrage. We should be outraged and the world should be outraged
because of this. We have heard all the details about how these
things work, so I am going to kind of stick to what it is we
are trying to correct.
We have mentioned several times today the appraisers. One
time we did have a mention of a real estate agent. And I did
want to say, before I start, that in everything that I have
heard, it is rare, the real estate agents who are fully
regulated, are generally not involved in these schemes. But for
the other people who are involved, there is more that needs to
be done.
The appraisers, the reputable appraisers, have been begging
us to demand full licensure. Their bills have failed in the
past in the legislature. And I had great hopes that this year
would be the year that that would be different. The house bill
was doing fine, however the companion bill on the senate side
died this week.
The argument is that they are federally regulated. The
problem is Federal regulation has a monetary trigger that
begins at $250,000 a transaction and up. I would ask that the
Federal Government please have another look at that. Because
there should be the same standards for whatever the cost of the
transaction. It is still the largest investment anyone makes in
their lifetime, their home. And whether you can afford a
$250,000 home or a $50,000 one, it is just as important to the
individual.
On the mortgage brokers, we have several bills you will
hear about that have something to do with banking practices in
this State. This whole industry has had such great changes made
in it that I think maybe our problem is that we have not
reacted to all of the changes. For instance, we do not really
license mortgage brokers. We license the mortgage lenders. The
lenders act as brokers.
However, the mortgage lender can have loan initiators in an
infinite number who are out there making these deals. I have a
bill that has already passed the house that I expect will also
pass a companion bill in the senate that will give our State
regulators more strength in looking into the practices of
mortgage lenders/brokers. They would have then an ability to
insist that all changes in licensure become available to them
immediately.
They would be able to do examinations in 18 months and
repeat examinations within 3 years. There would be funding to
do investigations. All of these things are needed because we
have grown a number of these characters, to 2,744 licensed
brokers, and God only knows how many people work for them. I
would like to see how this works. If this does not work, if we
are not able to keep track of these things, then I think the
next step would be to make sure that those brokers inform us as
to each and every party who is out there working on that
license.
In regard to the counseling, there is not legislation to
deal with the counseling, but I have had many conversations--
actually, we all have--at various times. And always the subject
comes up to the Governor about the counseling. The way the
counseling normally works now is that there are grants given to
nonprofit organizations. And those nonprofits will employ
housing counselors.
There are a variety of ways that these people get their
expertise. And so we have been talking with the Governor and
with Secretary Skinner and the Department of Housing and
Community Development, trying to get a better handle on that
and getting the State more involved in how that works and how
we can coordinate it and how we can make it more uniform. We
also talked to the Governor about the fact that the ultimate
victim in this is the community. And the community fails
because it is very difficult to sell a house when there are
four empties on the block.
It is very difficult for the people who are living there to
put up with the drug traffickers who take refuge in those empty
houses or who use the condition of the community as an excuse
to carry on their kind of activity. So we have talked about
intervention. We already do some of that in these areas. Ed
Rutkowski does a wonderful job of that.
We would like to get more money. We would like to get money
based on the fact that these are neighborhoods with particular
problems. In addition, we are asking the State also to take a
look at their low-interest loan program and put more money into
that, so that we can better aid some people and improve these
neighborhoods.
In regard to the FHA inspections, just a comment. On
hearing Mr. Quayle, it is a wonderful education for all of us
on how those things have changed. And yet, I will tell you,
from personal experience, the inspection of the FHA appraisers
or FHA inspectors has not changed everywhere. In the past 2
years--actually, it is less than that--it is just a year and a
couple of months--my family sold my uncle's house that was in
that area that we talked about earlier. And we totally rehabbed
that house, the family members did, before we put it up for
sale, and still had an FHA inspector who looked at every inch
of the place and found some things we had not improved.
Prepared Statement
My son sold a house last December in the Dundalk area, and
was put through a lot of minor repairs, things that you would
not have even seen walking through the house. And so it sort of
depends a lot on what income level they are looking at maybe or
what neighborhood they are looking at. But it seems that we
have stricter rules for the people who can afford better. And I
think we need to make sure that everything is fair for everyone
and that everybody gets the same level of regulation to protect
them.
And I again thank you very much for asking me here.
[The statement follows:]
Prepared Statement of Delegate Carolyn Krysiak
Senator Mikulski, Senator Sarbanes and members of the U.S. Senate
Subcommittee on V.A. HUD, and Independent Agencies, it is an honor to
testify before you today.
In recent years we have taken steps toward making the American
dream of homeownership possible for greater numbers of Americans. We
have opened the mortgage market, offered homebuyer incentives and
assistance.
However, unscrupulous people have taken these efforts and bent them
to serve their own ends. They have used them to defraud our most
vulnerable citizens, the elderly, the poor and the financially
unsophisticated. Indeed, the victims of mortgage fraud are mostly
female heads of households. Nearly all are members of minority
communities.
A few years ago the public was outraged because some Marylanders
lost money in the savings and loan scandal. These were people who had
deposited savings and excess income in savings and loan institutions.
These were people who had some resources. Today's victims of the
mortgage fraud ``flipping'' scam have no resources or excess income.
Usually, they have excessive debt. They are unaware they are being
victimized.
Unscrupulous home sellers, mortgage brokers and appraisers have
lured the poor into real estate transactions by grossly misrepresenting
the facts. The mortgage broker puts the pieces together. In a typical
``flipping'' transaction, the broker contracts with a seller of a low
cost property and then finds a potential buyer. The mortgage
application is falsified to make the buyer qualify for the loan. An
appraiser, who agrees to evaluate the property for a price well in
excess of its actual value, is enlisted in the scheme. The property is
usually cosmetically disguised to hide structural flaws and plumbing
and electrical inadequacies. Often the seller or the broker fulfills
his contract and purchases the property on the same day that it is sold
to the victim. It is not unusual for disreputable property owners to
sell a house back and forth to each other to inflate the price. There
are many variations on the ``flipping'' scam.
In Maryland we are attempting to combat this type of mortgage fraud
by providing greater enforcement powers to those agencies that oversee
the industries. Maryland recognizes that the ultimate victim of
mortgage fraud is the community. Neighborhoods are destroyed when the
``flipping'' victim cannot make the payments on the home, cannot afford
to repair the home and eventually, must surrender the property to the
lender. The lender is unable to resell the property in settlement of
the debt. The property remains vacant. Abandoned and boarded up homes
are eyesores. They are open invitations for criminals and drug addicts
to move in and drive out the decent neighborhood residents.
Appraisers.--While its neighboring states require licensing of
appraisers, Maryland adheres to the Federal law on appraisers.
Licensing is required for appraisers in transactions valued at $250,000
or more. Licensing is strictly voluntary for transactions under that
amount. Licensing is also required when a mortgage will end up in the
secondary market that involves Fannie Mae and Freddie Mac, etc. This
protection is insufficient. People who purchase a $250,000 home should
not be entitled to more protection under the law than people who buy a
$60,000 home. In the absence of licensing, the state has neither the
enforcement powers nor the resources to investigate the $60,000
transaction. It borders on criminal neglect to allow ``flipping'' to
continue and some time later bring a few fraud scam artists to trial.
We should not be content to think that ``flipping'' will end after we
have made in example of a few criminals. Unfortunately, HB 768 to
require the licensing of appraisers failed to gain the approval of the
Senate Finance Committee.
Mortgage Brokers.--HB 1337 has received House approval, and the
companion bill is expected to receive Senate approval. This measure
will give the Commissioner of Financial Regulations enforcement powers
necessary to monitor the ownership of mortgage broker licenses, provide
regular examinations and investigations, as well as the power to apply
civil penalties for infractions. Those penalties include fines and the
suspension or revocation of licenses. The mortgage market has changed.
No longer do we receive a loan from a neighborhood bank and make
payments to that bank until the obligation has been satisfied. Today
mortgages are sold and resold. Where once the State was responsible for
the examination of a manageable number of financial institutions, it
now must examine 2,744 mortgage brokers with the same staff.
Counseling.--We must take a good look at Housing Counseling. Such
counseling should be required for all sales, involving any public money
or government incentive. The counseling should include credit
counseling to assure that the party is ready to purchase a home and
offer guidance on steps that must be taken to become ready.
Counseling in Maryland is done through nonprofit organizations and
is often the type of guidance that might be given by a real estate
agent. Currently, Maryland's Housing and Urban Development Department
is looking at their program. The Department has pledged improvement and
funding through department regulations.
Marketing and Education.--A coalition of real estate agents,
mortgage brokers and lenders, banks, appraisers, non-profit groups and
government are putting together a campaign of bus advertisement, fliers
and educational opportunities. Hopefully, we can reach the public with
the message; ``Don't let your homebuying dream become a nightmare'' and
``If it seems to good to be true . . . it probably is.''
