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Baltimore City Flipping and Predatory Lending Task Force - 2005 Final Report Prepared by Community Law Center 2500 Maryland Avenue, Baltimore, Maryland 410.366.0922 ~ www.communitylaw.org Baltimore City Flipping & Predatory Lending Task Force 2005 Final Report Table of Contents Page Preface & Acknowledgements……………………………………………………………………..1 Introduction………………………………………………………………………………………...2 A. Research & Analysis…………………………………………………………………………...3 St. Ambrose Housing Aid Center Community Law Center B. Law & Regulatory Enforcement………………………………………………..........………...4 US Attorneys’ Office HUD Appraiser Sanctions Lender Audits Office of the Attorney General of Maryland Maryland Department of Labor, Licensing and Regulation C. State Legislative Reform……………………………………………………………………….7 Appraiser Reporting Requirement Foreclosure Rescue Scam Legislation Licensing of Individual Mortgage Loan Originators D. Regulatory & Policy Reform……………………………………………………...…………...8 HUD Flipping Rule Treble Damages Rule Lender Accountability for Appraisals Strengthened Lender Approvals Credit Watch Neighborhood Watch Appraiser Watch Maryland Appraiser Pre-Licensing Requirement E. Victim Assistance……………………………………………………………………………..11 The Clearinghouse Second Time Around Program St. Ambrose Legal Services Civil Justice Inc. Legal Representation by Private Attorneys Solid Foundations, Inc. Rescue Fund - Homeowner Emergency Loan Program Tenant Conversion Pilot Program Tenant’s Right of First Refusal F. Neighborhood Recovery………………………………………………………………............16 Expanded Revitalization Areas Sales to Investors Posing as Owner-Occupants Asset Control Area Program Patterson Park Community Development Corporation G. Prevention & Consumer Education…………………………………………………………...19 First Time Homebuyer Free Legal Service HUD Predatory Lending Brochure Office of the Attorney General of Maryland Greater Baltimore Board of REALTORS® The Maryland Coalition for Financial Literacy The Maryland Bankers Association Maryland Association of Appraisers H. Community Law Center 2004 Regional Conference ………………………………………...22 Conclusion and Recommendations……………………………………………………………….23 Task Force Member List………………………………………………………………………….25 Baltimore City Flipping & Predatory Lending Task Force 2005 Final Report Table of Contents Page Preface & Acknowledgements……………………………………………………………………..1 Introduction………………………………………………………………………………………...2 A. Research & Analysis…………………………………………………………………………...3 St. Ambrose Housing Aid Center Community Law Center B. Law & Regulatory Enforcement………………………………………………..........………...4 US Attorneys’ Office HUD Appraiser Sanctions Lender Audits Office of the Attorney General of Maryland Maryland Department of Labor, Licensing and Regulation C. State Legislative Reform……………………………………………………………………….7 Appraiser Reporting Requirement Foreclosure Rescue Scam Legislation Licensing of Individual Mortgage Loan Originators D. Regulatory & Policy Reform……………………………………………………...…………...8 HUD Flipping Rule Treble Damages Rule Lender Accountability for Appraisals Strengthened Lender Approvals Credit Watch Neighborhood Watch Appraiser Watch Maryland Appraiser Pre-Licensing Requirement E. Victim Assistance……………………………………………………………………………..11 The Clearinghouse Second Time Around Program St. Ambrose Legal Services Civil Justice Inc. Legal Representation by Private Attorneys Solid Foundations, Inc. Rescue Fund - Homeowner Emergency Loan Program Tenant Conversion Pilot Program Tenant’s Right of First Refusal 1 F. Neighborhood Recovery………………………………………………………………............16 Expanded Revitalization Areas Sales to Investors Posing as Owner-Occupants Asset Control Area Program Patterson Park Community Development Corporation G. Prevention & Consumer Education…………………………………………………………...19 First Time Homebuyer Free Legal Service HUD Predatory Lending Brochure Office of the Attorney General of Maryland Greater Baltimore Board of REALTORS® The Maryland Coalition for Financial Literacy The Maryland Bankers Association Maryland Association of Appraisers H. Community Law Center 2004 Regional Conference ………………………………………...22 Conclusion and Recommendations……………………………………………………………….23 Task Force Member List………………………………………………………………………….25 2 Baltimore City Flipping & Predatory Lending Task Force 2005 Final Report Preface and Acknowledgements In the first quarter of the year 2000, Maryland United States Senator Barbara A. Mikulski called the nation’s attention to the pervasive and venal practice of illegal property flipping and mortgage fraud that was undermining the stability of Baltimore’s neighborhoods. The foreclosure rate in Baltimore had quadrupled and hundreds of families were losing their homes. The Senator garnered local and national attention to shine a spotlight on the issue. In April of 2000, the National Task Force on Predatory Lending and a parallel task force in Baltimore City were created as a result of Senator Mikulski’s commitment to the neighborhoods of Baltimore and cities throughout the country. Maryland Senior Senator Paul S. Sarbanes joined in this commitment in the effort to halt such practices. The members of the Baltimore City Flipping & Predatory Lending Task Force extend their deep appreciation for the support that our United States Senators have provided on this issue. While the Task Force members generously and unselfishly volunteered their time, energy and expertise, it was clear that the work facing the Task Force could not be coordinated and sustained without additional resources. Through the Department of Housing and Urban Development, the City of Baltimore was awarded a $5 million Neighborhood Initiative Grant in 2001 to assist with neighborhood recovery. These funds became available following extensive discussions with Senator Sarbanes and Senator Mikulski prior to the Senate Hearing on Predatory Lending held in Baltimore on May 14, 2001. The HUD funds committed have been utilized to implement Baltimore’s Healthy Neighborhoods Project, to contract with the Community Law Center to staff and coordinate the Task Force, to establish a Victim’s Clearinghouse and create a Homeowner Emergency Loan Program for homeowners victimized by predatory practices. These supplemental funds allowed the non-profit and government sectors to offer programs with counseling, education, legal intervention, repair loans and affordable mortgage refinance loans for Baltimore homeowners. Another note of acknowledgement must also be made to remember Denis Murphy, a colleague and founding member of the Task Force, who passed away suddenly in May 2005. Denis was an attorney who moved to Maryland to become the Executive Director of Civil Justice Inc., a nonprofit formed to increase access to justice for Maryland residents. Denis’ leadership developed a nationally distinctive program that has received several awards for giving poor and modest income people effective access to justice. In particular, Denis personally represented many victims of property flipping and mortgage fraud. 1 Introduction The Baltimore City Flipping & Predatory Lending Task Force was established in 2000 by the United States Department of Housing and Urban Development (HUD) with the direction to use Baltimore City as the “laboratory” to develop creative solutions to the problems which arose nationwide from the abuse of the Federal Housing Administration (FHA) mortgage insurance program designed to assist low income families attain homeownership. In the late 1990’s, several thousand Baltimore City properties were bought and quickly resold in transactions that involved fraud and misrepresentation. This deceptive real estate practice, known as “illegal property flipping” victimized Baltimore’s most vulnerable residents and neighborhoods. Relying on false appraisals, lenders provided FHA-insured mortgages based on sale prices greatly exceeding the property’s true market value. Families lacking experience in home buying and homeownership were deceived into purchasing under-repaired and over-mortgaged houses they could not maintain and could not sell. The end results included foreclosure, bankruptcy, displaced families, vacant houses, and neighborhood disintegration. In addition to the fraudulent sales to first-time homeowners, hundreds of rental properties were illegally flipped to absentee landlords. These investor sales resulted in compounding and magnifying the harm to neighborhoods. Absentee landlords, many of whom were complicit in the mortgage fraud, purchased multiple properties at falsely inflated values and defaulted on scores of conventional mortgages, leaving in their wake abandoned properties, displaced tenants evicted by foreclosing lenders, and further distressed neighborhoods. The Task Force included representatives from HUD, the FHA, Baltimore City Housing Administration, the Fannie Mae Baltimore Partnership Office, city, state and federal regulatory and law enforcement, finance agencies, elected officials, consumer advocates, housing counseling agencies, community based organizations, community development corporations, lenders and real estate industry associations.1 The Task Force issued a preliminary report in 2002, summarizing the efforts of the first two years of the Task Force.2 The May 2002 Report outlined the Task Force’s accomplishments thus far in connection with state and federal investigations of the individuals and companies responsible in the property flipping schemes, the establishment of resources to assist victims who became obligated on FHA-insured mortgages in amounts greatly exceeding the market value of their homes, consumer education and outreach, and neighborhood recovery. The 2002 Report indicated as well, that much work remained to be done to not only enhance these early efforts, but to also work towards legislative and regulatory reform to prevent the A list of the members of the Task Force and their affiliations appears at the end of the Report. The Community Law Center, Inc., a nonprofit public interest law firm, staffed and coordinated the Baltimore City Flipping & Predatory Lending Task Force. The May 2002 Report of the Task Force, “Lessons Learned from the Baltimore Laboratory,” is available at http://www.communitylaw.org/Lessons%20Learnedhtm. 