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Introduction: In the second half of the 1990s, Baltimore’s housing market was corrupted by dozens of individuals and companies engaged in property flipping, mortgage scams, and predatory lending. Programs of the Federal Housing Administration (FHA) were undermined and abused. Hundreds of families were bilked in these schemes and were losing their homes to foreclosure. Over three thousand houses were flipped, i.e. bought and sold quickly (many on the same day) for increases of more than fifty percent; conventional mortgages on these inflated values were issued to both investors and homeowners. During this same period of time, sub-prime lending (loans to borrowers with imperfect credit) increased several hundred percent in Baltimore and across the country. Many of these mortgage re-financing and home equity loans were viciously predatory resulting in equity stripping and increased foreclosures.

1. Law Enforcement

   1. Need: In the second half of the 1990s, Baltimore City’s housing market experienced a crime wave. Hundreds of houses, perhaps as many as three thousand, were bought, sold and mortgaged illegally. Fraudulent appraisals were a common thread through these housing schemes; properties were overvalued as much as 100% on a broad scale. The most common victims, from a legal standpoint, were the lenders left holding the bag with mortgages on properties worth a fraction of the loan amount. Whether involving sales to homeowners or investors, the conspiracies were designed to draw mortgage money out of settlement for the conspirators – sellers, real estate agents, mortgage brokers, title companies, and appraisers.

      These complex economic crimes posed challenges for law enforcement agencies. Urged on by Senator Barbara Mikulski in a hearing March 27, 2000, the federal agencies stepped up to the challenge. Supported by research and information from community groups, law enforcement has focused on priority investigations and prosecutions with positive results.

       

   2. Accomplishments:

      a. Federal Law Enforcement – Forty-seven (47) defendants have either pled guilty or been found guilty of criminal offenses, and twenty-nine (29) have been sentenced, in connection with federal prosecutions of property flipping and mortgage fraud in Baltimore City. Those convicted include 18 flippers, one appraiser, four mortgage brokers, two settlement officers, and six straw purchasers. The typical sentence has been between 30 to 36 months imprisonment although cooperation with authorities has earned some defendants reduced sentences. Several investigations by the FBI, U.S. Postal Service, and the HUD Inspector General’s Office are still underway and are expected to result in further prosecutions.

      Mr. Scott Mead was convicted of both arson and mortgage fraud this year and received the stiffest sentence, five years. His ill-gotten gains stashed in bank accounts in Lichtenstein and the Cayman Islands were forfeited to the government.

      b. HUD Office of Inspector General (OIG) – The HUD OIG has partnered with the FBI in several investigations with emphases on those cases in which the federal government was defrauded. In one case a local real estate agent/property speculator obtained scores of properties and sold them to unqualified or straw buyers. The mortgages on forty-eight (48) of these properties have gone into foreclosure resulting in $3.9 million in claims on the FHA insurance fund.

      In another joint OIG/FBI investigation, a property speculator, who started in the real estate business as a Section 8 landlord, flipped overvalued properties to investors and defrauded lenders. The loss to lenders is estimated at $5 million.

      c. Maryland’s Attorney General’s Office – The Consumer Protection Division of the Maryland Attorney General’s Office pursued a complex case against a seller, Lee Shpritz, and a lender, American Skycorps. An administrative judge found the respondents in violation of the Consumer Protection Act; a decision is pending regarding their punishment and fines.

   3. Next Steps: a. FTC Actions – The Federal Trade Commission is in the middle of a major case involving a subprime lender, Associates Financial, which has been acquired by CitiFinancial. This case goes to the heart of loan flipping, credit life insurance, fee packing and other characteristics of predatory lending. Other FTC cases are at various stages of development and also focus attention on predatory lending. The outcome of this case will have major impacts on the subprime lending market. Some analysts suggest that major subprime lenders have abandoned the sale of single premium financed credit life insurance in anticipation of the FTC’s decision. b. Additional Consumer Protection Cases – Now that the Maryland Attorney general has completed the Lee Shpritz and American Skycorps case, it is time to consider new consumer protection cases. Consumer protection cases have the potential of setting ethical boundaries for the lending and real estate industries. Certainly much of what we have seen in Baltimore’s housing market violates ethical standards without necessarily violating the criminal law. The deceptive trade practices of flippers, mortgage scammers, and predatory lenders needs to be pursued aggressively through use of the Consumer Protection Act. c. Largest Federal Investigation Yielding Results – Federal law enforcement officials are concluding an investigation into one of the largest mortgage fraud conspiracies that operated in Baltimore over the past four years. In this case hundreds of properties starting in the hands of some of the city’s largest landlords were flipped to investors at inflated values. The conclusion of this case and anticipated prosecution will be an important milestone in law enforcement’s response to the twin problems of property flipping and mortgage fraud.

