Agencies lack tools to combat 'flipping'

State regulator calls enforcement system `broken -- very flawed'

Deterring mortgage fraud

January 19, 2000|By John B. O'Donnell | John B. O'Donnell,SUN STAFF

Saying they lack resources to do the job, state regulators acknowledged yesterday that their agencies have done almost nothing in recent years to regulate mortgage brokers and appraisers -- key figures in property flipping in Baltimore.

"There is a whole area of the law that has to be enforced," Mary Louise Preis, Maryland commissioner of financial regulation, testified at a General Assembly committee hearing called to examine the practice that has been rampant in Baltimore for more than three years.

"If you believe enforcement is deterrence, then you have to toughen up on enforcement," she told the House Economic Matters Committee.

FOR THE RECORD - In a Page 1A article yesterday, The Sun erroneously reported that the Maryland Association of Mortgage Brokers opposes the licensing of real estate appraisers. In fact, the association supports licensing. The Sun regrets the error.

Gregory Glover, chairman of the state commission that regulates property appraisers, said his agency's enforcement and investigation system is "broken -- very flawed."

Preis and Glover testified at a three-hour hearing which looked at the problem in Baltimore, where in the past four years more than 2,000 houses have been bought and quickly resold for a price increase of more than 100 percent.

Mortgage brokers are intermediaries between the lender and the seller. They put together loan packages that convince the lenders, usually out-of-state firms, to finance the deals. On flipped properties, those packages often contain falsified documents. They also include appraisals that inflate the value of the property, frequently persuading lenders to provide financing that exceeds the actual value of the house.

Del. Michael E. Busch, an Anne Arundel County Democrat who chairs the committee, agreed later that enforcement is a problem. "You've got to give the agencies of the state the tools to do it," he said.

Busch said he will schedule further hearings after bills aimed at flipping are introduced. Two Baltimore delegates, Carolyn J. Krysiak, a member of Busch's committee, and Samuel I. Rosenberg, have promised to introduced legislation to combat flipping.

Preis told the committee that flipping is but one form of mortgage fraud -- but "the hardest one for us to deal with."

Citing figures from the Mortgage Asset Research Institute, a Reston, Va., firm that tracks fraud, she said: "Maryland, with a population that ranks 19th in the nation, surprisingly ranks fifth in instances of mortgage fraud."

The institute ranked California, Florida, New York and Illinois ahead of Maryland.

Since 1990, the first full year that mortgage brokers and lenders were licensed in Maryland, the number of state employees assigned to monitor them has been cut, from a dozen to six, while the number of licensees has tripled, from 900 to 2,744, Preis said.

"If your enforcement gets lax, people recognize it, and it becomes a good place to do business," she testified, complaining that the governor's office has rejected her request for two additional staff members.

Preis said she had been told that added personnel could be part of a comprehensive package of anti-flipping legislation and increased funding that Gov. Parris N. Glendening might support later in the General Assembly session. Glendening said this month that he would work with legislators to curb flipping.

Glover told the committee that his agency has no staff to investigate complaints against appraisers and has been having the state Department of General Services review suspect appraisals.

"We've been very hamstrung in our investigations," he said, adding that the commission last week approved the use of volunteer appraisers to fill the void.

"Hopefully, we will get some volunteers," he said.

Thus far, the commission has formally charged only one appraiser, G. Samson Ugorji, for alleged involvement in flipping. State ad- ministrative law judge Laurie I. Pritchard heard the case against Ugorji last week. She is expected to issue a recommendation by early April. Glover's commission will have the final say.

Glover said he'd like to require all appraisers to be licensed -- only those engaged in transactions involving the federal government, FHA and VA-insured mortgages, for example, are now required to have licenses. He also suggested that training standards be tightened.

"Some of what I see out there is absolutely appalling," he said.

His recommendation on licensing appraisers -- echoed by other witnesses -- was opposed by the Maryland Association of Mortgage Brokers and the Maryland Bankers Association. Licensing all appraisers would drive up appraisal costs, they said, increasing closing costs for mortgages and home equity loans and affecting borrowers in parts of the state where flipping is not a problem.

Robert Enten, a lobbyist for the bankers, said that licensed appraisers have been involved in all the flipping deals he has seen. The solution, he told the committee, "is enforcement and education -- not increasing closing costs."

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