2 1 2 future sales of properties at falsely appraised values. The Baltimore City Flipping & Predatory Lending Task Force is pleased to release this Final Report detailing its collaborative efforts since 2000 to serve as a laboratory to recommend how mortgage fraud, property flipping and predatory lending can be identified, prevented, and how families and communities can recover.3 A. RESEARCH AND ANALYSIS St. Ambrose Housing Aid Center Task Force member St. Ambrose Housing Aid Center’s research of all Baltimore foreclosure petitions filed in 2000 was used by FHA to declare a temporary moratorium on FHA foreclosures. The foreclosure findings were also used by the United States Attorneys’ Office, the Postal Inspector General, the Federal Bureau of Investigation and the HUD Inspector General’s investigations of mortgage fraud in Baltimore. Community Law Center The Community Law Center supported law enforcement efforts through the periodic analysis of residential real estate transactions that occurred in Baltimore City. The Community Law Center’s first analysis, a review of 22,524 residential real estate transactions occurring between June 1, 1999 and November 30, 2000, identified 1,808 “suspect transactions” and shared its research with local and federal law and regulatory enforcement agencies. Suspect transactions were identified as transactions in which the property was bought and re-sold in six months or less and the difference in the sales prices was greater than fifty (50) percent. Of these transactions, 932 involved properties bought and sold on the same day. The Community Law Center’s second analysis of City residential transactions that occurred January 2, 2002 through September 30, 2002 revealed that there had been a 38% decrease in the incidents of property flipping overall. More significantly, there had been a 47% decrease in the number of same day transactions. During this time period, the average number of properties flipped per month declined from 100 to 63, while the average number of same day transactions per month declined from 52 to 27. The third analysis, covering the January 2003 through May 2003 transactions, revealed a further decline in property flipping. In the first five months in 2003, an average of 18 properties per month were flipped and an average of nine properties per month were bought and resold on the same day at excessive prices. The 2003 figures represent an 82% decrease in overall property flipping since 1999 and an 83% decrease in same day flip transactions since 1999.4 3 4 The Final Report will be available at: www.communitylaw.org. We chose to examine a somewhat shorter time period in the 2003 analysis to enable us to use the data to more timely identify both those who are participating in the suspect transactions as well as the potential victims of the mortgage fraud. 3 Finally, we analyzed the 17,950 Baltimore City residential real estate transactions that occurred between May 27, 2003 and April 14, 2004. The companies and individuals involved and the overall trend in the frequency of suspect transactions were documented. Applying our “property flipping” criteria of “bought and resold in six months or less and the difference in the sales price was greater than fifty percent,” we found a 77% decrease in these types of sales since June 1999. At the height of the property flipping epidemic in the late 1990’s, the prices of the flipped properties were based on falsely appraised values. However, for some of the zip codes represented in the most recent analysis, the current so-called “hot” Baltimore real estate market has left us with some ambiguity in concluding whether certain transactions likely involve sales based on a false appraisal or, rather, are a legitimate reflection of the escalating prices in local real estate. Therefore, the reduction in the number of falsely appraised sales may be even greater than 77% from the 1999 baseline and more in keeping with the 82% reduction in illegal flipping documented in the 2003 research, conducted prior to the recent rapid rise in City real estate values.5 For example, building permits were issued for a significant number of the properties sold between May 2003 and April 2004 where the sale price increased by more than 50%. These permits covered substantial work including demolition of non-structural building interiors, framing of interior walls, installation of drywall and new HVAC systems, upgrading electrical systems, building additions and decks, and completing “gut” rehabs. In contrast, no building permits were taken out and no investments were made to improve properties identified as suspected flips in our earlier research. B. LAW AND REGULATORY ENFORCEMENT United States Attorneys’ Office Since 2000, the United States Attorneys’ Office for the District of Maryland has brought criminal charges against one hundred and four (104) defendants who have participated in mortgage fraud, primarily in Baltimore City and Prince George’s County. The primary criminal charges have been mail or wire fraud, conspiracy, or false statements to an agency of the United States, generally the FHA, for the purpose of obtaining mortgage insurance. One hundred defendants have been convicted and four have been acquitted. Convicted defendants have received sentences as low as probation and as high as sixtyfour months imprisonment. In the federal system, parole has been abolished so that the sentence imposed is the sentence actually served. In addition, some of the defendants have the means to pay a financial penalty. Some of these financial penalties have gone to community development organizations in the affected neighborhoods and agencies working to combat property flipping and predatory lending. These agencies and 5 According to citywide research by the Baltimore Neighborhoods Indicators Alliance (BNIA), the median number of days that a house listed for sale remained on the market during the time period covered in the May 2003-April 2004 analysis fell 46% since 2000, from 52 days to 28 days. Furthermore, the number of construction and rehab building permits issued increased citywide. According to BNIA’s Vital Signs data, “the percent of residential properties where rehab investment above $5,000 takes place is an indicator of the interest, demand, and financial ability to invest and/or live in an area for the long term.” See http://www.bnia.org. 4 organizations have submitted Community Impact Statements to the court to demonstrate the harm caused to the communities. To punish those who have participated in mortgage fraud and to deter would-be participants, charges have been brought against not only property flippers or the organizers of these schemes but professionals such as appraisers, title company owners, settlement officers, title or settlement attorneys, mortgage brokers, loan officers, and loan processors. A typical illegal property flipping case involves the purchase by a flipper of a Baltimore City row house for $10,000 - $12,000. The property is quickly re-sold for as much as $50,000. This second sale is financed by a mortgage loan of approximately $40,000. To secure a mortgage loan in this amount, the appraiser must prepare a fraudulent appraisal which relies upon comparable properties which are either not within the neighborhood, have been rehabilitated, unlike the subject property, or are prior flipped properties. The title company or settlement officer must be involved in the fraudulent scheme providing a title insurance binder which fails to disclose the prior sale or the date the property changed hands. In addition, settlement officers have frequently supported the fraud by not requiring the borrower to comply with the settlement sheet from the lender and not obtaining funds to close from the borrower. Thus the flipper has necessarily corrupted both the settlement officer and appraiser in completing the mortgage fraud. In many of the cases prosecuted, the appraisers, title companies and settlement officers had participated in exchange not for an exorbitant “cut” of the proceeds but in exchange for their usual fees. The mortgage loan broker or loan officer also plays a useful role to the flipper and frequently participates in the scheme to defraud as well. The loan broker or loan officer may help the borrower to inflate income to qualify for the loan or may fail to disclose to prospective lenders property settlements of the borrower which have occurred so recently they have not yet been reported on the borrower’s credit report. Sometimes, the borrowers may falsely state their intention to occupy an investment property; the loan broker/officer may know because of the number of properties purchased, that this statement is false. The loan broker/officer may also be in a position to know that the flipper is “recruiting” first-time homeowners or investors. The broker/officer may be an eager and willing participant in a fraud scheme on first-time homeowners because of the large fees they collect at settlement. HUD HUD’s Office of Inspector General (OIG) in Baltimore established a Housing Fraud Initiative to address illegal property flipping. The OIG obtained seventeen indictments and seventeen successful prosecutions of individuals involved in predatory real estate practices in Baltimore and the surrounding area. There are fifty-three open investigations relating to single-family loan fraud and predatory lending issues. Additionally, the OIG reached settlements in two Program Fraud Civil Remedies Act investigations. Court ordered restitution for these defendants totaled $3,162,456. 