   4. Lessons Learned: a. Consistency of Effort – In the arena of law enforcement, it is important to maintain consistency of effort. There are many pressures and priorities placed upon federal law enforcement officials. This was most clearly evident following September 11^th. Among the ongoing priorities for the FBI, the OIC, Postal Inspectors, and the US Attorney’s Office, mortgage fraud should rank high. Losses to the federal government from such fraud amount to millions of dollars. The crimes regularly cross state lines. State or local agencies do not have the resources or the experience to conduct the kind of investigations and prosecutions which these cases entail. For all of these reasons there should be an ongoing federal concentration on mortgage fraud.

   b. Early Interdiction – So much of the response of law enforcement agencies to mortgage fraud occurs after the damage is done. Collectively, law enforcement officials, housing agencies, and community groups need to develop strategies for early interdiction. Periodic and random review of new deeds and transactional documents, sting operations, watching ads for property investment opportunities, and tracking current patterns of certain professionals and companies need to be considered in efforts to stop mortgage fraud before dozens, scores, or hundreds of properties are undermined.

2. Regulatory Enforcement

   1. Need: The regulatory arms of state and federal government were unprepared for the crime wave that hit Baltimore’s housing market from 1995 to the present. Traditionally, regulatory enforcement is designed to deal with the rogue agent or professional who steps outside the ethics and the standards of a professional group. Criminal investigations and prosecutions, due to limited resources, are reserved for the most egregious cases and malefactors. We need regulatory enforcement to address the contributing role that real estate, appraising, title work, and mortgage professionals play. In some areas, simply greater enforcement resources are needed. In other areas, legislative authority for regulatory enforcement needs to be expanded. It is necessary for regulatory agencies to play a watchdog role for these professions by monitoring their activity for signs of illegal behavior, rather than only identifying egregious violations after they have occurred.

   2. Accomplishments: a. FHA reforms and debarments – HUD has strengthened its fraud detection procedures with emphases on property appraisal reviews for flipped properties. A proposed "Flipping Rule" has been published in the Federal Register and its comment period has closed; it has not yet been implemented. The "Flipping Rule" would further tighten controls on properties bought and sold quickly with FHA-insured mortgages. HUD and FHA have taken disciplinary actions against realtors, sellers, lenders, title companies, and appraisers. Twenty-one appraisers in the Baltimore area have been targeted for discipline based upon review appraisals and flipping checks. b. Expanded Enforcement Capacity, MD Division Of Financial Regulation – The Maryland General Assembly expanded the powers of the Commissioner of Financial Regulation and provided resources for enforcement staff. The Commissioner now has the power to issue suspensions and "cease and desist" orders upon companies and mortgage brokers that are parties to illegal property flipping and mortgage fraud. c. Coordination of Regulatory Enforcement Agencies – Under the direction of Maryland’s Assistant Secretary for Licensing and Labor Regulation, Mark Feinroth, regulatory enforcement personnel are beginning to coordinate their efforts. State and federal law enforcement personnel are also contributing to the identification of professional people and companies deserving of disciplinary consideration. d. Measures Taken By the City of Baltimore – The City of Baltimore now requires housing counseling for all municipal homebuyer incentive programs, including the Settlement Expense Loan Program (SELP). Lenders participating in the City's incentive programs were asked to report upon their fraud detection and prevention plans as well as their plans to investigate fraudulent transactions already completed. All loans supported by the City are carefully evaluated with checks on appraised value, previous sales price and purchase date prior to approval. The City is also cleaning up the general administration of the Section 8 Program, which, in some cases, has been abused by speculators, flippers, and mortgage scammers. e. Urban Appraising Course – At the request of the task force, the Maryland Association of Appraisers developed a two-day course for those seeking appraisers licenses and renewals. Nearly 250 appraisers have already completed the course that emphasizes the special challenges of appraising urban properties and how to avoid, even inadvertently, becoming part of a flipping scheme or mortgage scam. 