Community Recovery.--In talks with Governor Glendenning, he his
indicated he understands fully the impact of predatory lenders on the
community. We have requested an increase of intervention buying money
for Community Development Corporations and for community associations
in the affected neighborhoods. We expect an increase in low interest
mortgage money to be available in the threatened neighborhoods.
Victim Recovery.--A small percentage of victims will recover their
losses from civil suits. State and Federal fraud suits will serve to
punish the perpetrators of mortgage fraud. Hopefully, in the fraud
convictions the courts will require restitution. An ideal solution
would involve restructuring of loans to more accurately reflect the
value of the properties.
POSSIBLE FEDERAL CHANGES
HUD Houses.--Anyone who lives in a transition area will relate that
HUD-owned properties often pose a serious problem. They are not
maintained. They are not sold in an acceptable and reasonable period of
time. They are a wasted resource. Community Development Corporations
should be able to acquire these houses more easily.
FHA Inspections.--If one sells a house in a stable neighborhood an
FHA inspection is thorough. In such instances it's common for the
seller to be required to repair and replace handrails, window sills,
backyard cement, etc. in order to receive FHA approval. However, where
``flipped'' houses are concerned no such scrutiny takes place. The
victimized buyer ends up with a house in disrepair with open drains,
leaking roofs, dangerous electrical systems and deteriorating floors
hidden beneath carpeting. Nevertheless, these homes may very well have
an FHA approved loan.
Appraisers.--A Federal requirement mandating the licensure of all
appraisers would go a long way toward assuring equal uniform
application of the rules. I would urge you to remove the monetary
trigger and treat all transactions alike.
Mortgage Brokers.--State borders do not limit lending transactions.
The enforcement of the law is more appropriately accomplished at the
Federal level.
Counseling.--A comprehensive program of homebuying education and
counseling is imperative. It is the Federal government that has the
appropriate resources to effectively accomplish such a program.
Community and Victim Recovery.--I would suggest that funds under
the Community Reinvestment Act be used to stabilize communities
victimized by ``flipping.'' Individuals victimized by ``flipping''
should be offered greater and varied types of assistance under the
Community Reinvestment Act to reduce their mortgage obligation to
reflect the corrected appraisal.
I want to thank you for your attention to this issue. I appreciate
the honor and the opportunity you have extended to me to appear before
you today.
Senator Mikulski. Thank you very much.
Ms. McIntosh.
STATEMENT OF MAGGIE McINTOSH, DELEGATE, MARYLAND HOUSE
OF DELEGATES
Ms. McIntosh. Thank you, Senator Mikulski, Senator
Sarbanes. It, too, is an honor for me to testify before you
today. I am testifying, as I said, in my written remarks, as
the Chair of the subcommittee that oversees financial
institutions in the House of Delegates. That subcommittee is
part of the Commerce and Government Matters Committee.
This session, probably more than any session certainly in
recent history, our subcommittee and our House of Delegates has
had to deal with several issues, flipping being one of them.
Predatory lending, Senator Sarbanes, has become increasingly a
topic of concern. Several issues you raised earlier, also,
although I will not delve into them today, payday lending and
check cashing for profit--check cashing, which has also
flourished in our City. Basically, what we see, at least in my
estimation, is the convergence of two issues that have been
talked about today.
One, we have our bank teller going from a bank teller to a
bank machine. And now our bank machine is becoming an Internet
service. And the question becomes, when institutions that were
the anchors of our neighborhoods, the corner bank, the corner
savings and loan, the corner credit union, when they leave our
communities, what is left behind and what services are left
behind for those who are still there? That is a policy issue we
need to look at both federally and at the local and State
level.
This has converged, I am afraid, with also the issue of
housing and housing stock. Senator Mikulski, when I was
privileged to work for you some years ago, I recall us being
very concerned about what was reported at that time as over
1,000 vacant homes in this area, described today as the Little
Flower and the Patterson Park area. I remember that now. The
homes were not vacant as in boarded up vacant, but basically
the families had moved out. The grandmother or grandfather has
passed on, and the younger generation of that family was not
moving in to take over that house, as had been done in
generations past.
Today, sitting here, I unfortunately heard what happened to
many of those homes. They became subject to folks who came in
and bought up those homes and flipped them. So the convergence
of both the banking and the brokerage business in this City
have caused great problems.
I put a bill in that I am pleased to tell you I think
filled the gap in our State regulatory area when it comes to
regulating financial institutions and mortgage brokers who were
involved in flipping. That bill has passed the house and I am
pleased to say passed out of the senate finance committee the
other day. It is a bill that addressed a problem that I believe
State regulators faced when they heard early on about the
flipping schemes.
Our Commissioner on Financial Regulation in Maryland had no
ability, no ability even when the mortgage brokers were
licensed, to go in and issue a emergency cease and desist order
or to stop a transaction that they felt may be questionable.
And so the bill that I introduced gives the Commissioner on
Financial Regulation that ability. It also expands her
investigatory powers. And it gives her civil remedies as well
as the criminal remedies.
We know that with predatory lending, although not so on
flipping, I think these are very large and egregious loans that
have been forced on people unknowingly. But I do know that we
have seen a lot of these start out in small kind of infractions
that she could easily move in and impose fines and have an
administrative hearing to do the kind of investigation needed.
So the bill basically fills a gap that we see from flipping,
from check cashing, from payday lending, in our regulatory
arena. It also, by the way, calls on the Governor to
appropriate the funds needs to have the investigators to do the
kinds of investigation needed and to do increased enforcement.
I do want to mention, with my two colleagues sitting with
me today, that I think it is one of the first times that our
City delegation, chaired by Delegate Mamariotte, when the
Governor came to visit, we not only talked about school
construction needs, we talked about enforcement needs and we
talked about regulatory needs in this area. So one of the
priorities for the City delegation this year was increased
funding for enforcement to look at flipping and to look at
predatory lending practices in our City.
I will summarize and close by saying that it is very
important for us to look at how we work together federally and
at the State level to make sure we do not create big kind of
holes in our regulatory system for one or the other of us to
drive through. We have closed, I think, all of the gaps on
check cashing, on payday lending, from the State perspective.
But there is still one at the Federal level.
And on flipping, I think this is an area where we have to
continue to look at, in particular, where the State can bolster
the kind of regulation and enforcement that you need. And I
thank you very much for allowing me to be with you today.
[The statement follows:]
Prepared Statement of Delegate Maggie McIntosh
Senator Mikulski, Senator Sarbanes, and members of the U.S. Senate
Subcommittee on V.A., HUD, and Independent Agencies it is an honor to
testify before you today. The issue of ``real estate flipping'' that
you have asked me and my colleagues from the Maryland General Assembly
to address is a very serious one. Today, my remarks are in my capacity
as Chair of the Financial Institutions Subcommittee of Commerce and
Government Matters. It is from this vantage point that I have witnessed
several practices, such as ``flipping,'' ``pay day lending,'' and the
emerging ``for profit check cashing services,'' move into predominately
urban and, unfortunately, predominately poor communities. I have termed
this phenomenon, ``banking while poor.'' After listening to my
colleagues, especially Delegate Carolyn Krysiak, describe how our
regulatory and enforcement agencies in Maryland could not adequately
address such practices as ``flipping'' in a timely manner, I began to
look at whether our enforcement agencies had the tools to protect our
citizens. The answer was no.
House Bill 727, introduced and, I am proud to say, passed by the
House of Delegates, addresses a gap in enforcement powers for the
Commission of Financial Regulation in Maryland. It expands the
investigative and enforcement powers of the Commissioner of Financial
Regulation and directs the Governor of Maryland, in the Fiscal year
2001 and each fiscal year after, to appropriate to the Division of
Financial Regulation funds for the positions necessary to implement the
new powers authorized under this bill. Specifically, House Bill
727authorizes the Commissioner to make investigations to determine
whether any person has violated any law, regulation, rule, or order
over which the Commissioner has jurisdiction.
For the purpose of an investigation or proceeding, the Commissioner
may: administer oaths, subpoena witnesses and compel their attendance,
take evidence, and require the production of books and records.
When the Commissioner determines that a person has engaged in an
act that constitutes a violation of a law over which the Commissioner
has jurisdiction, and an immediate action is in the public interest,
the Commissioner may issue, without a prior hearing, a summary cease
and desist order, provided that the summary order gives notice of the
opportunity for a hearing before any final action.
After proper notice and a hearing, if the Commissioner finds that
the person has engaged in a violation of any law, the Commissioner may
order a final cease and desist order, suspend or revoke the license, or
issue a civil penalty of up to $1,000 for the first violation and a
maximum of $5,000 for each subsequent violation. Additionally, the bill
authorizes the Commissioner to seek remedies from the court. These
remedies include civil fines, a temporary or permanent injunction, or
restitution.