5 Appraiser Sanctions The HUD Philadelphia Home Ownership Center (HOC) conducted field reviews on targeted appraisers based on property flipping information generated by the Task Force. In addition, HUD targets appraisers nationwide for review based on default and claims rates that far exceed the norm. As a result of these reviews, HUD has sanctioned more than fifty Baltimore area appraisers and twenty-three of these appraisers have been removed the FHA Roster.6 Lender Audits Between January 1, 1999 and March 22, 2005, HUD’s Quality Assurance Division (QAD) initiated 5,920 on-site reviews of lenders. As a result, 13,552 FHA-insured mortgages were indemnified by HUD approved lenders. Since 1999, HUD’s Mortgagee Review Board imposed sanctions against two hundred and fifteen (215) lenders. Office of the Attorney General of Maryland – Consumer Protection Division The Office of the Attorney General of Maryland (AG) addressed a range of predatory lending practices in Maryland. Consumer education materials regarding payday lending were produced and charges were brought against a payday lender operating in Baltimore County, Prince George’s County, and Montgomery County. As a result, an order was issued that stopped the lender’s improper practices and ordered restitution to the victims of these practices. The AG entered into a consent order with Household International, Inc., a major home equity lender, which was engaging in a number of predatory lending practices, including equity stripping and misrepresenting the terms of its loans. The settlement provided for reform of Household’s lending practices and $12.8 million in restitution to Household borrowers in Maryland. The AG also filed charges under the Consumer Protection Act against ten individuals and companies, including four involved in property sales, three involved in mortgage lending, and two appraisers. The charges involved were connected with forty-nine flipped properties in Baltimore City. The charges resulted in an agency decision that awarded $2.2 million in restitution and provided for $127,000 in penalties, as well as injunctive relief. In Consumer Protection Div. v. Morgan, the Court of Appeals upheld the lower rulings that all of the parties charged had violated the Consumer Protection Act, but remanded the case for further proceedings with respect to the restitution award. Significantly, the Court of Appeals in Morgan held that the sellers, the lender and one of the appraisers were properly held jointly and severally liable for restitution under the Maryland Consumer Protection Act – an issue of first impression for the Court.7 The most noteworthy of these actions was the case against Dale Schulz, a key participant in numerous property flipping schemes in the Baltimore area. Based on HUD reviews of a sampling of his appraisals, the Philadelphia HOC worked with HUD’s Enforcement Center to obtain a debarment action against Schulz, and provided information used in criminal proceedings against Schulz. Schulz was successfully prosecuted and received a prison sentence for his property flipping activities. 7 387 Md. 125 (2005) 6 6 Maryland Department of Labor, Licensing and Regulation The Office of Financial Regulation of the Maryland Department of Labor, Licensing and Regulation (Financial Regulation) investigated numerous cases involving the mortgage industry. Financial Regulation recovered mortgage-related overcharges for refund to homeowners, revoked and suspended licenses of mortgage brokers and issued cease and desist orders to brokers. However, the state regulator’s ability to fully protect Maryland homeowners and consumers is hindered by the preemption for federally chartered banks. In late 2003, Financial Regulation completed its investigation regarding the loan servicing practices of Fairbanks Capital Corp. (now known as Select Portfolio Servicing), which at that time was one of the largest servicers of subprime loans in the country. The State of Maryland entered into a Consent Agreement with Fairbanks, which provided for a refund of fees to Maryland homeowners as well as changes in the company’s loan servicing practices. C. STATE LEGISLATIVE REFORM Appraiser Reporting Requirement As a result of a recommendation of the Task Force, the Maryland Legislature passed a law requiring real estate appraisers to file a quarterly report listing the address and appraised value of all appraisals performed for mortgage lending purposes on properties in the City of Baltimore. The quarterly report is not public information and access to the information filed by the appraisers is restricted to representatives of government agencies “for investigation of fraudulent practices.”8 The reporting requirement also serves as a cautionary note for appraisers who might otherwise consider performing a misleading appraisal – their work will not be as anonymous as it was before. Appraisers are the only professionals who perform a service in connection with a real estate transaction whose fee, but not name, appears on the HUD-1. HUD has not accepted the Task Force recommendation that the name of the appraiser be reported on 8 Section 16-212.1 of the Maryland Code of Business Occupations and Professions provides that: (a) A licensed or certified real estate appraiser shall file with the Commission [of Real Estate Appraisers] or a designee otherwise provided by law at the end of every calendar quarter a report listing the address and appraised value of residential real estate in Baltimore City upon which the appraiser performed an appraisal during the calendar quarter. (b) The report shall be open for inspection only to representatives of government agencies for investigation of fraudulent practices. The City of Baltimore, as the sponsor of the legislation, requested that the Commission advise appraisers that the reporting requirement involves only one-to-four family residential real estate appraised for mortgage underwriting purposes. Therefore, appraisals for settling estates, establishing asking prices, assisting a buyer in preparing a bid, supporting litigation, or for other such non-mortgage related purposes are not to be included in the quarterly report. 7 the HUD-1. There were hundreds of mortgage scams in Baltimore involving conventional loans as well as FHA-insured loans. In addition to reopening this issue with HUD, the Task Force should similarly recommend that Fannie Mae and Freddie Mac require that the name of the appraiser be provided on the HUD-1 of any loan purchased by Fannie Mae and Freddie Mac. Foreclosure Rescue Scam Legislation Homeowners in Maryland and throughout the country have lost title to their homes after they unknowingly signed legal documents prepared by so-called “foreclosure consultants” who promised to save their homes from foreclosure. Financial Regulation initiated numerous investigations of foreclosure rescue cases and was instrumental in stopping the eviction of victimized homeowners and locating pro bono legal services for them. The Office worked closely with members of the state legislature in drafting legislation to address the rapid rise in foreclosure rescue scam cases in Maryland. The Office and other Task Force members provided testimony in support of comprehensive legislation passed by the 2005 Maryland General Assembly to protect the victimization of homeowners facing foreclosure. The legislation regulates the activities of foreclosure consultants and provides remedies for the homeowner to regain title to their homes.9 Licensing of Individual Mortgage Loan Originators This legislation establishes a new licensing requirement for mortgage originators. The law requires mortgage broker loan officers and under certain circumstances, mortgage lender loan officers to become licensed with the Maryland Commissioner of Financial Regulation not later than January 1, 2007.10 D. REGULATORY & POLICY REFORM HUD Flipping Rule On May 1, 2003, FHA published a final rule in the Federal Register outlining more stringent property eligibility requirements for FHA mortgage insurance. Specifically, the rule prohibits FHA insurance for properties sold within 90 days of acquisition, with some exceptions, and requires any properties that are acquired to be purchased from the owner of record in order to be eligible for insurance. For property re-sales occurring between 91 and 180 days after the date of acquisition where the new sales price exceeds the previous sales price by 100 percent or more, the rule requires additional documentation validating the property’s value. The rule allows FHA some flexibility to examine and require additional evidence of appraised value when properties are re-sold within a twelve-month Real Property Article Section 7-301 et seq. of the Maryland Annotated Code. See: National Consumer Law Center’s June 2005 Report - Dreams Foreclosed: The Rampant Theft of Americans’ Homes Through Equity-Stripping Foreclosure “Rescue Scams” at http://www.nclc.org/news/ForeclosureReportFinal.pdf. 10 Financial Institutions Article Section 11-601 et seq. of the Maryland Annotated Code. 9 8 period.11 On October 18, 2003 FHA implemented a modification of the Computerized Homes Underwriting Management System (CHUMS) to automatically check mortgages during the pre and post-endorsement review periods to prevent insurance on any property sold within 90 days after acquisition. Treble Damages Rule A final rule that established new penalties on lenders that fail to engage in loss mitigation was published. The penalties amount to three times the amount of a foreclosure