   3. Next Steps: a. Federal Debarment Questions – We are waiting for a response from HUD on the question of whether individuals with guilty records in housing court can be debarred from purchasing HUD homes. We have also asked whether companies that have forfeited their corporate status in Maryland or never obtained that status are qualified to buy HUD houses. Once those questions are answered, city and state officials can take the appropriate action to identify unqualified buyers or recommend debarment. b. Addressing the Overlap between Section 8 Abuses and Property Flipping and Mortgage Scams – In certain cases people engaged in property flipping and mortgage scams, either as buyers or sellers, have also been landlords abusing the Section 8 program. The City of Baltimore has made great strides in improving the administration of its Section 8 Program, ensuring that inspections are effective, that repairs to properties are made, that rents are reasonable and within guidelines, and that those who abuse the program are rooted out. We will mesh research from flipping databases with the improved records of Baltimore’s Section 8 program to coordinate our activities.

   4. Lessons Learned: a. Critical Role of Appraisers, Greater Regulatory Enforcement Needed – While all professionals involved in real estate and lending should be regulated more fully and aggressively, none are as critical to the problems of property flipping and mortgage scams as are the appraisers. Consequently, it is recommended:

      1. Criminal penalties should be imposed on negligent and fraudulent appraisers at federal and state levels.

      2. Licensing should be required of all appraisers regardless of the value of the property or the state in which they do business.

      3. FHA appraiser panels and local appraisal review processes should be restored.

      4. Appraisers should be required to report regularly on the addresses they have appraised.

   Industry groups, professional associations, government representatives, and consumer activist organizations have agreed to a framework for appraisal reform and regulation in Maryland. It would cover the steps outlined above and it would mandate a minimum number of investigative and administrative personnel for the Maryland Appraisal Commission. State Delegate Carolyn Krysiak is prepared to introduce legislation to that effect in next year’s session of the General Assembly.

   b. Coordination of Regulatory Agencies needs to be Institutionalized – Those who perpetrate real estate and mortgage-related crimes actively cooperate in conspiracies to defraud homebuyers, lenders, and the federal government. Government agencies, operating in typical bureaucratic fashion, cooperate less easily. Yet in order to successfully combat conspiracies, the agencies have to do so. The coordination of regulatory agencies needs to be institutionalized and may require the appointment of a high level coordinator.

   c. HUD’s debarment authority needs to extend to more purchasers of HUD properties – HUD lacks either the legislative or the regulatory authority to place effective controls upon the purchasers of HUD properties. People with criminal records in Housing Court should not be allowed to buy HUD properties. Companies that are not registered to do business in Maryland should not be allowed to purchase HUD properties. There should be post purchase requirements for rehabilitation of properties in a reasonable amount of time for HUD buyers. Investors masquerading as owner occupants should be investigated and debarred. True owner occupants of HUD houses should be encouraged and assisted in a variety of ways.

   d. Credit Watch and Appraiser Watch – The threshold for Credit Watch should be lowered to include all lenders who exceed two times an area’s average default rate so that more unscrupulous, high default lenders are not allowed to profit in our neighborhoods. Loans that are rejected by FHA-approved lenders should be reported to HUD, and those loans should be carefully scrutinized if they are approved elsewhere. Additionally, a parallel program for Appraisal Watch ought to be created so that fraudulent appraisers cannot continue to act with impunity. HUD, working with the Baltimore laboratory, has disciplined or debarred 17 appraisers, but there is not yet a national mechanism for replicating that success.

   e. Fraudulent Gift Letters' Role in Foreclosures - Typically, gift letters are a method for friends and relatives of borrowers to assist them in the purchase of a home. In many transactions in Baltimore City, gift letters are being used illegally to funnel money from an inflated purchase price to the buyer for closing costs. They are used to disguise the buyer's lack of preparedness for the responsibilities of homeownership, and only add to buyer's long-term liabilities. Several major prosecutions, including those of Robert Beeman and Lee Shpritz, uncovered the use of phony gift letters at settlement. This is an area in which careful watchdog scrutiny by regulatory enforcers could identify suspicious methods of operation and lead to successful prosecutions.

3. Victims Assistance

   1. Need: At Senate hearings, town hall meetings, in newspaper stories, and in community gatherings, we have learned about the tragedies that befall families entrapped in houses that are over-valued and under-repaired, houses they cannot afford and cannot sell facing the prospects of foreclosure and financial ruin. Most of the holders of these mortgages, who were not parties to the fraudulent transaction, are unwilling to re-write the mortgages at true values and give victimized families a fair deal. FHA, after first promising to do so, found itself unable to right these wrongs directly. Lawsuits are limited and criminal proceedings offer little relief to victims in the form of restitution. New pathways to help families recover from mortgage fraud victimization needed to be found.