How does this differ from current powers of the Commissioner for
Financial Regulation? First and most important, the Commissioner
currently has no authority to issue an emergency summary cease and
desist order over any licensed or non licensed person violating any
law, regulation, rule, or order over which the Commission has
jurisdiction. Second, the Commissioner does not presently have the
ability to enforce the law in an administrative proceeding against non
licensees engaging in all categories of lending within the
Commissioner's jurisdiction. Currently the Commissioner can only refer
violations of the consumer lending law to the Attorney General for
criminal prosecution. Although that may be the final remedy, we have
witnessed in the ``flipping'' scheme, the need for swift intervention
to protect our citizens.
How will the passage of House Bill 727 allow the Commissioner for
Financial Regulation to react differently in violations such as real
estate flipping? Even if the mortgage broker is non licensed, the
Commissioner will be able to investigate, order a summary cease and
desist, and level fines. The issues in real estate flipping are
complex. One of the aspects was the non licensed brokers working with
property owners and appraisers to approve bogus loan packages. The
Commissioner will now have the authority to stop that transaction. This
legislation also allows for broader investigative authority and
assessment of potential violations.
Senator Sarbanes, as you and Senator Mikulski know, the United
States Congress has passed a banking bill, which is now law, that will
give our Commissioner of Financial Regulation additional
responsibilities. Although we cannot project the future of banking in
Maryland, we can state the obvious--banks as we know them today will
change. Due to the Federal Banking Modernization Act of 1999, banks
will be able to engage in, or affiliate with, insurance and securities
companies. Although the Commissioner of Financial Regulation has
sufficient regulatory power over banks and their subsidiaries, it was
not clear that current Maryland law provided the Commissioner
regulatory authority over affiliates of banks after the action taken by
Congress.
With the cooperation of the Maryland Bankers Association, House
Bill 727 gives the Commissioner of Financial Regulation summary cease
and desist powers with respect to any person engaged in lending,
whether licensed or not, under the Maryland Consumer Lending Laws. This
legislation will put our Commissioner of Financial Regulation on an
equal playing field with the Insurance and Securities Commission.
We have witnessed over the past decades our bank teller become a
bank machine, and now our bank machine will soon become a web site. We
must carefully examine the void in financial services remaining in our
communities and ask how and what is filling that void? Who among us is
remaining behind? Are we creating a two-tier financial services system?
On a parallel track we have seen our strong urban--neighborhoods suffer
from urban flight and decay. Part of our solution in many transitional
neighborhoods has been to encourage new homeowners. I recall the debate
when former Secretary of Housing and Urban Development, Jack Kemp,
wanted to turn public housing over to the tenants. Ownership is a
laudable goal but successful home ownership requires building capacity.
As state and federal policy makers we must help to build capacity. We
must also examine the regulatory and enforcement powers we hold to
ensure that timely detection and swift action can be taken to reduce
harm in areas that I earlier referred to as ``banking while poor.''
Again, let me thank you for your time and attention to this serious
matter. I am honored to have appeared before you today.
Senator Mikulski. What did you call it, banking while being
poor?
Ms. McIntosh. Banking while poor. Unfortunately, I hate to
say that. The bankers, the hair goes up on the back of their
neck, because it is not our Federal and State chartered banks
that have been a problem in the flipping. And they are now
becoming victims in many instances. But yes, this is banking
while poor. What are the services left in our communities when
our local branches have moved out? And it is progress, I guess,
to do banking on the Internet now, but there are a lot of
people left behind in that progress.
Thank you.
Senator Mikulski. Delegate Rosenberg.
STATEMENT OF SAMUEL I. ROSENBERG, DELEGATE, MARYLAND
HOUSE OF DELEGATES
Mr. Rosenberg. Thank you. As it is for my colleagues, it is
an honor for me to be here today, as well. I have worked with
both of you on housing issues in the past: condominium
conversion, Section 8 conversion. And for the last 8 years, I
have worked with Delegate McIntosh, representing northwest
Baltimore City and County on a host of issues, and it has been
my privilege. This is the first time I have worked with
Delegate Krysiak, and she has been a real leader on this issue.
And it really affects her neighborhoods. And she has chaired
the subcommittee on economic matters, which has dealt with it.
Let me just address two points where I have been
specifically involved, because we have had a long hearing. One
is that of counseling. I chair the subcommittee on the
appropriations committee in the House of Delegates that has the
budget of the State housing requirements. So we have inserted
language in the budget on the house side that requires that
there be counseling and education on home buying if there are
State dollars involved.
We have heard a lot of talk today, and very importantly,
about the need to do that as well with FHA. But we are going to
conference on our budget. And from what I have heard today, I
am going to add more language, more than just counseling and
education, but making sure that it is done early, that it is
not done at the settlement table. So we are going to try to
strengthen that language in the conference. And, at least if
there are State dollars involved, that we can get that
counseling in at the appropriate time, and perhaps even study
some of these issues so we can create a better record for next
year to deal with the appraisers, who are one of the big
problems here.
Another version of this scam has to do with creating a
trust in the name of a nonprofit. There have been some
instances where the original property owner, the investment
property owner, creates a trust in the name of Walters Art
Gallery, without any knowledge of the Walters Art Gallery. So
that when the unsuspecting buyer goes, wow, the Walters is
involved in this; this must be a decent house that I am buying;
they would not be involved in something like this.
So what we have done--and this legislation has passed out
of the house and is awaiting action in the senate--is require
that there be the written acceptance of a nonprofit when an
instrument transferring property to that nonprofit or naming it
as a beneficiary to an interest in the property. That is just
one aspect of the problem, but I can see by your reaction that
these people will go to great lengths and great imagination to
try and take advantage of unsuspecting people. So as we try to
deal with it in one area, it pops up in another.
Prepared Statement
I think the attention that has been focused on this
problem, as Ken Strong said earlier, this is the blockbusting
of the nineties now with the new millennium, and we need to
address it because the neighborhoods are at risk. And I think,
working together, we will solve this problem.
[The statement follows:]
Prepared Statement of Delegate Samuel I. Rosenberg
Senator Mikulski, Senator Sarbanes, and Members of the
Subcommittee: Many of Baltimore's neighborhoods are suffering from a
housing crisis. First-time home buyers have fallen prey to the
unscrupulous real estate practice known as house flipping. Low-end
homes are bought at bargain basement prices and quickly resold to
inexperienced purchasers at highly inflated prices.
As part of the scam, the flipper engages the services of a mortgage
broker and an appraiser. The broker often connects the buyer with an
out-of-state firm specializing in high interest loans for buyers with
poor credit. The home is falsely appraised at a higher value, enabling
the buyer to qualify for a substantially higher mortgage.
Far too often, the buyer realizes the home is worth much less than
the appraised value, is unable to continue making payments on the
mortgage, and abandons the property. Preventing this kind of fraud is
crucial to the well being of the Baltimore neighborhoods where this
practice is concentrated.
In another version of the scam, the flipper creates a trust in the
name of a non-profit organization, without its knowledge or consent. A
purchaser is then induced into buying the property at an inflated
price, falsely lured into the deal by the respectability derived from
the association with the non-profit.
To prevent this, I introduced House Bill 1044, which would require
that the written acceptance of a non-profit organization accompany an
instrument transferring property to the 501(c)(3) or naming it as a
beneficiary to an interest in property. The unknowing non-profit would
no longer be an unwilling accessory to unscrupulous real estate
schemes. This legislation has passed the House of Delegates and is
awaiting action in the Senate.
I also had language inserted in the State operating budget
requiring counseling and education on home buying for people who are
using state funds to assist in their purchase.
Home buyers should be able to own a home without having to worry
about scams that seek to defraud them through fraudulent appraisals,
inflated prices and false representations. I welcome this
subcommittee's interest in this issue and thank you for the opportunity
to present my views on the flipping crisis in Baltimore City.
Greater Baltimore Board of REALTORS, Inc.,
Lutherville, MD, March 27, 2000.
The Honorable Barbara A. Mikulski,
Subcommittee on VA-HUD and Independent Agencies,
Committee on Appropriations,
U.S. Senate,
Washington, DC 20510.
Dear Senator Mikulski: On behalf of the 2,700 members of the
Greater Baltimore Board of REALTORS (GBBR), thank you for the
opportunity to present written testimony before the Subcommittee on the
issue of fraudulent real estate practices in Baltimore City. Enclosed
please find our prepared testimony for the March 27, 2000 hearing. For
your review I have also enclosed information on the exciting
educational outreach campaign GBBR is undertaking with regards to this
issue. If you have any questions or concerns about our testimony or the
enclosed materials, please do not hesitate to call Carolyn Blanchard
Cook, Director of Government Relations, at 410-337-7200.