claim submitted by a lender.12 Loss mitigation is not only a critical tool to assist borrowers; it is also a critical tool in preventing subsequent predatory practices. Delinquent borrowers who are not offered meaningful loss mitigation are vulnerable targets for predatory refinance schemes and deed theft scams from so-called foreclosure consultants who falsely promise to save borrowers from foreclosure. Lender Accountability for Appraisals A new regulation effective August 2004 holds FHA approved lenders accountable for the quality of appraisals on properties securing FHA-insured mortgages. The new regulation applies to both sponsor lenders who underwrite loans and loan correspondents who originate loans on behalf of their sponsors. The rule will help to protect the FHA insurance fund and homebuyers by: a) establishing clear guidance to make lenders aware of their responsibilities with respect to appraisals; b) improving FHA’s authority to enforce compliance with FHA appraisal standards; and c) reinforcing FHA’s requirement that homebuyers receive an accurate statement of appraised property value. Lenders who submit appraisals to HUD that do not meet FHA requirements and who knew or should have known about the deficiencies are subject to the imposition of sanctions by the HUD Mortgagee Review Board. Strengthened Lender Approvals The Lender Approval and Recertification division enhanced its gate-keeping functions in several areas through aggressive screening of the principals of new applicants. A proposed rule will allow HUD to disapprove applicants if any of the principals previously worked for an FHA approved lender that was sanctioned by HUD. In addition, a database of loan officers is being developed to track their performance with respect to insured loans originated by them. This will enable HUD to better pinpoint the parties responsible for actions in the loan origination process.13 FR-4615 Prohibition of Property Flipping in HUD’s Single Family Mortgage Insurance Programs, effective June 2, 2003. 12 24 CFR Parts 30 & 203 Treble Damages Rule for Failure to Engage in Loss Mitigation, effective May 26, 2005. 13 In conjunction with these requirements, FHA established a national training program for lenders, providing comprehensive information and guidance relative to FHA single-family mortgage programs. Over 1,000 lenders participated in this training program in 2004. 11 9 Credit Watch HUD’s Credit Watch Termination Initiative is a risk management tool used to monitor the loan performance of over 25,000 FHA approved lenders over a 24-month period. Each quarter, HUD compares the default and claim rates of lenders within a HUD office jurisdiction. Through Credit Watch, HUD may place a lender in “watch status” if the lender’s default and claim rate exceeds 150 percent of the local HUD office jurisdiction. Since Credit Watch Termination was launched in May 1999, HUD has terminated the Origination Approval Agreements of hundreds of lender branch offices. Neighborhood Watch Neighborhood Watch is an automated, web-based risk management tool that complements the Credit Watch Termination Initiative by providing FHA approved lenders with statistical views of their loan origination and servicing performance. It enables lenders to monitor their performance in comparison to other lenders, take corrective actions within their own organizations and/or terminate relationships with poorly performing business partners. It is the underlying tool for targeting lenders for review. Neighborhood Watch is also used by the OIG to target lenders for audit reviews. Neighborhood Watch enables community groups and housing advocates to track the default and claim rates of lenders doing business within their neighborhoods. Appraiser Watch Appraiser Watch is an automated, web-based tool implemented since the inception of the Task Force and used to target appraisers for review. Under Appraiser Watch, some 25,000 appraisers are monitored and held accountable for faulty appraisal practices. Appraisers' default and claim rates are monitored and sanctions, including removal from HUD’s list of approved appraisers, are levied against those whose rates are excessive. Appraiser Watch analysis results in Baltimore greatly assisted HUD Headquarters staff in developing a policy on “Lender Accountability” for appraisals. Although HUD targeted and removed poor performing appraisers from the FHA Roster, members of the Task Force frequently expressed concern that HUD did not have a means to hold mortgage lenders accountable for objectionable and harmful appraisal practices. Maryland Appraiser Pre-Licensing Requirement Strengthening Appraiser Trainee Experience – Appraiser trainees must log 2,000 hours of actual appraisal experience under the direct supervision of a certified appraiser before they can sit for the Maryland license examination. The Maryland Commissioner of Real Estate Appraisers and Home Inspectors now requires that experience to be acquired over no less than two years. This will help ensure that the trainees have had time and the depth of experience necessary to develop the professional judgment that is essential to competent appraising. 10 E. VICTIM ASSISTANCE The Clearinghouse St. Ambrose Housing Aid Center, Baltimore’s oldest nonprofit housing provider, served as the Clearinghouse to identify and assist victims of illegal property flipping and predatory lending in Baltimore City. The Clearinghouse provided a range of services for hundreds of Baltimore homeowners, including one-on-one mortgage default counseling, interceding on behalf of homeowners with lenders and/or appropriate regulatory and investigative agencies, lodging complaints with regulatory and licensing agencies, legal advice, legal representation, referral to other legal service providers, and direct intervention with HUD on behalf of victims with FHA-insured loans and with lenders of victims who had conventional loans. Second Time Around Program More than two hundred first-time homeowners whose mortgages were insured by the FHA were identified as victims. The vast majority were minority single female head of households of low to moderate income who were unprepared for homeownership. More significantly, they were financially unable to maintain the mortgage payments concurrent with the costly maintenance and repairs that were required on these substandard properties. HUD failed to obtain voluntary compliance by these lenders to write down the inflated mortgages and concluded that it lacked the authority to require the lenders to do so. Homeowners threatened with foreclosure were offered either relocation assistance in the amount of two thousand dollars from HUD or the opportunity to participate in a long-term program that would allow them to keep their homes. Seventy-four (74) homeowners received relocation assistance from HUD. Of the two hundred families, only twenty-two (22) agreed to participate in the “Second Time Around Program” crafted and implemented by St. Ambrose. HUD allowed the participants to remain in their homes after the foreclosed properties came into HUD’s inventory. Under the program, homeowners were required to resolve credit problems, pay down debts, attend monthly group-counseling sessions as well as individual counseling, develop and maintain a budget and deposit in the bank their anticipated new monthly mortgage payment plus an additional $50 each month. Families that successfully completed the 18 month program re-purchased their homes from HUD at the actual market value. In addition, HUD provided funds for homeowners to complete repairs identified by the appraisers and home inspectors. Chesapeake Bank of Maryland, a local community bank, and Susquehanna Mortgage Corporation provided mortgages for the successful participants. Ten of the twenty-two participants completed the program and re-purchased their homes from HUD. Four did not qualify for mortgages due to new credit problems that arose after starting the program. Four voluntarily withdrew because they were unable to meet the conditions of the program. One family withdrew to seek a legal remedy and St. Ambrose withdrew three families as a result of their lack of participation and interest in 11 meeting the guidelines of the program. St. Ambrose is monitoring the borrowers for two years. All borrowers are thus far making timely mortgage payments. One homeowner has sold the property and moved on. Even the families that did not complete the program walked away with new skills in money management. St. Ambrose Legal Services (SALS) St. Ambrose Housing Aid Center is a unique organization that offers both counseling and legal services under one roof. In addition to the mortgage default services, the counselors provided referrals to their in-house legal services division where the circumstances warranted legal intervention on behalf of single plaintiffs or groups of plaintiffs in illegal property flipping and predatory lending transactions. The counselors and legal staff identified multiple victims by the same predators, which in some cases involved collusion among sellers, real estate agents, appraisers, home inspectors, home improvement contractors, loan officers, lenders or mortgage brokers, and settlement agents. SALS settled individual and multi-client lawsuits for clients who received reduction of loans to fair market value, reduction of interest rates, repairs to their homes and double cash reimbursement for all illegal fees charged in connection with their loans. Civil Justice Inc. Task Force member Civil Justice Inc., as a subcontractor in the Clearinghouse, supplemented the work of SALS and represented numerous homeowners on claims against sellers, lenders, mortgage brokers, real estate agents and title companies. Civil Justice continues to assist homeowners throughout Maryland. Legal Representation by Private Attorneys In Hoffman v. Stamper, attorneys on the Task Force in private practice represented nine homeowners in a lawsuit against the sellers, an appraiser, a loan officer and the lender, alleging fraud in a property flipping scheme involving FHA-insured loans.14 The case was settled in 2005 for the nine plaintiffs for a total payment of $1,845,000. The settlement followed a jury verdict in January 2002 against all defendants. The original verdict was for $129,000 in economic damages, $145,000 for each plaintiff in noneconomic damages, $195,000 in attorneys’ fees and expenses under the Maryland Consumer Protection Act, and $200,000 per plaintiff in punitive damages against the sellers only. The trial judge refused to submit the punitive damage claims against the other defendants to the jury. The Court of Special Appeals affirmed the judgment for liability in all respects, vacated and remanded the award of attorney's fees, and reversed the trial judge's decision to withhold punitive damages from the jury against the lender, loan officer and the appraiser, and ordered a partial retrial limited to the issue of whether punitive damages 14 Defendants were sellers Robert Beeman and his wife Suzanne, appraiser Arthur Hoffman, loan officer Joyce Wood, and lender Irwin Mortgage Corporation. 