   2. Accomplishments:

      a. The Baltimore HELP Program – The Baltimore Homeowners Emergency Loan Program (HELP) is a collaborative effort of SEEDCO, HUD, the Community Development Financing Corporation, Fannie Mae, the Annie E. Casey Foundation and local banks designed to re-finance victims of predatory loans into fair and affordable mortgages. HUD has made available one million dollars for the writing down of inflated mortgages, a critically important component of the program. This is a three-year demonstration program. It is expected that 50 –100 families will be aided in the first year.

      b. Assistance for Borrowers with FHA-insured mortgages – On March 1, 2001, through a HUD grant of $500,000, Saint Ambrose Housing Aid Center became Baltimore’s clearinghouse for assisting victims of fraudulent and predatory lending, especially those with FHA-insured mortgages. Many families were unable to continue as homeowners and needed relocation assistance; HUD provided $2,000 per family in those cases. Twenty families were deemed to be good prospects for continued homeownership but HUD was unable to help them directly. Indirectly, through St. Ambrose, these families are renting with lease/purchase agreements.

      St. Ambrose also provides legal advice and representation to victims of mortgage scams. The agency has ten significant lawsuits in process involving mortgage brokers, originating lenders, appraisers, title companies and secondary lenders.

      c. Solid Foundations, Inc. – In May, 2000 Solid Foundations, Inc. was established as a private charitable organization providing grants to families recovering from mortgage scam victimization. Ms. Mimi Kapiloff (founder), Struever, Bros. Eccles & Rouse, and Fannie Mae pledged a total of $11,000 to get the program started. A successful first fundraising event was held at Tide Point and initial grants were made. Solid Foundations provides small grants of up to $2,000.00 to families for refinancing settlement assistance or help with relocation.

      When Robert Friedman of Consumers Title Company was sentenced in federal court, the judge ordered him to pay Solid Foundations $22,500 as part of his fines. It is hoped that additional fundraising and orders of restitution may provide support to many more families. The board of Solid Foundations has voted to coordinate all future grants to complement the work of the Baltimore HELP Program.

   3. Next Steps: The most important next step is to implement the Baltimore HELP Program. As a demonstration project, we will learn what works and what doesn’t work in re-financing fraudulent and predatory loans. Announcement and promotion of the Baltimore HELP Program will also bring out new information about those who have been defrauded and their needs.

   4. Lessons Learned:

   a. Limitations of FHA fund – A major lesson of the Baltimore Laboratory was the limitations upon use of the FHA fund to forestall foreclosures and correct for property flipping and mortgage scams. There should be legislative authority for FHA to require mortgage reductions when loans were made on overvalued properties. Lenders and secondary market purchasers must have incentives to check values and prevent fraud. Lenders that fail to perform "due diligence" should not receive FHA insurance payments. b. Restitution – In criminal cases, fines are typically paid to the state or federal treasury. Restitution, in some of the early federal prosecutions, was ordered paid to banks, which bought fraudulently created mortgages. More recently, federal judges, at the request of the U.S. Attorney’s Office, have ordered fines paid to Solid Foundations, the Community Law Center, and the Patterson Park Community Development Corporation. Restitution is a potentially important source of funding to aid families victimized by mortgage scammers and predatory lenders. The Justice Department and the Attorney general’s Office should be encouraged to continue channeling fines into the vehicles created for victims’ assistance, the Baltimore HELP Program and Solid Foundations.

4. Prevention and Consumer Education

   1. Need: Perpetrators of flipping schemes and mortgage scams prey upon unsophisticated first-time homebuyers. Most often, such buyers have received no independent advice from housing counseling agencies or other professionals. Most often, such buyers rely on the sellers for all the arrangements. Consumer education is needed to forewarn prospective homebuyers about real estate and lending predators. More broadly and more deeply, we need to raise the level of financial literacy in this country, especially in urban areas.