Sincerely,
Patrick J. Kane,
President.
Prepared Statement of the Greater Baltimore Board of REALTORS
FRAUDULENT REAL ESTATE PRACTICES
On behalf of the 2,700 members of the Greater Baltimore Board of
REALTORS (GBBR), thank you for the opportunity to present
this written testimony on such an important topic. At the outset, GBBR
would stress that it does not condone any real estate practice that
involves fraud and we, as a professional trade association, find it
reprehensible that investors, appraisers and lenders were engaging in
these kinds of practices. Furthermore, to the extent that all of the
willing participants in these schemes can be identified, they should be
held accountable under applicable law and regulation. GBBR would also
stress that the overwhelming number of cases involving real estate
fraud were perpetrated by a handful of actors and that these practices
are not indicative of the way the vast majority of real estate
professionals conduct business.
Nevertheless, in response to the devastation that these fraudulent
real estate practices are having on Baltimore's neighborhoods, GBBR
convened an Issues Mobilization Task Force in November 1999. GBBR
convened this Task Force for several reasons: First, the vast majority
of these incidents have occurred without the use of a licensed real
estate professional, licensed appraiser and homeownership counselor.
However, all of these industries are being negatively impacted by these
scams. Secondly, the real estate industry believes that it is important
to state unequivocally that we as a collective industry of
professionals will not tolerate fraudulent practices as a cost of doing
business. Finally, GBBR believed it was important to bring the
respective industries and interested parties together to develop ways
to effectively end these fraudulent real estate practices. The Task
Force is an ad-hoc coalition of some 45 individuals and organizations
in the lending, appraisal, homeownership counseling and real estate
industries, as well as community organizations and state and local
elected officials.
To that end, the GBBR Task Force has focused its efforts primarily
on the need to educate the public on the fraudulent scams that have
been occurring and how to avoid these scams; as well as to work with
other groups to encourage the Attorney General to Investigate these
scams and prosecute the fraudulent practices under the State's consumer
protection laws. GBBR has also been actively working with the Maryland
Real Estate Commission to educate them on these scams and has received
assurances that should these transactions involve licensed real estate
agents, the Commission is committed to full disciplinary action where
warranted.
For the most part, all of these transactions involved one thing:
fraud. The sellers colluded with the appraisers to create an appraisal
that far exceeded fair market value to justify a sales price that far
exceeded fair market value. The seller then colluded with a mortgage
broker to falsify the buyer's income, credit history and contract sales
price so that the buyer could get not only the loan, but the loan at
100 percent of the sales price. In order to make these transactions
happen, a lot of paper and information was falsified. All of this
falsification amounts to fraud and is illegal under Maryland and
federal law. The Consumer Protection Division is responsible for
enforcing Maryland's Consumer Protection Law and we are glad to see
that the Attorney General has stepped up to the plate and begun to
actively investigate and hopefully prosecute these cases. GBBR is also
pleased to see that the U.S. Attorney is also actively investigating
these cases.
GBBR believes that a great number of the horror stories you have
read about could have been eliminated if the buyers had been better
educated on the homebuying process and how to exercise their rights
under the real estate contract. To that end, we have developed a year
long outreach campaign that will be targeted in those zip codes that
are being hit the hardest by these fraudulent practices. The campaign
will consist of multiple direct mailings, targeted bus advertisements,
public service announcements and coordinated outreach with the faith
communities in these zip codes. The thrust of the campaign will be the
theme ``Don't let buying your dream home become a Nightmare--contact a
homeownership counselor or a REALTOR before you sign the
contract to purchase.'' In other words, bring on a professional before
you get caught in one of these scams. A secondary theme in the campaign
will be ``not everyone is ready to buy today, but a homeownership
counselor or a REALTOR can get you into your dream home at a
price and an interest rate that is right for you.''
The Task Force is also focusing on this secondary theme because the
real tragedies in these cases are those buyers who tried to do
everything right. They talked with a REALTOR and a housing
counselor and because of credit issues or a lack of a down payment were
told they were not ready to buy today--Not that they couldn't ever buy,
but that they weren't ready today. And, disappointed, they went home.
And in their mailbox they saw a flyer that said ``You can own your
dream home today, no money down, bad credit don't worry, etc.'' And
instant gratification being what it is, they got sucked into the scam.
Well the reality is that not everyone is ready today to become a
homeowner. Lack of down payment and poor credit are two of the primary
reasons why people can't buy today. But there are a whole bunch of good
and decent counselors, REALTORS and lenders who are willing
to work with these buyers for the six months to a year that it might
take to save for the down payment or straighten out the credit. And
that is the message we are going to try and get out to the public with
this educational campaign.
We anticipate that this campaign will cost in the neighborhood of
about $165,000 and will reach well over 360,000 people. The campaign
itself is designed to hit our targeted audience multiple times over the
next year so that the message ``if it is too good to be true, it
probably is'' stays before them for an extended period of time. GBBR
has committed $8,000 towards this effort and the Baltimore City
Department of Housing and Community Development has made an initial
commitment of $15,000. We are asking our Task Force partners, members
of our own organization and various other groups to also assist us in
funding this important effort.
In short, we in the real estate industry, as well as all of us
participating on the Task Force, are committed to doing what we can to
stop these fraudulent practices. They do nothing but devastate entire
neighborhoods and ruin the credit of those who have gotten caught up in
the scams. And the message we want to leave with you is that we are
collectively out front on this issue doing what we can to educate
buyers on how the right way to become homeowners.
The 2,000 possibly suspect sales that were reported in the
September 21 issue of the Sun are not all illegitimate sales. But, of
those that were illegitimate, it is almost certain that these
transactions involved some amount of fraud. Fraud is what the various
governmental agencies need to focus on. Fraud can and should be
prosecuted under existing law. Prosecute the handful of perpetrators of
these fraudulent transactions and the problem is almost solved.
Homebuyers can and should be educated on what they need to do to
protect their investment. We at the Greater Baltimore Board of
REALTORS and the members of our Task Force invite you to join
us in our efforts to better educate homebuyers on the homebuying
process and we welcome your support of our efforts.
819 N. Kenwood Avenue,
Baltimore, MD, March 27, 2000.
Hon. Barbara A. Mikulski,
U.S. Senator,
U.S. Committee on Appropriations,
501 East Pratt Street,
Suite 253,
Baltimore, MD 21202.
Dear Senator Mikulski: My name is Ms. Darlene Glover and I am a
victim of the ``House Flipping'', that has become a major concern for
this committee and a major problem for the low-income, single-parent,
unknowledgeable, residents of Baltimore City.
I was in attendance at today's hearing and I had the opportunity to
hear several testimonies regarding this matter. I was hoping to be able
to give my input on flipping and what I am going through. I was
informed that this was not possible so I am submitting this letter,
along with documentation on my case, to become part of the official
record on this subcommittee.
My horror story started in 1996 and it is still haunting me today.
The attached news article will give you and the subcommittee an idea of
what I am going through. I have met with Mr. Carl Cleary of SECO
several times with hope of obtaining some type of finance for rehab on
my home but I keep running into brick walls. I am always available to
help in anyway I can with killing this ``House Flipping'' epidemic.
Sincerely,
Darlene Glover.
[From the Sun Staff]
A Cruel Lesson in Home Buying
(By John B. O'Donnell and Tom Pelton)
From her kitchen window in East Baltimore, Darlene Glover watched
the junkies line up in the alley from dawn until well past dark to buy
crack cocaine.
Her son watched, too. He was 9 years old.
Desperate to buy a home in a safer neighborhood but lacking good
credit, the 42-year-old advertising assistant became a victim of real
estate flipping--an increasingly common practice in which speculators
buy shoddy homes and then rapidly sell them to naive purchasers for
inflated prices.
Glover paid $60,000--twice the amount she thought she was paying--
for a problem-ridden house at 819 N. Kenwood Ave. that a speculator had
purchased six months earlier for $8,000, according to city records.
Today she's broke, more than $60,000 in debt, and her dream of home
ownership--``a picket fence, a dog and all that''--sits cold, dark and
empty.
Now renting down the street, she finds the vacant house a painful
reminder when she walks past.
``I feel embarrassed, I feel like I failed at something I wanted to
do,'' said Glover.
``It bothers me because I want to be a homeowner and leave
something for my children. Now I live in an apartment, and that house
is staring me in the face every day,'' she said.
Like hundreds of other Baltimoreans, Glover was burned by a real
estate brush fire that has swept across struggling neighborhoods in
recent years, cheating first-time homeowners, lenders and aspiring real
estate investors.
More than 2,000 Baltimore houses have been bought and resold for
more than double their purchase price in the past three years, the
State Department of Assessments and Taxation says. In two major
lawsuits, lenders claim that they were duped into providing mortgages
that exceeded the value of the houses being financed.