12 were warranted.15 On further appeal, the Court of Appeals struck the award of noneconomic damages, sent one plaintiff’s claim for non-economic damages back for retrial, reinstated the award of attorney's fees and otherwise affirmed the Court of Special Appeals, paving the way for a partial retrial limited to punitive damages scheduled for October 2005.16 After motions and a hearing, the trial court entered judgment on the bond against Irwin's bonding company for the economic damages, attorney's fees, and interest from the date of the verdict. Irwin paid out $440,000 to the plaintiffs to avoid execution on the bond. The remaining punitive damage claims were settled for $150,000 per plaintiff ($1,350,000 paid by Irwin Mortgage), an additional $35,000 paid by the appraiser jointly to the plaintiffs, and the one non-economic damage claim settled for $20,000. In addition to the payments to the plaintiffs, HUD was reimbursed $171,000 for losses sustained on the foreclosure of three of the properties. Irwin chose to reimburse HUD after plaintiffs’ attorneys obtained a ruling that HUD's losses were admissible in the Stamper case on the issue of the extent of the harm caused by the scheme which further justified an award of punitive damages. Solid Foundations, Inc. Solid Foundations, Inc., a nonprofit organization established to assist victims of illegal and unethical real estate and lending practices in Baltimore City, provides small grants up to $2,000 to help victims transition to successful homeownership or relocate to rental housing. The grants assist victims in three critical ways: to help them become more successful homeowners in their current homes by providing financial assistance with key repairs and maintenance; to help with a transition to safe and sound rental housing by providing financial assistance towards security deposits and moving expenses when continued homeownership is not feasible for the family; and to help families with funds needed in connection new programs and incentives that lead to successful homeownership, such as a refinance through Baltimore Homeowner Emergency Loan Program, described below. Rescue Fund – Baltimore Homeowner Emergency Loan Program The Baltimore “Homeowner Emergency Loan Program” (HELP) was established to provide victims with an affordable refinance of a predatory loan to prevent foreclosure and ensure sustainable homeownership. Eligible properties are owner occupied one to two unit homes located in the City of Baltimore. Based on a model proposed by SEEDCO (Structured Employment and Economic Development Corporation of New York), HELP is a comprehensive approach to eliminating the impact of predatory practices on low and moderate income homeowners in the City of Baltimore. The program includes financial counseling and education; intervention with the existing mortgage lender (including legal intervention as needed to assist the homeowner); an affordable mortgage refinance and emergency repair loan fund; and write-down grants 15 16 155 Md. App. 247, 843 A.2d 153 (2004) 385 Md.1, 867 A.2d 276 (2005) 13 (deferred loans) to enable eligible borrowers to achieve an affordable refinance of a predatory mortgage loan. The HELP loan fund offers both a mortgage refinance product up to $80,000 and a second mortgage up to $25,000 to finance the cost of repairs. HELP is administered by the Baltimore Community Development Financing Corporation (BCDFC). BCDFC sells the loans to Fannie Mae. Each loan applicant undergoes a thorough and lengthy review process to determine eligibility for refinancing. Task Force member Civil Justice reviews the original loan documentation to determine if the transaction involved a predatory practice. BCDFC has identified and assisted, either directly or through subsequent referrals, more than two hundred families over the last two years. Not all families identified were eligible for the refinance program but they were assisted through referrals to participating HUD approved default management counseling agencies, including St. Ambrose Housing Aid Center and Belair Edison Neighborhoods, Inc. Twenty-two loans have been refinanced, two of which included second loans for property repairs. Solid Foundations funds were used to assist borrowers in nine of these refinances. Additional loans are in the pipeline and BCDFC is in the process of obtaining documentation to determine eligibility. One of the common obstacles to refinancing remedies for victim buyers of flipped properties has been the existence of "phony" second mortgages. These mortgages typically appeared as private loans from the sellers to supplement purchase money mortgages that fell significantly below the purchase price. This commonly occurred as a result of buyers’ inability to qualify for higher loans, or in conventional deals with loan to value limits requiring down payments that buyers obviously did not have. The second mortgages were "phony" in the sense that the documents were created and recorded for purposes of closing the deals and securing the first loan proceeds, but were never enforced. No actual funds were generated by these instruments and buyers never were required to make payments on these loans. Since these loans appeared as liens against the properties, a payoff of these bogus second mortgages in connection with the HELP refinance would result in cash windfalls for the holders of these instruments. St. Ambrose Legal Services undertook legal challenges to these mortgages by filing complaints for declaratory judgments alleging that the mortgages were not bona fide as attested to and were void for failure of consideration and intent. This approach was remarkably successful and informative as well. Frequently, these instruments were bundled by high volume sellers and sold at a deep discount as investments to private investors. These investors declined to defend the instruments, allowing the buyers to benefit either from default judgments or lien releases. As a result, much needed dollars in the HELP rescue fund were not diverted to pay off these liens or unjustly enrich those responsible for the predatory transactions. HELP could not assist some of the earliest applicants because their homes were in very poor condition and the funds needed to make the repairs would exceed market value of properties in the surrounding area by a substantial amount. Further, combined 14 rehabilitation cost, loan amount and write-downs in these cases far exceeded the combined loan-to-value established for the program. BCDFC worked with Fannie Mae to overcome the combined loan-to-value issue and succeeded in obtaining a Fannie Mae modification of the HELP Master Agreement to raise the combined loan-to-value ratio from 125% to 145%. At the outset of the program, applicants that had high credit card and installment debt were unable to qualify since their total debt to income ratio exceeded program guidelines. After interviewing these applicants, BCDFC found that many of the mortgage delinquencies resulted from unexpected repair costs that could be related to predatory real estate practices. It was not uncommon to find that applicants had delinquent mortgage payments and the properties were in danger of foreclosure because available funds had been used to make the necessary home repairs. The Loan Committee determined that grants should not be used to write down debt that is not associated with the property. However, the program does allow use of grant funds to assist a borrower when clear evidence is available that the debt is attributable to essential health and safety repairs made to the property. BCDFC has begun a direct mail campaign with the assistance of local community development corporations in an effort to continually market HELP and bring greater awareness of predatory lending practices. BCDFC and the HELP Steering Committee are committed to extending the program beyond its initial three year demonstration period and are working on a plan to ensure its continuation. Tenant Conversion Pilot Program When the scope of the mortgage fraud was uncovered, the emphasis initially focused on providing assistance to the owner-occupant who had been victimized. However, the Community Law Center’s extensive review of the sales to investors (many of whom purchased multiple properties sight-unseen), coupled with interviews with numerous tenants residing in those properties, brought to light the innocent tenant