   2. Accomplishments:

      a. Attorney General’s Town Hall Meetings - Maryland Attorney General Joseph Curran hosted four Town Hall meetings on the subjects of property flipping and mortgage scams. In each quadrant of Baltimore City, the town hall meetings educated community leaders about the issues and provided citizens with prevention information. "Buyer Beware" pamphlets were produced and distributed widely.

      b. Media Campaign and Hotline Promotion – The Baltimore Sun has published over 100 articles about property flipping and mortgage fraud over the past three years. The Attorney General’s Office produced PSAs on the subject. The Maryland Bankers Association has produced a video and curriculum for consumer education purposes. Fannie Mae has produced brochures on predatory lending and tips for safe home buying. ACORN, with some help from HUD, has conducted grass roots consumer education and action campaigns.

      c. Greater Baltimore Board of Realtors (GBBR) – GBBR was a lead organization in the creation of an ad campaign using billboards, radio, and print media to forewarn buyers about potential mortgage fraud and flipping schemes. The ads promoted use of a hotline service staffed by the Maryland Center for Community Development. This $300,000 campaign, supported by many partners earned GBBR the National Hope Award for consumer education from HUD. Additionally, GBBR has tapped the services of task force member Vito Simone to teach Continuing Education Classes to real estate agents on "How To Spot and Avoid Flipping Schemes".

      d. Legal Representation for First-time Homebuyers – Civil Justice, Inc. approached prevention through the provision of legal services. With a grant from the Abell Foundation, Civil Justice coordinated free or reduced-cost legal consultation for first time homebuyers prior to settlement.

   3. Next Steps: a. AARP’s Program for Wholesale Consumer Education Partnering with Faith-Based Organizations – At the Senate Appropriation Subcommittee hearing on May 14, 2001, Senator Mikulski suggested that consumer education to prevent mortgage fraud should be at the "wholesale" rather than the retail level and that it should involve faith-based organizations. AARP has taken that suggestion to heart and will host the first in a series of educational forums in June 2002 in Northeast Baltimore. The forum is designed to have a broad-based ripple effect through participating religious institutions.

   4. Lessons Learned: a. Challenge to School Systems – Many of our public and private schools graduate students who are ill prepared for financial decision-making about housing and borrowing. Credit card companies target young adults and mortgage scammers target first time homebuyers. Our citizenry must be systematically better prepared for critically important life choices. School systems must be brought to task to meet this challenge. Other forms of consumer education are often too little and too late. Financial literacy should be a measurable goal of every secondary education and higher education program in the country. b. The Role of Home Ownership Counseling – The Baltimore Laboratory learned several things about the role of home ownership counseling in preventing mortgage fraud and predatory lending. A great many victims of predatory lending in Baltimore never sought independent advice from free home ownership counselors provided by non-profit organizations. Some mortgage fraud conspiracies included fraudulent counseling schemes and one corrupted a faith-based organization. Locally and nationally there should be greater incentives for utilizing the services of independent home ownership counselors. At the same time there should be higher standards for such services and a certification program to ensure that such services are of a high quality, independent, and honest.

5. Neighborhood Recovery and HUD Houses

   1. Need: Not only are individual families victimized by mortgage fraud but whole communities are devastated by the combined and concentrated impact of illegal and unethical real estate practices. In certain neighborhoods, Patterson Park communities for example, vacant and abandoned properties overwhelm some sections. When houses become part of HUD’s inventory, they stay vacant for long periods, deteriorate, and frequently are sold to investors. Banks that foreclose also frequently sell to investors who do not improve the properties. A cycle of disinvestment, speculation, and deterioration undermines the stability of neighborhoods. FHA's REO houses should be sold to (1) homeowners who can demonstrate they have the resources to restore them to neighborhood standards, (2) non-profits who have the proven capacity to restore the houses to neighborhoods standards and resell them to capable homeowners, and (3) for profit investors with a proven track record of restoring the houses to neighborhood standards and selling them to capable homeowners.