A Sun examination of more than 400 flips found that many ads
included falsified documents to make buyers appear creditworthy,
inflated appraisals and sham second mortgages--all aimed at getting a
loan for more than house was worth.
Federal and state investigations are under way, and, sources say
federal investigators have gone beyond document examinations and begun
to call in witnesses.
``I was scammed. I gave that lady all my trust,'' Glover said of
Maxie Hoffman, who sold her the house.
Hoffman, 52, a landlord and speculator, lives in a waterfront home
with a silver Porsche 924 parked in the driveway in the Chesaco Park
neighborhood of Baltimore County.
``I don't really remember the case. It was a few years ago,''
Hoffman said in a brief interview concerning Glover. ``She's probably
exaggerating. I don't want to talk to you.''
Hoffman said that she didn't do ``anything wrong and added that she
didn't know Glover had bad credit.
``The lady is not telling you the truth,'' Hoffman said, refusing
to elaborate.
Need for unbiased help
Will Backstrom, a homeownership counselor for Neighborhood Housing
Services in the Patterson Park area, said Glover has not been alone in
misplacing her trust. It is not unusual for naive first-time buyers to
rely on the seller in making key decisions. And that, he said, is the
problem.
Glover ``would never have gotten into that transaction if she had
had a counselor who had no financial interest in the transaction,''
said Backstrom.
``The American dream is homeownership--but not at all costs. People
who are thinking of buying a house should come to see us.''
Glover is a tall, dignified woman from a middle-class neighborhood
in West Baltimore. She flashes a brilliant smile and warm greeting to
most people she meets, despite a painful injury to her left knee that
makes her limp.
She wears an ``I Love Jesus'' pin on her long winter coat and has a
large portrait of Jesus on her wall, not far from where her now-12-
year-old son loves to play Nintendo video games.
Job, evening studies
At 7:50 am. weekdays, she catches bus No. 62 heading west on
Madison Street to her $24,000-a-year job as an assistant marketing
coordinator for the architectural and engineering firm Daniel, Mann,
Johnson and Mendenhall. At night, she takes computer classes at
Sojourner-Douglass College.
``Most of my life, I've struggled,'' said Glover, a divorced mother
of two. ``I wanted to go to college, because I wanted to be a child
psychologist. But my family didn't have the money for it.
``There are times when I get tired of being the breadwinner, the
mother and the father. But I put my trust in the Lord and keep going.''
Until 1997, Glover and her two sons lived in a rented rowhouse at
1620 E. Lanvale St. in the middle of a violent drug market.
She recalls hearing the pop of gunfire as two neighborhood boys,
were shot to death on the corner near her home.
Audrey Wilkes, director of the community outreach program at Zion
Hill Baptist Church, where Glover volunteered to help needy people,
said Glover was brave to try to rescue her sons.
``Sometimes when I drove her home from church, drug dealers would
literally be standing on the doorstep,'' Wilkes said. ``She was a
strong woman who wanted to do the right thing by moving to a better
neighborhood.''
Glover saw an ad in The Sun that offered a rent-to-buy deal for
buyers with poor credit. She called Hoffman, who she said offered to
sell her 819 N. Kenwood Ave. for $29,200.
Exciting opportunity
She was excited about becoming a homeowner in a less dangerous
neighborhood north of Patterson Park, despite her poor credit history
and then salary of $17,500.
On April 30, 1997, Glover signed on the dotted lines--many dotted
lines.
She recalls the day vividly Hoffman picked her up at work she said.
On the drive to a Pikesville title company, Hoffman asked her
whether she had $6,000. When she said she didn't, Hoffman handed her
six money orders worth $1,000 each.
``She told me to make it look like it was mine,'' said Glover.
So Glover signed the money orders, put them in her purse and
submitted them at settlement.
The document that outlines details of the deal lists the $6,000--as
``cash from buyer.''
Glover was so ecstatic about owning a home that she didn't read
everything she signed.
The Rev. Randolph Price, pastor of Zion Hill Baptist Church,
recalled that his parishioners held a jubilant home-blessing ceremony
for Glover, with two dozen people holding hands in a circle in her
living room.
``We all told her she was blessed to buy that house,'' Price said.
``But I guess we should all read the fine print.''
Over the next year, Glover gradually learned the grim details of
the agreement. The price was $60,000--not $29,200. She had signed two
mortgages, not one, as she thought.
The first was a 30-year loan from One Stop Mortgage Inc., a Wyoming
firm, with $294 monthly payments and an interest rate of 11.7 percent
that could rise to 18.7 percent but never decline.
``I felt stupid,'' Glover said. ``I didn't want anybody to know. I
didn't want my family to know.''
Glover realized her dream house had become a frightening burden.
The house looked good when she bought it, with new carpeting and a
fresh coat of white paint slapped over the wallpaper.
But it wasn't long before problems surfaced. The roof leaked into
the second-floor bathroom, dislodging chunks of plaster. Most of the
radiators and many electrical outlets didn't work. During the winter,
the house became so cold that she and her sons could see the breath
rising from their mouths in the living room.
The pipes to the bathtub weren't hooked up properly, so when she
turned on the faucets water would ooze through the kitchen ceiling. The
bathroom sink and kitchen counters weren't attached to the walls. The
basement flooded; the shower spat only a trickle.
She moved into an apartment a half-block south on Kenwood Avenue,
dreading the $60,000 debt hanging over her head. The foreclosure suit
was dismissed for lack of prosecution in August. But Glover is afraid
to move back into the vacant home because the lender could resurrect it
at anytime.
Impact on personality
Denise Murchison, Glover's sister, said Glover has suffered not
only financially but also emotionally. Her normally free-spirited
personality changed as she became more introverted and suspicious.
``She thought buying this house was such an accomplishment,'' said
Murchison. ``And then she found out it was just a rip-off. It was
devastating. She doesn't trust anyone anymore.''
[From The Sun, December 31, 1999]
Homebuyer Sues Seller, Alleging Fraud and Breach of Contract
(By Eric Siegel)
An East Baltimore woman who purchased a problem-ridden house for
7\1/2\ times what it had been sold for six months earlier has filed a
lawsuit against the seller, alleging fraud and breach of contract.
The suit by homebuyer Darlene Glover says she was duped by seller
Marie Hoffman into paying $60,000 in 1997 for a house at 819 N. Kenwood
Ave. in Patterson Park that Hoffman bought for $8,000 six months
earlier.
Filed Tuesday in Baltimore Circuit Court by Civil Justice Inc., a
nonprofit legal advocacy group, the suit is the latest action targeting
house ``flipping''--a practice in which real estate speculators buy
substandard properties and quickly sell them at excessive prices.
The practice is frequently accompanied by falsified documents and
inflated appraisals.
Investigations into flipping have been launched by a U.S. Senate
subcommittee and by three federal agencies--the FBI, the Postal
Inspection Service and the U.S. Department of Housing and Urban
Development--and the Maryland attorney general's office.
Lawsuits have been filed on behalf of dozens of homebuyers and
lenders who claim they were deceived into offering mortgages that
exceeded the value of the houses being financed.
Glover, 42, whose plight was detailed last month in The Sun, says
in her lawsuit that she was told by Hoffman that the cost of the
property would be $29,200.
Glover also alleges that Hoffman improperly gave her six $1,000
money orders to be used for a down payment on the house at settlement
to make it appear that it was her money and that Hoffman failed to make
promised repairs to the property.
The suit asks the court to rescind a $24,500 second mortgage on the
house from Glover to Hoffman and seeks another $24,500 for repairs as
well as punitive damages ``in excess of $25,000'' for harm to her
credit rating.
Glover, a $17,500-a-year advertising assistant who moved out of the
house after she fell behind on her mortgage payment and her lender
filed foreclosure papers, said she hopes the lawsuit will help her
erase her debt.
``I just want to get out of this situation, so I won't be held
liable for the money, so it won't be held over my head,'' she said
yesterday.
Efforts to reach Hoffman, a landlord who lives in Chesaco Park in
eastern Baltimore County, were unsuccessful. Last month, she denied
wrong doing in the sale and said Glover was ``exaggerating.''
The suit says Hoffman has been involved in as many as 100
transactions similar to the Glover sale.
Denis Murphy, executive director of Civil Justice, said the Glover
lawsuit is the fourth such lawsuit he has filed.
Senator Mikulski. Thank you. Your testimony was excellent.
Senator Sarbanes, how about you go first.
Senator Sarbanes. Well, Madam Chairman, I, a long time ago,
committed to give a speech over in Silver Spring very soon. So
I am going to have to excuse myself. First of all, I will not
be able to join you, unfortunately, on the tour. But I will get
a full report about that.