families who were directly impacted by the illegal real estate practices. For the tenants whose landlord had not lost the house to foreclosure, their living conditions were dismal. Landlords with mortgages greatly exceeding the value of the houses failed to adequately maintain and repair the properties. Numerous other tenant families faced imminent eviction due to their landlord’s default on the inflated mortgages. The Community Law Center’s research revealed that many of the rental properties illegally flipped to investors were being foreclosed by Fannie Mae. In cooperation with Fannie Mae, the Task Force developed a Tenant Conversion pilot to provide tenants the opportunity to purchase the houses they were renting to avoid eviction. The Community Law Center, Fannie Mae, city agencies, housing counselors, real estate agents and lenders are collaborating on this program. One such tenant, a senior citizen who faced eviction after 26 years as a model tenant, purchased her home from Fannie Mae at the true market value. Unfortunately, only three tenants have purchased their homes thus far. The vast majority of the tenants were not planning for homeownership and were not financially 15 prepared to take on such a responsibility immediately upon learning of their landlord's default. Tenant’s Right of First Refusal Baltimore City Ordinance requires (with limited exceptions) that before a voluntary transfer of title to a single-family residential rental property may occur, the tenant shall have the right of first refusal to purchase the property. The Community Law Center’s research findings that hundreds of single family rental properties were bought and resold to investors revealed the widespread lack of compliance with the Tenant’s Right of First Refusal Ordinance.17 In response, the Community Law Center launched a “Tenant’s Rights Initiative” with the assistance of Task Force member Civil Justice. Baltimore Neighborhoods, Inc., a Fair Housing Agency, maintains a Landlord/Tenant Hotline and fields hundreds of calls per year from tenants facing eviction, many as a result of a proposed sale of their rental properties. These tenants are referred to the Community Law Center for an initial screening and, where appropriate, referred to Civil Justice for legal representation. In addition, on a positive note, numerous landlords have also contacted the Community Law Center, seeking information to enable them to comply with the Ordinance. F. NEIGHBORHOOD RECOVERY To enable neighborhoods to recover from the wave of mortgage fraud and resulting foreclosures, it was imperative to break the cycle of inexpensive substandard properties falling once again into the hands of investors who had no intention of improving the properties and/or would likely once again illegally flip these properties. Thus, major objectives of the Task Force were to develop recommendations to promote increased sales of properties owned by HUD to qualified owner-occupants and community development corporations with proven capacity to rebuild, and to encourage private sales from investors to qualified tenants residing in their properties. HUD REO (Real Estate Owned After Foreclosure) Expanded Revitalization Areas The Task Force provided data in support of its request that HUD significantly expand its criteria for designating Revitalization Areas in Baltimore City to include areas that have a disproportionately high concentration of delinquent or foreclosed properties. The prior criteria only included neighborhoods with very low income or low homeownership rates. As a result of the expanded criteria, almost the entire City of Baltimore now qualifies as a Revitalization Area. HUD properties located in Revitalization Areas are offered at a discount under programs designed to expand homeownership opportunities. Two such programs, the Teacher Next Door and Officer Next Door, offer deeply discounted sale prices to teachers and law enforcement officers who will occupy the houses as their 17 Subtitle 6 of the City Code of Baltimore, Art. 13, Section 6-1 et seq. 16 principal residence. The more properties that are earmarked for owner-occupant purchases, the more the housing stock available for sales to unethical investors decreases. Sales to Investors Posing As Owner-Occupants To encourage homeownership, HUD properties are initially offered for sale during an exclusive owner-occupant bid period. To purchase HUD REO during this exclusive bid period, prospective buyers must certify that they will occupy the house as their primary residence for at least twelve (12) months. Real estate brokers who submit such offers to HUD must also certify that they have not submitted the offer on behalf of an investor purchaser. However, HUD does not have any monitoring system or owner self-reporting system to verify whether an owner-occupant in fact resides in the property after acquisition. HUD has limited criteria under which it will bar purchasers from purchasing its properties, such as those who have violated a HUD housing rule or regulation, or have been convicted of mortgage fraud. Task Force members representing community organizations suspected that investors purchased many properties in their communities during the owner-occupancy only bid period, which would constitute a violation of a HUD rule or regulation. To demonstrate that particular investors violated HUD rules and regulations, the Community Law Center researched sales of HUD properties in 2003 in a sampling of zip codes that HUD confirmed were sold during the exclusive owner-occupant bid period. Our analysis of these sales revealed 25 questionable transactions believed to be sales to investors posing as owner-occupants. The analysis included identification of properties re-sold within twelve (12) months of purchase from HUD; open Baltimore City housing code violations and in particular, vacant house notices; identification of owners known to be investors from the Community Law Center’s periodic research of City sales transactions; cross-referencing claimed owner-occupancy status with state records on-line regarding status of property as a principal residence; cross-referencing the property addresses with mailing addresses indicated on the City’s Department of Finance web site for property tax bills; and information provided by community organizations indicating that tenants were residing in the properties. HUD investigated these transactions and referred numerous cases to the HUD Office of the Inspector General. However, the Task Force recommendation that HUD establish a monitoring system to verify that an owneroccupant resides in the property has not been accepted. Instead, HUD agreed to investigate specific transactions involving suspected violations of the exclusive owneroccupancy bid period that are brought to its attention. Asset Control Area Program - Reclaiming Foreclosed Properties In October of 2004, St. Ambrose received site control of its first four properties from HUD to begin implementation of the Asset Control Area Program (ACA). Under the ACA, St. Ambrose will acquire and rehabilitate HUD properties in approved neighborhoods in North and Northeast Baltimore City for sales to owner-occupants. St. 17 Ambrose will purchase the properties at a discount rate from HUD, renovate and re-sell to owner-occupants up to fifty-five (55) properties in six City neighborhoods in year one. In year two, St. Ambrose will increase its production in the initial six neighborhoods, add at least three new neighborhoods in Northeast Baltimore and complete the renovation of ninety-nine (99) properties.18 Through the ACA program, St. Ambrose will be able to control and improve the housing market in these communities through quality renovations and market sales of HUD foreclosures. St. Ambrose’s work will greatly reduce the instability caused by an increasing number of foreclosures in a community. The number of HUD properties sold to investors will drop to near zero. Through quality renovations and sale to qualified buyers, St. Ambrose will be able to gradually and legitimately increase property values in stagnated communities. It is expected that rising property values will spur home improvements by existing homeowners, further strengthening the neighborhoods. Every week HUD provides additional inventory of foreclosed properties in the designated areas. The properties are appraised and sold to St. Ambrose at 50% of the “as is” value. Seventy-five percent of the houses must be renovated and sold to homeowners within 12 months and 100% within 18 months of purchase from HUD. As the properties are obtained from HUD, St. Ambrose’s staff architect creates a list of renovations to be completed and solicits bids from private contractors. St. Ambrose conducts all construction management. The goal is to complete the greatest amount fiscally possible of interior and exterior quality improvements. Particular attention is given to the outside of the house and to landscaping in order to have a visible impact on the neighborhood. Upon completion, Charm City Realty, St. Ambrose’s in-house real estate brokerage, multiple lists all properties for sale at market prices currently ranging from $115,000 to $160,000. Marketing of the properties is being coordinated by St. Ambrose in conjunction with local real estate agents and lenders, the Northeast community groups, major employers such as Morgan State University and Good Samaritan Hospital, religious and social organizations, and special outreach to teachers and police officers. Every home will be sold to a qualified homeowner with a maximum income at or below 115% of area median income, which for 2005 is $83,835 for a family of four. HUD sets the income levels for the Program. The ACA Program is designed to be a “Baltimore Project” that will be a model for the country. A partnership of Baltimore lending institutions is participating in the first year of the Program providing St. Ambrose with revolving lines of credit to purchase and 18 Five of the neighborhoods are collectively referred to as Northwood. The sixth neighborhood is a portion of Belair-Edison. Burdick Park, Waltherson and Ednor Gardens will be phased in during year two. The designated areas are proud and historically stable middle-class communities with a high quality housing stock. The housing stock is primarily 3-bedroom townhouses and semi-detached houses built after 1945. The properties are modestly sized and with consistent layouts, thereby reducing design and rehabilitation costs and the properties present fewer structural and “systems” problems than older homes. 