[Senate Hearing 106-923]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 106-923




                                before a

                          SUBCOMMITTEE OF THE


                       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/


63-947 cc                   WASHINGTON : 2001
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 


                     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
LARRY CRAIG, Idaho                   DIANE FEINSTEIN, California
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
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


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



                         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 
    Present: Senator Mikulski.
    Also present: Senator Sarbanes.


    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 
    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 
    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 
    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 
    Senator 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 
    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 
    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.
    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 
    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 
    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.
    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 
    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.
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.
    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.

    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 
    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 
    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 
    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 
    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.

    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 
  --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 
    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 

         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 
    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 

    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 
    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 
    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 
    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 
    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 

                            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.

    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 
    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 
            Respecfully submitted,
                                         Andre R. Weitzman,

    *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

    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 
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 
                                              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 
    ``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 
    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 
    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 
    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 
    ``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 
    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 
    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 
    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 
    Easy Life officials could not be reached for comment Thursday 
    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


    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 
    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.
                                               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.
            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 
    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 
    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 
    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 
    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.

    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 
    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.

    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.

    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
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.

    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.

    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 
    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 
    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
    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
    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
    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 
    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.
    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 
    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
    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.
    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.
    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
    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
    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
    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.
    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
    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.
    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''
    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 
  --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.

                                                 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.

    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.

                                                 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 
  --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.

    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.

                                                 All Other     Leading
                                                  Lenders      Lenders
Percentage of Conventional Home Purchase Loans
    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 
  --The top subprime lenders made at least 13 percent of all 
        conventional purchase loans made by Baltimore lenders in low-
        income census tracts.

    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.

                                           Prime Lenders      Leading
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 ?
    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, 
    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 
    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 
    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 
    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 
    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 
    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 
    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

    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 

    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 
    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 
    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 
    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 
    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 
    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 
    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.

    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; 
    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 
    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 
  --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 
  --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.

    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 
    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 
    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 
    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 
    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 
    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 
    Senator Mikulski. And that is one of the most direct 
    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 
    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 
    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.
    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 
    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 
    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 
    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 
    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.
    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 
    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, 
    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 
    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.
            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 
    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 
    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.

    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 

                           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 
    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 
    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.

    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 
  --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 
    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 
    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 
    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 
    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 
    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 
    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 
    [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 establishes a number of requirements applicable to 
sales of real property. Some of the pertinent provisions are discussed 
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
    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 
    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 
    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 
    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 
    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.
    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 
    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 
    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 
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 
                                   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.
            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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.
            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 
    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 
    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 
    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 
    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.
    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.
                                           Patrick J. Kane,
Prepared Statement of the Greater Baltimore Board of REALTORS

    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 
    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.
                                                    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    Senator Mikulski. Thank you.
    Do either of you two want to talk about the counseling 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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

    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 
    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 
    \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 
    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.
    \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.
    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.]