I want to thank our three colleagues in government not only
for their testimony, but for their efforts in the General
Assembly to obtain State legislation. I think the message ought
to be pretty loud and clear that these practices are going to
be brought to a halt. I think the law enforcement agencies are
moving with vigor and force, and they are already beginning to
bring some people to justice. And I am sure others will be
brought there as well. And I think the joint task force they
have set up is a very important step, and perhaps a very
significant development at the Federal level. And Senator
Mikulski and I have been in communication with the Federal
Reserve.
There was a speech that Alan Greenspan gave just last week
in which they have now announced a multi-agency task force
involving 10 agencies, including the Department of Justice,
HUD, and the Federal Trade Commission. And Alan Greenspan gave
a very sharp speech on this issue of predatory lending. And we
intend to push hard on that initiative.
Senator Mikulski and I have been pressing the Fed on that
for some time, and we are hopeful that out of that will come a
renewed commitment by the regulators to move ahead in their
support for actions in the legislative process as well. We have
got to carve out these abusers who are exploiting people in an
absolutely deplorable way. And they have moved in, and we are
anxious to get people into home ownership. We want to do that.
That is an accomplishment. But they need to be brought into it
in a reasonable way, appropriately counseled, so they are not
taken advantage of and exploited.
And we have heard these examples here this morning, and I
think it is imperative that we mount this joint effort both at
the Federal and State level. And at the Federal level, both
between the regulatory bodes and the executive branch and the
legislative branch, to try to get at these practices. Some very
sharp operators have been making a lot of money by, in effect,
as the one woman said earlier, transforming what was their
American dream into an American nightmare. And we do not intend
for that to continue.
And I really commend Senator Mikulski for bringing the
appropriations subcommittee here in order to have this hearing.
It is a serious problem, obviously, in Baltimore, but it is
happening elsewhere in the country, as well, and elsewhere in
our State. And I know all three of these delegates, and I
deeply appreciate their strong commitment to this issue.
Thank you very much. And if you will excuse me, Madam
Chairman.
Senator Mikulski. Tell everybody in Silver Spring I said
hi, and read the bottom line at any settlement.
I want to turn to some questions for our colleagues and for
those in the audience. And I might say that this has been an
excellent program with the people that have been the most
affected speaking and Federal law enforcement, and of course
our State response. And the question might be, where is HUD and
where is the HUD I.G.?
We are going to be holding a hearing on Thursday in terms
of the HUD appropriations. And a major focus of my questioning
with Secretary Cuomo will be HUD and FHA. Flipping will be one
component. So this is where we will deal with HUD. And we feel,
rather than talking remotely, because flipping and FHA disposal
is a national problem, we will deal with this Thursday. And we
will be discussing this with Secretary Cuomo.
In addition to that, we are looking at lessons learned from
VA. At no time in our testimony or our conversations does the
VA mortgage program seem to be involved in flipping. This is
another important Federal tool. And we want to know what is
their framework for operation, where we could do lessons
learned and apply it to FHA.
We have also, as Senator Sarbanes indicated, been in touch
with Alan Greenspan. And also I have been in touch with Fannie
Mae and Freddie Mac. Because the financial deregulation and, as
ACORN so wonderfully said, there are the big guys, there are
the out-of-state and maybe out-of-country banks, and then there
are the little, itty-bitties that really masquerade as
financial institutions, that then are predatory. And of course
that goes to what you were saying, Delegate McIntosh, that
there are organizations that perform a function and masquerade
as if it were a financial institution. But they are also
outside the regulatory framework. So we are looking at that.
The other thing we are looking at, and we will be talking
with Secretary Cuomo and part of our afternoon walking around
is HUD as a landlord, HUD as a holder of last default, HUD as
contributing to neighborhood decay through its disposal of what
it then takes in. But we felt that was best used when we were
out in the community. But we are interested in things like
asset zones. How could nonprofits be involved? If they can flip
so fast, why cannot HUD move those properties quickly to a
nonprofit organization like Northwest Baltimore Corporation,
the Park Heights, whoever, SECO, that wants to get into buying
in bulk and then renovating, repairing and returning to the
market at a fair value so that people can pursue home
ownership?
Now, we are in it for the people and we are involved in the
neighborhoods. Our whole interest is to prevent the gouging of
the poor and neighborhood destabilization. Senator Sarbanes and
I intend to be very persistent about this. I have 4 more years
left in this term and a whole lot of life ready to go. Senator
Sarbanes is on the brink of a 6-year term. So we are not here
today and gone tomorrow. When the television cameras go, we are
still going to be poring over your recommendations.
So, again, the message is to the flippers: If you are here,
why do not you pack up and leave. And if you think about coming
or moving to some other place, we are here. We are truly here.
And knowing the three of you, we are going to be here a long
time, too.
So then this takes me to a few of my questions. Delegate
Krysiak, what I would like to ask you is about the appraiser.
You spoke very firmly and very clearly and echoed, I know, my
sentiment, which is the issue of, under FHA and the Federal
Government, that if you buy a $250,000 house, you get one kind
of appraiser, but if you buy a $65,000 house and then it is
flipped, you get another. You said license is required in
transactions valued at 250 or more.
Would you tell us what your recommendations would be at the
Federal level?
Ms. Krysiak. Now, when you say two different kind of
appraisals----
Senator Mikulski. I might have misspoke. You say in your
testimony license is required for appraisals in transactions
valued at $250,000.
Ms. Krysiak. That is the Federal regulation. And Maryland
follows Federal regulation. We do not have any regulation
beyond that. We were proposing that everyone be regulated or
that everyone be licensed. And the reason for that is because,
as long as it is kind of a voluntary licensure, you do not have
full enforcement powers. You do not have the money for
enforcement. And you probably do not have the inclination to do
it either.
And when you are dealing with smaller loans, that is the
reason why many of us feel it is necessary for all appraisers
to be required to have a license for any transaction.
Senator Mikulski. So require a license for all appraisers.
And then also, I do not remember if it was Mr. Strong or Mr.
Quayle who said that, for FHA, there should be an approved list
of appraisers, so you could pick your appraiser. We do not want
steering or whatever, but an approved list of essentially
board-certified appraisers. Then you could get that. Would that
be helpful?
Ms. Krysiak. Yes, that is a perfect solution, I think, to
get objective appraiser in there rather than one hired by the
lender and told what number to come up with.
Senator Mikulski. Could you then talk, you and any of the
other delegates, about counseling? You heard again the
recommendation that it be mandatory when a dollar amount or
where the other--I believe it was Mr. Quayle who said, if there
is a mortgage for 100 percent, that is where there should be
counseling.
Ms. Krysiak. You know we are limited in what we can enforce
upon private because, but I would try to enforce that
counseling requirement in any way possible. I would say even
where maybe it is not directly State dollars or Federal
dollars, but somehow, in some way, we have given an incentive
to banks or lending companies, that even that incentive would
carry that obligation with it.
The other thing is what we did this term that I did not
mention was we have passed an appraisers apprenticeship bill
which would give us and future appraisers at least a uniform
kind of education. As it is right now, there are some
requirements, but maybe not as strict a training as we would
like them to be. They train under another appraiser often, and
it depends upon the quality of that appraiser.
So if you are regulated, they would have a better
opportunity to oversee that training, as well, the department
does.
Senator Mikulski. Thank you.
Do either of you two want to talk about the counseling
issues?
Mr. Rosenberg. As I pointed out, through the budget
process, what we would hope we are going to be requiring the
State, if there are any State dollars involved, that there be
counseling.
Senator Mikulski. At what amount and at what level? In
other words, if somebody is buying a $300,000 home in Homewood
or $150,000 house in Ashburton or one of the other communities?
Mr. Rosenberg. At this point, what we have put in on the
house side says there should be counseling. But I am going to
refine that in conference based upon what I have heard today.
Senator Mikulski. We cannot, at the Federal level, Delegate
Rosenberg, say there shall be counseling.
Mr. Rosenberg. At least through the budget process we can
say, if there are State dollars involved.
Senator Mikulski. What is your recommendation on when
counseling should be required?
Mr. Rosenberg. I guess it would be whether it is at a
certain level, whether it is $100,000 or for first-time home
buyers.
Senator Mikulski. And who should do the counseling? Should
it be the bank?
Mr. Rosenberg. No. Somebody independent. Somebody who does
not have a stake in the transaction.
Ms. Krysiak. The nonprofits do it now. If we continue to
use the nonprofits to do that but we gave them greater
resources for training people to do it, it would help a great
deal.
Senator Mikulski. But you think it is also important to
have HUD-certified nonprofits. Because, let me say this, where
there is greed, there is scam. And so, Delegate Rosenberg, your
outstanding testimony in terms of involving a nonprofit like
Walters or maybe even a community development corporation or a
beloved hospital in the community, like a Mercy or a Sinai, and
people are being gouged because they think, oh, wow.