18 renovate the 50 houses. Thus far, twenty-five (25) houses have been sold to homeowners. Four (4) are under contract and pending settlement. Patterson Park Community Development Corporation Institutions were in place that allowed recovery in Patterson Park, a neighborhood hard hit by the effects of the illegal property flipping and the resulting massive foreclosures. During 2000-2003, there was an average of 100 FHA foreclosures per year in the Patterson Park area of only a few thousand homes. These homes were in extremely poor condition. Neighborhood recovery depended on the ability to get foreclosed houses into responsible hands at a scale that would make a difference. The Patterson Park Community Development Corporation (PPCDC) purchased hundreds of foreclosed properties, rehabbed and sold more than 160 properties to homeowners and rehabbed a similar number for affordable rental. Approximately 20 properties were sold as-is to responsible investors, who rehabbed them and resold to homeowners. One of the major challenges of the PPCDC is to keep the neighborhood free of irresponsible investors. PPCDC runs an aggressive campaign to buy houses, including those not suited for owner-occupancy. PPCDC’s rental operation helps maintain local control of the real estate, so that someone in the neighborhood is accountable for the property. Over time, tenants have purchased their rental properties, increasing the homeownership base of the neighborhood. There are few foreclosures in the Patterson Park neighborhoods now. PPCDC’s efforts have helped spur increased market values so that if homeowners with FHA or conventional mortgages want to move or run into financial trouble, they can sell their houses for prices sufficient to pay off their mortgages. G. PREVENTION AND CONSUMER EDUCATION Preventing Predatory Practices First Time Home Buyer Free Legal Service None of the families victimized in the property flipping and mortgage fraud cases had obtained any independent advice or review of their contracts or loan documents before entering into the transactions. Supported by a grant from the Abell Foundation, Task Force member Civil Justice conducted the pilot program known as “First Time Home Buyer Free Legal Service.” Volunteer attorneys reviewed sales contracts and loan documents before buyers entered into legally binding agreements. The pilot proved successful - in many instances, potential purchasers, whose participation was voluntary, were advised not to go forward with a proposed contract or loan agreement, or the attorneys negotiated contract terms that protected the buyers. Although the foundation funding to support this program has ended, Civil Justice is continuing this program and has obtained commitments from attorneys who will review documents at no cost to the first-time homebuyer. St. Ambrose Legal Services is now an additional resource to review purchase and loan documents. 19 Public Awareness Campaigns and Information for Consumers HUD Predatory Lending Brochure In collaboration with the Task Force, HUD published a consumer brochure Don’t Be a Victim of Loan Fraud – Protect Yourself from Predatory Lenders. The easy-to-read pamphlet describes nine different types of predatory lending characteristics, offers eleven tips on being a smart and informed consumer and describes tactics commonly used by predatory lenders.19 Office of the Attorney General of Maryland – Consumer Protection Division In October 2000, the Attorney General’s Office launched a consumer education campaign to combat flipping in Baltimore City and throughout the state. The Office developed a flipping brochure in English and in Spanish entitled Home Buyers: Beware of “Flipping” Scams that informed and alerted consumers to predatory real estate and lending practices and included a detailed set of questions the buyers should ask sellers to determine the ownership history of the property and its condition. The brochure encouraged consumers to obtain homeownership counseling from an independent organization, retain a buyer’s real estate agent, seek legal assistance before signing contracts and warned consumers not rely on the seller or the seller’s agent to recommend a lender, title company or home inspector. A series of town hall meetings in neighborhoods most affected by flipping brought together members of the public, victims of predatory lending, community groups, and elected officials to draw attention to the problem and discuss solutions. In addition, public service announcements were aired at the same time as flippers typically ran their commercials. Greater Baltimore Board of REALTORS® The Greater Baltimore Board of REALTORS® (GBBR) launched a $300,000 comprehensive public awareness educational campaign designed to educate potential homebuyers on how to avoid fraudulent real estate schemes and to help them access the real estate professionals and homeownership counselors who could assist them in purchasing a home. GBBR's "Know Housing Fraud When You See It" campaign included billboard, bus sides, radio and television advertising. Over 45 partners, including the Fannie Mae Foundation, Freddie Mac, HUD, the City of Baltimore, the Maryland Association of REALTORS®, the National Association of REALTORS®, Baltimore County, the homeownership counseling industry, lenders, appraisers, elected officials, and the Real Estate Brokers of Baltimore (Realtists), helped fund the campaign. The REALTOR® community is actively engaged in promoting the Freddie Mac Credit Smart program to potential homebuyers throughout the Baltimore area. The Maryland 19 The brochure is available for downloading from the HUD web site or can be obtained by calling HUD's Direct Distribution Center toll free number at 1(800) 767-7468. 20 Association of REALTORS® Housing Foundation coordinates these extensive educational efforts. Maryland Coalition for Financial Literacy In June 2002, Mary Louise Preis, then Maryland’s Commissioner of Financial Regulation, convened a meeting of representatives from banking and nonbank financial institutions, real estate, government, education, consumer groups, financial planning, retailing and credit counseling services, to address the need for a statewide financial literacy initiative. The Maryland Coalition for Financial Literacy was formed as a division of the Maryland Council on Economic Education. The mission of the Coalition is to ensure that every Maryland adult and high school senior has the knowledge needed to make informed financial decisions. Most significantly, the Coalition is working to promote a financial literacy graduation requirement in every Maryland school system and an inventory of adult financial literacy materials and programs.20 In addition, Personal Finance is being added to the Maryland Correctional Education Program’s General Equivalency Diploma (GED) curriculum. Maryland Bankers Association The Maryland Bankers Association (MBA), a founding member of the Maryland Coalition for Financial Literacy, has independently developed a range of tools for bankers to use in consumer education efforts in schools, in their institutions, and in the communities they serve. A wide range of consumer education/financial literacy initiatives and programs receive ongoing support from the MBA. In 2004, the MBA elevated consumer education to one of its five mission areas.21 Maryland Association of Appraisers Urban Appraising Course - Task Force member Maryland Association of Appraisers (Association) developed a two-day course, with a required examination, for those seeking real estate appraiser licenses, upgrades, and license renewals in Maryland. Nearly 700 appraisers have already completed the course, which emphasizes the special challenges of appraising urban properties and how to avoid, even inadvertently, becoming part of a flipping scheme or mortgage scam. The course is a required part of the Association’s basic appraiser trainee curriculum. http://www.mdfinancialskills.org. Among other information, the website provides (1) a clearinghouse of resources that people can access for financial information and (2) a lending library of personal finance resources that teachers, parents and others can borrow. The Coalition is directed by an Advisory Council comprised of members from banking, credit unions, consumer lending, credit counseling, retail merchants, REALTORS®, nonprofit charitable and educational organizations, local school systems, colleges and universities, members of the community at large, the Maryland State Senate and House of Delegates, the Maryland Division of Financial Regulation, the State Treasurer’s Office, the Maryland State Department of Education, the Office of the Maryland Attorney General and the Federal Deposit Insurance Corporation. 