   2. Accomplishments: a. Reduction in HUD’s inventory in Baltimore – Through a combination of foreclosure prevention and better inventory management, HUD has reduced its inventory of houses in Baltimore. In August of 2000, HUD’s Baltimore inventory numbered 1,194 houses; today that number is 762. Though some of that reduction may have resulted from a moratorium on FHA foreclosures during the course of the Baltimore Laboratory, HUD deserves credit for progress in this area. b. Home Buyer Incentives Being Tested – HUD is testing a combination of closing cost assistance and home ownership counseling requirements as incentives for true owner occupants to purchase HUD houses. A Home Buying Fair in the Brooklyn/Curtis Bay community April 27^th featured these incentives for several HUD homes. It is a positive step. c. Dollar House Program has made a difference in Northeast Baltimore – Saint Ambrose has made the most extensive and successful use of the "dollar house" program primarily in northeast Baltimore. Seventy houses are receiving extensive renovations and being sold to owner occupants meeting certain income requirements. Reviews by City and federal officials have given the Saint Ambrose program high marks. d. Spotlight on Brooklyn/Curtis Bay – Intensive research into the real estate transactions of the Brooklyn/Curtis Bay community revealed a disturbing pattern of flipped and overvalued properties. Special community meetings were called by State Senator George Della to review the research and take action. Light Street Housing Corporation was invited to extend its CDC capacity for housing acquisition and rehab. HUD officials toured the area and were shown where vacant HUD houses contribute to the instability of the neighborhoods. The City included Brooklyn/Curtis Bay in its Community Legacy funding proposal and the state granted $200,000 for housing intervention strategies. e. Healthy Neighborhoods – The property flipping and mortgage scam problem has been most concentrated in neighborhoods where racial change is taking place. These areas coincide with districts designated by the City as targets for the Healthy Neighborhoods Initiative. In these neighborhoods strategic investments spur home improvements, sales to homeowners, and neighborhood pride. HUD support for this program helps neighborhoods recover from the effects of property flipping and mortgage fraud.

   3. Next Steps: a. Park Heights Stabilization Program – In much of Park Heights, vacant housing and other problems have already overwhelmed the area. HUD has agreed to provide the City of Baltimore $500,000 to begin to stabilize two sections of the Park Heights community where the problem of vacant housing is just beginning to emerge as a threat to the community. In the northern region of the community near Pimlico racetrack and Sinai Hospital, stabilization of vacant houses can deter the spread of blight. Now that the federal funds are available, the City will begin to implement its plan for the stabilization of the Park Heights community. b. Asset Control Area Model Being Studied – Baltimore’s Department of Housing and Community development is interested in possibly adapting HUD's Asset Control Area (ACA) model for Baltimore. In 16 areas around the country, government entities and non-profit organizations have managed the inventory of HUD houses in low-income neighborhoods. With deep discounts for purchasing HUD houses in ACAs, and with HUD financial assistance in some areas, the model envisions local partners rehabilitating HUD houses for ownership by low and moderate-income families. With one of the country’s largest per capita inventories of HUD houses, Baltimore could be fertile territory for one or more ACAs. We recognize that the program has been critiqued by the OIG and is undergoing significant revision. It may be that Baltimore could become a laboratory for a new, re-invigorated, and better-managed ACA program. We envision an ACA program in Baltimore focusing on communities experiencing stress in which there is also a high concentration of HUD foreclosures and HUD houses. c. "Accelerated Claims" – HUD has proposed to experiment with an "accelerated claims" program for the Philadelphia region. In the proposed program, FHA-insured mortgages in default would be sold to a public-private partnership. The partnership would undertake loss mitigation efforts or foreclose and sell the property. While this proposal might work well in strong housing markets, Baltimore task force members worried that it could exacerbate problems in distressed urban areas. We are considering "an urban pilot within the pilot" and thinking about alternative models for accelerating claims that are appropriate to the complex problems encountered in Baltimore City. We would like to find ways to right the wrongs of predatory lending and give families the fair deal they deserve and the chance to succeed as homeowners. Failing that, we would like to find ways to promote the disposition of HUD properties in ways that complement established community development plans.

   4. Lessons Learned: a. Controls on Purchasers of HUD houses needed – As discussed in section B., 4., c. on Regulatory Enforcement, we have learned that a significant number of purchasers of HUD properties are neglecting or flipping properties. b. Abuses by investors masquerading as owner occupants are significant – At Baltimore task force meetings, community representatives have reported their concerns about investors who misrepresent themselves to be owner occupants. In neighborhoods where urban revitalization is taking place (South Baltimore and Canton), this is a serious problem. Across the board, prospective owner occupants need assistance in navigating the procedures for purchasing a HUD property. Everyone would like to see more owner occupants and more home ownership arising from former HUD houses but the procedures and bidding processes don’t lend themselves to achieving that goal. We need to find better ways to succeed in promoting home ownership via HUD houses. c. Local Government and Non-Profit Organizations need to play stronger roles in the disposition of HUD properties – While there are some opportunities for local governments and non-profit agencies to obtain and make good use of HUD properties, they often lack the resources to do so on a large scale. In some distressed communities, if we want better outcomes for HUD houses than what we see today, the federal government will need to invest more targeted resources, financially and in terms of technical assistance.