Now people are going to invent nonprofits. They are going
to say they are the All Saints and Rescue the Sinners nonprofit
counseling. And they are going to want a fee because there will
have to be some type. Private philanthropy should not carry
that load by itself. And so there will be gougers. Do you think
that will be important?
Ms. Krysiak. Absolutely.
Ms. McIntosh. Particularly those that have had some history
in home ownership or housing as a part of their mission, which
we have several.
Senator Mikulski. I know we have several. What about the
mortgage brokers? What do you think we ought to do with them?
Ms. McIntosh. Well, the mortgage brokers actually, in the
regulatory bill that I introduced, I want to make it clear that
the financial commissioner now will have the ability to move in
and have a cease and desist order over someone who is
unlicensed--unlicensed as well as licensed--under her purview.
But I do want to go back again and say that this is not
appraisers. The appraisers are not under the banking
commissioner. So we do have a hole there.
But in terms of the mortgage brokers, I think, one, the
regulatory process now and in the years to come will be is if
there is any complaint or suspicion, they will be able to move
in whether they are a licensed or unlicensed mortgage broker
and do an investigation and even stop a transaction. So that I
think, from a regulatory perspective, we have hopefully fixed a
problem.
But I think Delegate Krysiak pointed out that part of the
problem was also that one broker can have many, many loan
initiators, which we need to look very carefully at.
Senator Mikulski. Well, I know this is a work in progress.
And when the session is over, we will be interested in what
passed and also your lessons learned from the testimony. And we
are welcome to ongoing conversation.
I want to go into neighborhood recovery for just a few
questions, and then we will conclude. Availability of credit to
poor people is a big issue. As a young social worker, working
in the war on poverty and a parishioner at St. Gregory's Church
in west Baltimore, with a beloved priest named Father Joe
Connelly, one thing we at the parish council identified was
access to credit and that people, because of redlining, could
not buy a home, and also because of segregation, which was the
worst of redlining. And there was no way to get credit, not
only to buy a home or business, but you would have the loan
sharks. And they had Happy Harry.
And one of the reasons Harry was so happy was that on
payday he would come in and do loans at 20 and 30 percent. We
established a credit union in the neighborhood and, in many
instances, it was the establishment of credit unions in faith-
based organizations that helped. But they could never be a bank
by proxy and had certain limitations.
It is regrettable that 30 years later I am having the same
conversation with you. Thirty years later, it is the same
conversation. The usury continues. The scams are more
sophisticated. But, again, it is a failure to really have
financial services in all of our communities. That is a whole
other issue.
Let us go to neighborhood recovery. Delegate Krysiak, you
talked about in your testimony community recovery, the fact
that HUD houses are a problem. Do you have thoughts on that?
Because I know you all are in session and will not be able to
come with us.
Ms. Krysiak. As a matter of fact, we General Assembly at
2:00, and some of us have to be there earlier than that.
The HUD houses, if we could turn them over faster, even if
you could turn them over to an Ed Rutkowski or turn them over
to a Southeast Development or some organization that would at
least maintain the appearance of a house until they are able to
either get it in condition to rent or sell. And I think if you
will read through Mr. Rutkowski's testimony, he tells you that
in these areas where they have had difficulty, you might want
to fix them up and rent them a little while until we recover
the reputation of the neighborhood and can then sell.
But the HUD houses do not look good. That is a big problem.
If you walk past these houses and there is a piece of paper
stuck on the dirty window and the house is just in disrepair,
that does not do anybody any good. It would be better off for
the community if those houses got into the hands of the
community as quickly as possible. And we have not just the
CDC's, we have community organizations that could take on the
responsibility for a house here and there and could get it into
condition so it is habitable again.
Senator Mikulski. Well, these are things we have to look at
carefully. I am not so sure we can do a house here or there.
And we are really going to look to you and the coalition on
what is the best way or the minimum number to maximize the
Federal value.
Did any of you wish to comment on the HUD houses, because
you represent a variety of areas?
Well, let me conclude with just one last comment about the
FHA inspectors. I agree, Delegate Krysiak, but it is not the
big homes that are going to sell for $300,000 or $400,000,
where they are going to be fussing. But there is between what I
call the 100 or, again, depending on how solid is the zip code,
anywhere from $85,000, where the house is really worth 85, up
to $175,000 or $185,000, where they fuss. It is different than
a home inspection. But, again, what we heard from Ms. Wonson,
plumbing, roofs, what we have heard from Ms. Adams and Ms.
Simon, and so on. And it is reminiscent of the S&L crisis.
You and I come from a community where, because of the
redlining of the Polish community 100 years ago, our own folks
were able to pool their money and start S&L's because we could
not get loans without them. There was a reason we had names
like the Copernicus Savings & Loan and the White Eagle Savings
& Loan, and it was affectionately called the Polish Wall
Street.
Ms. Krysiak. White Eagle was my family.
Senator Mikulski. Koziusko was mine. But I am also familiar
that in the height of the S&L debacle, you would have
inspectors come in and spend 3 to 5 days at a small ethnic
savings and loan that had no history of foreclosure in maybe a
decade, and yet we had Old Court and some of the others. And so
I hope we are not developing this same pattern and practice
here, which is where there is scam and scum, there is the
avoiding and only the unlicensed, bribed appraisers who are
there, and others are just fussing around with others. Because
the whole idea of an appraiser is to tell you what you need.
And the whole idea of a home inspection is an excellent tool
often for the buyer.
I know someone who wanted to sell a home when their mother
died in east Baltimore. The home inspection told them things
about the home they did not know. So they wanted to do the
right thing because they knew it meant neighborhood
stabilization and sold to a young couple through one of the
programs.
So we are on this. But those are other issues. Again, you
really have led the Nation in coming up with solutions. To my
knowledge, the leadership in the Maryland General Assembly,
represented by you three at the table, is one of the first
responses at a State government level nationwide. I really
would like to salute you. Thank you for what you have already
briefed the committee on--lessons learned as you go through.
And again, I thank you for not only what you are doing for the
people of Maryland, but these are extraordinarily helpful in
terms of serving the Nation. Thank you.
And I want you to be there for your roll call. This
concludes this part of the hearing. And the official record
will conclude at this time and I will call it into adjournment.
I will be joining the residents for a walk-through of the North
Robinson Street area. And we will be with the community leaders
and any of the press who chooses to come, as well as Senator
Sarbanes' staff, if they would like, we would very much welcome
their presentation.
As I conclude this hearing, I want to thank each and every
one who testified and each and every one who already is making
a service to the Nation, to the community groups who brought
this to our attention, to the wonderful people from the
community who put their embarrassment aside to be able to come
and discuss this with us, to Federal law enforcement, to,
again, our delegates. They have made an outstanding
contribution.
We will continue the hearing with Andrew Cuomo on Thursday.
We will be looking at all of his appropriations. But I will be
focusing on FHA, FHA as a tool, as a rung in the ladder of
opportunity for home ownership. Because we want to be sure we
keep that going and do not so shackle it that we then work
against our desire for home ownership in America. But also HUD
as an FHA landlord, and creative ways that they can work with
community organizations to restore neighborhoods and bring
housing back to the market that is fit for duty.
And last but not at all least, what we are going to do
about the flipping. And I want to say to the people of
Baltimore, we are highlighting you, but this is not only your
problem. This is a national problem. It is going to require
national solutions. We intend to pursue flippers this year,
next year if we have to, and the third year after that and the
fourth year. If we have to go to the Cayman Islands to find
you, we are going to be on this.
Additional Submitted Statement
The subcommittee has received a statement from E. Barry
Skolnick which will be included in the record at this point.
[The statement follows:]
Prepared Statement of E. Barry Skolnick, M.S., Fair Housing Director,
National Community Reinvestment Coalition
Introduction
To Ranking Member Mikulski of the Subcommittee on VA, HUD and
Independent Agencies of the Committee on Appropriation, U.S. Senate;
and to Senator Sarbanes, attending. This writing is hereby submitted as
invited by Senator Mikulski's letter dated March 26, 2000 in lieu of
oral testimony, and subsequent to the Field Hearing's scheduled date,
to represent my personal views as a concerned resident of Baltimore
City and as an experienced technical analyst in the field of private
enforcement of the nation's fair housing laws, concerning ``Real Estate
Flipping'', which was the subject of the Subcommittee's Field Hearing
convened in Baltimore, Maryland on March 27, 2000, which I personally
attended.
I am at present employed as the Fair Housing Director of the
National Community Reinvestment Coalition (NCRC), Washington DC, and
this position gives me added depth of perspective on this issue of
``property flipping''. Previously I was data analyst and co-author of
the 1998 Home Mortgage Disclosure Act (HMDA) data-based fair lending
report, Fair Lending in Montgomery County: A Home Mortgage Lending
Study, produced with Zina G. Greene and Carmen-Rosa Torres under
contract for the Montgomery County, Maryland Human Relations
Commission. I have also worked on the national staff of ACORN Fair
Housing, Inc., Washington, DC.