21 http://www.mdbankers.com/financial_education/overview.aspx. 20 21 Educating Homebuyers on Appraisals – The Association prepared a brochure, What Homebuyers Should Know About Their Appraisal. The brochure, available for download on the Association’s website, provides information in plain language on why the appraisal is performed, to what extent the appraiser will (and will not) inspect the property, how the value is estimated, and where the homebuyer should turn if they suspect the appraiser is being negligent or deliberately misleading.22 Multiple presentations were made to groups of first-time homebuyers. Educating Regulators and Law Enforcement Personnel – A one-day briefing on the ethical and performance requirements of the Uniform Standards of Professional Appraisal Practice (USPAP) was presented to the non-appraiser members of the Maryland Commission of Real Estate Appraisers and Home Inspectors by USPAP instructors of the Association. A half-day version, focusing on how an appraisal report can be manipulated to cover up deliberate falsification of value, was presented to attorneys in the Office of the Maryland Attorney General. H. Community Law Center 2004 Regional Conference In June 2004, the Community Law Center held its first regional conference, Ending Predatory Real Estate Practices: Lessons Learned & Best Practices from Baltimore and the Mid-Atlantic Region. The conference provided the opportunity for the Community Law Center, the Task Force, and others involved in similar efforts throughout the region, to share “Lessons Learned” in identify and responding to illegal property flipping, mortgage fraud, predatory lending, and abusive mortgage loan servicing practices. U.S. Senator Paul S. Sarbanes delivered the keynote address. Panelists from Maryland, New York, New Jersey, Pennsylvania, Illinois and Washington, D.C. shared their expertise. The panelists represented local, state and federal housing agencies, law and regulatory enforcement agencies, local and national consumer advocacy organizations, the news media, and the real estate, appraisal and lending industries. 22 http://www.mdappraisers.org 22 CONCLUSION The Task Force developed a multi-faceted response to address the problems facing homeowners, their neighborhoods and the FHA as the insurer of the mortgage loans secured by falsely appraised properties. The research and analysis of real estate transactions, victim assistance resources, neighborhood recovery programs, and consumer education are fundamentally important and will be ongoing. Aggressive law enforcement has also been essential not only to punish those responsible, but also to deter future criminal activity and it is hoped that law enforcement resources will continue to be allocated to the issue of mortgage fraud. One of the common characteristics of the victims who purchased falsely appraised houses was that they did not have the advice and guidance of a licensed real estate agent who worked for them as a “buyer’s agent.” The Task Force recommends that buyer’s retain a licensed buyer’s agent who will negotiate on the buyer's behalf in connection with a home purchase. The obligations of a buyer's agent include a duty of confidentiality, a duty to provide a market analysis of the property and a duty to disclose to the buyer any interest the agent has in the transaction. While the incidents of illegal property flipping have been dramatically reduced, prepurchase housing counselors, mortgage default counselors and consumer advocates continue to see a steady stream of senior citizens and low and moderate income residents who have obtained, or are being offered, purchase or refinance loans on terms that are unethical, unfair, overpriced, and in some instances, unaffordable and illegal. Counselors and advocates regularly see instances of “bait and switch” tactics, where loan terms are changed at settlement; subprime interest rates for credit worthy borrowers; adjustable rate mortgages that can only adjust upward; loans with excessive points and closing costs; and illegal fees for services not performed. Interest only loans and loans with balloon payments are examples of unsuitable loans that have been provided to senior citizens on fixed incomes and to low and moderate income families lacking the financial resources to weather the substantial future payment increases inherent in these loan products. None of the families victimized in the property flipping schemes, or those who took out mortgage loans described above, had obtained legal review of their purchase contract or loan documents before entering into the transactions. The First Time Home Buyer Free Legal Service offered by Task Force member Civil Justice, described earlier in this Report, has been successful. Access to free or reduced rate legal services for review of the legally binding contract and voluminous documents involved in the home purchase and mortgage process ensure that families of low and moderate income are not deceived or misled to purchase homes in substandard condition or obtain mortgages on terms that are unfair and unaffordable. 23 Building on this work of the Task Force, a Homeownership Preservation Workgroup recently convened in Baltimore.23 Many Task Force members and local funders have joined this Workgroup, whose strategy is two fold: prevention and intervention. The Workgroup is developing: (a) an expanded network of consumer attorneys who will review proposed home purchase contracts and mortgage loan agreements to prevent homeowners from unknowingly entering into predatory transactions (for both purchase money mortgages and refinances) and (b) an outreach campaign connecting homeowners in or approaching mortgage default to intervention services to avoid foreclosure. The Task Force recommends, and the Homeownership Preservation Workgroup will include in its outreach, a strong emphasis on the need for first-time homebuyers to obtain prepurchase counseling from a HUD certified counseling agency, have an independent home inspection, and buyer agent representation. While no longer meeting on a regular basis, the members of the Baltimore City Flipping & Predatory Lending Task Force all expressed a desire to convene periodically to identify and develop responses to emerging practices in real estate and lending that place Baltimore’s vulnerable residents and neighborhoods at risk. 23 Carol Gilbert, Program Officer at the Goldseker Foundation in Baltimore, is leading this Homeownership Preservation initiative. 24 Members of the Baltimore City Flipping & Predatory Lending Task Force In order to recognize everyone who has been part of this effort from the beginning, the list below includes former as well as current members of the Task Force. Alexa Sewell Ali Solis Allen Cox Andre Weitzman Angela Boyd Antonio Hayes Barbara Aylesworth Beatrice Tripps Beth Riedel Bill Riedel Calvin Wink Camille Holland Carl Cleary Carol Eshelman Carolyn Blanchard Cook Carolyn Krysiak Charles Turnbaugh Cheryl B. Walker Cheryl Hystad Christopher V. DiPietro Danielle Deckard David Goldberg Deidre Rye Diane Cipollone Donna Deleno Ed Rutkowski Engram Lloyd Evan Helfrich Frank Coakley James Kelly Janie Lee Jim Everett JoAnn Copes Jody Landers Jonathan Miller John Nethercut Joseph Evans Joseph McCloskey Joyce McDonald Office of Senator Barbara A. Mikulski Enterprise Foundation Maryland Financial Literacy Coalition Attorney-at-Law Enterprise Foundation Baltimore City Council Belair-Edison Neighborhoods, Inc. (BENI) Baltimore City Council Maryland Association of Appraisers Maryland Association of Appraisers Maryland Department of Labor, Licensing & Regulation, Office of Financial Regulation. HUD–Philadelphia Home Ownership Center Southeast Development, Inc. Brooklyn and Curtis Bay Coalition, Inc. The Greater Baltimore Board of REALTORS® Maryland House of Delegates Maryland Department of Labor, Licensing & Regulation, Office of Financial Regulation HUD–Philadelphia Home Ownership Center Maryland Consumer Rights Coalition Mid-Atlantic Financial Services Community Law Center Office of the Attorney General of Maryland American Association of Retired Persons (AARP) Community Law Center American Association of Retired Persons (AARP) Patterson Park CDC HUD-Philadelphia Home Ownership Center Code Enforcement Legal Section, State’s Attorneys Office Fannie Mae Baltimore Partnership Office HUD Baltimore Field Office Chesapeake Bank HUD Headquarters Baltimore City Department of Housing The Greater Baltimore Board of REALTORS® Office of Senator Paul S. Sarbanes Office of the Attorney General of Maryland U.S. Attorneys’ Office HUD Headquarters U.S. Attorneys’ Office 25 Kathleen Murphy Kathleen Skullney Keiffer Mitchell Ken Strong Laurie Maggiano Linda Cisco Lisa Evans Maria Howell Michael Guye Noreen Beatley Patricia Clements Paul Graziano Phillip Robinson Rahn Barnes Ramona Johnson Rick Sause Robert Bartolini Roy Miller Russ Sears Ruth Louie Scott Bailey Sheila Dixon Sherri Bell Stephen Prozeralik Tom Jaudon Vincent Quayle Vito Simone In Memoriam: Denis Murphy Maryland Bankers Association St. Ambrose Legal Services Baltimore City Council Baltimore City Department of Housing HUD, Office of Single Family Asset Management HUD, Office of the Inspector General St. Ambrose Housing Aid Center Maryland Volunteer Lawyers Service (MVLS) Baltimore City Department of Housing Enterprise Foundation Baltimore Community Development Financing Corporation Baltimore City Department of Housing Civil Justice Inc. Provident Bank Fannie Mae Baltimore Partnership Office Maryland State Department of Assessments and Taxation Baltimore City Department of Housing Belair-Edison Neighborhoods, Inc. Slavie Federal Bank Baltimore Community Development Financing Corporation Office of the Attorney General of Maryland Baltimore City Council Maryland Center for Community Development Maryland Department of Labor, Licensing & Regulation, Office of Financial Regulation Baltimore City Department of Housing St. Ambrose Housing Aid Center Simone Real Estate Civil Justice Inc. 26