   The "dollar" house program was a successful experiment in Baltimore and moved many houses off the backlog of HUD’s inventory into productive use. St. Ambrose rehabilitated 70 former HUD houses through this program but the lesson is that discounts for non-profit organizations often have to be that deep for the economics of urban housing rehabilitation to work. In contrast, the 30% discount program for non-profit organizations is insufficient in a distressed housing market like Baltimore City. HUD should develop some flexibility in its discount program to encourage non-profits to be partners at discount levels that make economic sense, and should tighten their standards for the dollar house program, allowing nonprofits to purchase more homes for a dollar for rehabilitation.

6. Legislation

   1. Need: As Senator Paul Sarbanes has said on numerous occasions, the problems of predatory lending, mortgage fraud, and property flipping call for assertive legislative action by all levels of government. Unfortunately, industry groups and professional groups tend to be over-regulated to begin with and oppose almost all new forms of regulation. As a result some protections for borrowers at the federal level are limited to a small percentage of the highest interest rate loans. Few states have passed comprehensive anti-predatory lending laws, and local jurisdictions have sometimes been preempted by their states. Too often the problems we have studied in the Baltimore laboratory have been viewed as mainly the concerns of poor, urban, and minority populations. Legislative progress has been frustrated; it is a daunting challenge.

   2. Accomplishments: Very little has been accomplished legislatively. The Baltimore City Council considered an anti-predatory lending bill but it has been dormant for more than a year. Questions about the City’s authority to enact lending laws have stalled local efforts. In the 2001 General Assembly Session, a bill passed that would preempt local jurisdictions from passing any law that purports to regulate the extension of credit. Very weak consumer protections were added to the bill for high interest loans. Activist organizations asked for a veto of the bill, but the Governor signed it into law. At the federal level, Senator Sarbanes has championed efforts to expand consumer protection for borrowers but the current political climate has not yielded any major success.

   3. Next Steps: a. Appraisal Industry Reform and Regulatory Enforcement – Some recognition of the need for appraisal reform and regulation is gaining a broad consensus among both industry and consumer groups. We look forward to the introduction and passage of a bill concerning appraisers in the Maryland General Assembly next year. AARP of Maryland has become an active participant in the Baltimore Task Force. Representatives from counties surrounding Baltimore have taken an interest in our issues, bringing a statewide focus to the issues that we have studied in Baltimore City. We encourage this broadening of concern and activism vis a vis predatory lending. The problem affects all jurisdictions, with older individuals especially targeted. Coalitions need to be built across jurisdiction lines, between age groups, and between income groups – everyone is negatively impacted by unethical, predatory, and sometimes illegal lending practices. b. Prior Purchase Disclosure - There should be a prior purchase price disclosure requirement as a matter of state law. Property flippers should be forced to show their hand in disclosing when they bought properties and what they paid for them. This would be valuable information for unwary buyers and it would also help mortgage companies and banks avoid financing inflated mortgages.

   4. Lessons Learned: a. Greater Controls on High Interest Loans Needed – The consumer protections of HOEPA did not prevent a great many people from foreclosures due to high interest home equity and re-financing loans. We support the efforts of Senator Paul Sarbanes to expand those protections via SB 2438, the "Predatory Lending Consumer Protection Act of 2002". b. Consumer Protections are needed for all borrowers not just those with high interest loans – Victims of mortgage scams and predatory lending in Baltimore have included those who obtain FHA-insured mortgages with moderate interest rates as well as those who obtain subprime, higher interest mortgages. We have also seen an explosion locally and nationally of check cashing outlets, payday lenders, and rent-to-own companies charging usurious amounts of interest and fees. There should be greater consumer protection laws to govern all of these kinds of financial transactions. c. Some practices are inherently predatory and should be banned. All subprime lending is not necessarily predatory; making credit available to people with poor credit histories can be a service. However, there are some practices within the lending industry that are inherently predatory and harmful. The sale of single premium financed insurance is one example. The allowance of "yield spread premiums" through which mortgage brokers receive a bonus for gouging consumers is another. These are practices that have no place in a fair lending marketplace and should be banned.

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Last Updated: September 25, 2006 © 2006 Community Law Center, Inc. Baltimore, Maryland