A. Racial basis of predatory practices including ``property flipping''
I applaud the Senate Subcommittee's newly-focused attention on this
issue of ``real estate flipping''--or more specifically residential
``property flipping''--which unfortunately appears to be a newly-needed
term in the recognized lexicon of abusive real estate industry
practices generally known as ``predatory lending''.\1\ The term
``flipping'' has been generally understood to apply to subprime home
mortgage loans, and was defined by Atlanta attorney William J. Brennan
as involving ``successive, repeated refinancing of [a] loan by rolling
the balance of the existing loan into a new loan instead of simply
making a separate, new loan for the new amount and always results in
higher costs to the borrower.'' \2\ As described in harrowing detail in
this Field Hearing's oral testimony and in recent investigative
journalism published in the Baltimore Sun \3\ and elsewhere, this
newly-recognized (if not newly-invasive) predatory real estate practice
of ``property flipping'' must now be distinguished from loan
``flipping'', although it is closely associated with many of the same
abusive ``predatory lending'' practices as is the latter.
---------------------------------------------------------------------------
\1\ For a seminal description and discussion of ``predatory
lending'' abusive practices, see the proceedings and testimony before
the Senate Select Committee on Aging on ``Equity Predators: Stripping,
Flipping and Packing Their Way to Profits'', March 16, 1998 (On-line
Ref. URL: aging/hr14.htm>
\2\ Ibid. See the 32-point annotated list of abusive practices
presented in the testimony of William J. Brennan, Jr., Atlanta Legal
Aid Society, Inc. ``Home Equity Lending Abuses in the Subprime Mortgage
Industry'', March 16, 1998 (On-line Ref. URL: aging/hr14wb.htm>
\3\ E.g. John B. O'Donnell, ``5 Face Charges in `Flip' Scheme'',
Baltimore Sun, March 9, 2000 (on-line URL: )
---------------------------------------------------------------------------
One attribute manifestly shared by both property flipping and other
prevalent predatory lending practices is race-based targeting--as is
suggested by the ``thematic'' map of Baltimore City's 1995-99 property-
flipping activity presented in today's testimony by Mr. Strong
representing the Southeast Community Organization (and reportedly based
on technical assistance provided by HUD Community Builder Carmen-Rosa
Torres, Ph.D.): this map compares well to maps of subprime loan
origination data, prepared in investigations of allegedly predatory
lenders.\4\
---------------------------------------------------------------------------
\4\ Examples are Ford Consumer Finance Company's loan activity in
Atlanta, as investigated by the Atlanta Legal Aid Society; and Delta
Funding Corporation's activity in New York City, the subject of
recently-settled state and Federal investigations (see URL: .
---------------------------------------------------------------------------
Such thematic maps, which visually compare the geographic
distribution of allegedly predatory activity (e.g. ``flipped''
properties, refinanced loans) against the racial distribution or median
income of U.S. Census Block Groups in the studied urban area,
characteristically reveal that the sales or loan activity is
disproportionately concentrated in high-minority or ``turning'' areas
(i.e. perceptibly changing from predominantly White to predominantly
minority populations, as had occurred en mass in West Baltimore, during
the notorious ``blockbusting'' days of the 1960's), while such activity
is minimal or absent in nearby non-minority residential areas having
similar demographic income characteristics. As a matter of technical
analysis, it has been rather difficult for analysts to obtain through
local sources the kind of ``pinmapped'' (i.e. localized or ``geocoded''
to street address geographic coordinates) loan or sales data which is
needed to produce such detailed maps of activities comparable to
demographics resolved to the Block Group level. Access to such data
must be facilitated if effective analysis of predatory ``flipping'' and
lending practices is to be performed more frequently and effectively
nationwide.
Similar (if less well-resolved) maps of subprime loan application
or origination data can be much more easily prepared using nationally-
reported Home Mortgage Disclosure Act (HMDA) data, and available
geographic information systems (GIS) ``mapping'' software.
Unfortunately, HMDA data collected annually through the several Federal
regulatory agencies by the Federal Financial Institutions Examinations
Council (FFIEC) is required to be reported as localized only to Census
Tract geographies, and so can only be mapped against Census Tract
demographic ranges for Race/National Origin or income, etc. This tract-
level resolution is often not sufficiently detailed to accurately
reflect community and neighborhood boundaries ``on the ground'' in our
nations congested urban areas. Best use of such nationally-collected
loan data (or any comparable residential property sales data) in
support of effective regulation and anti-predatory lending oversight
and enforcement would surely be much better served if loan geographies
were routinely reported to FFIEC and published localized at the Census
Block Group level, if not by street address (an alternative rightly
precluded by privacy considerations).
B. Applicability of anti-discrimination laws to predatory practices
including ``property flipping''
Future investigations will likely demonstrate that such apparently
race-based marketing and targeting of predatory real estate
activities--including property flipping as well as various abusive
lending practices--will prove to be the rule rather than the
exception--perhaps matched only by a similar tendency to target the
elderly in such fraudulent real estate-related schemes. Evidence of the
disproportionate minority impact of these practices--such as was
compellingly represented at this Field Hearing by the personal
testimonies of minority victims, and by the convincing maps of
Baltimore's cumulative property-flipping activity--is surely a
``smoking gun'' for unlawful acts of racial discrimination, falling
within the scope of existing civil rights laws.
This argument for the applicability of Federal civil rights, anti-
discrimination, and fair housing laws to predatory practices in lending
and property flipping, contrasts with that expressed by representatives
of the three Federal enforcement agencies who testified at this Field
Hearing--agents representing the Department of Justice, the Federal
Bureau of Investigation, and the U.S. Postal Service--who spoke only of
mail and wire fraud statutes, when asked by Senator Sarbanes what
violations of Federal law were under active investigation by the five
regional interagency task forces now constituted and actively
investigating predatory lending throughout the Nation.
In contrast, the Department of Justice (DOJ), in an amicus curiae
brief filed very recently in Federal district court,\5\ has presented
an interpretation of the Fair Housing Act and the Equal Credit
Opportunity Act (ECOA) by which ``reverse redlining'' (the ``practice
of targeting minority communities for predatory lending'') . . . ``can
violate the Fair Housing Act'' and ECOA; and that ``statistical
evidence of targeting can be sufficient to raise a factual dispute of
intentional discrimination'' in the case at issue. In its brief, DOJ
states, ``In our view . . . ``predatory lending'' is sufficiently
identifiable such that, when its victims are selected based on race, it
constitutes discrimination.'' From the factual and statistical evidence
presented in testimony at this Field Hearing, both orally and in
``thematic'' maps of Baltimore City presented by Mr. Strong and
demonstrating the obvious coincidence of clustered property-flipping
sales with high-minority residential communities (as represented by
1990 U.S. Census Block Group demographics), it is clearly evident that
property-flipping practices--like predatory lending--will be found to
similarly satisfy the DOJ's newly-expressed criteria for ``constituting
discrimination,'' and thus will be found to justify the sanctions of
law for violations of civil rights.
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\5\ U.S. Department of Justice, Civil Rights Division, Housing and
Civil Enforcement Section: Brief of the United States as Amicus Curiae
in Support of Plaintiffs' Opposition to Defendants' Motion for Judgment
on the Pleadings or, in the Alternative, for Summary Judgment,
Hargraves v. Capital City Mortgage Corp., No. 98-1021 (D.D.C., brief
filed Mar. 10, 2000), 45 pp.
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There is indeed a valuable role played by responsible subprime
lenders in providing credit access and homeownership to many
traditionally-underserved Americans; likewise, there is an essential
place for the purchase and quality rehabilitation of deteriorated
residential property for responsible resale as much-needed affordable
housing in the nation's disadvantaged communities.
However, the pain and growing prevalence of Baltimore's property-
flipping problem, as has been so well portrayed by victims, community
advocates and Federal enforcement authorities alike at this Field
Hearing, makes it is clear that Federal and local governments should
urgently begin to apply vigorously and fully utilize the nation's civil
rights laws as additional tools for effectively combating the now-
recognized scourge of property flipping, as well as the full range of
predatory and abusive (if highly profitable) subprime lending
practices--the past unbridled success of which may have spawned this--
to use Senator Mikulski's aptly-applied term--``despicable'' practice
of ``property flipping''.
CONCLUSION OF HEARING
Senator Mikulski. So thank you very much. The subcommittee
stands recessed until Thursday, March 30. Thank you.
[Whereupon, at 12:20 p.m., Monday, March 27, the hearing
was concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]
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