FHA moves on `flipping' in Baltimore

Agency will demand that lenders reduce inflated mortgages

Bid to cut default losses

Program could save city homeowners thousands of dollars

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

Troubled by property flipping in Baltimore and a rising foreclosure rate, the Federal Housing Administration plans to unveil a plan today that could save hundreds of Baltimoreans tens of thousands of dollars each on their mortgages.

The move is part of a package of steps the agency plans to enact to help the victims of flipping and cut down on its losses when it pays off its insured mortgages once borrowers default.

Among other things, the FHA will demand that lenders reduce inflated loans to the actual value of the house.

If the lenders refuse, the agency will pay off the loan, take title to the house and sell it back to the occupant at the actual market value, two sources said.

Then, the agency will pursue the lender legally to recover the difference between the inflated loan and the new loan.

Baltimore will be the testing ground for this approach, which will be adopted nationally if it works here, said an FHA official who declined to be named.

The agency also will target appraisers, lenders and brokers who have been involved in fraudulent loans, kicking them out of the FHA program and having them prosecuted.

The FHA effort to curb property flipping and what critics call predatory lending involves only mortgages insured by the agency, which is part of the U.S. Department of Housing and Urban Development.

The FHA, which plans to announce the steps at a hearing here today, would not confirm its plans.

The contents of the package were confirmed yesterday by U.S. Sen. Barbara A. Mikulski of Maryland. The Baltimore Democrat was instrumental in pressing HUD Secretary Andrew Cuomo to deal with a growing FHA problem in Baltimore.

Praise for proposal

Expressing pleasure at the FHA action, Mikulski said, "We need to do it now because people are suffering. The only way to stop their pain is to act immediately."

U.S. Sen. Paul S. Sarbanes of Maryland also praised HUD for its "new and innovative approaches" to the problem. "Predatory lending practices represent a frontal assault on homeowners," he said.

State records show that more than 2,000 Baltimore houses have been bought and quickly resold for at least a 100 percent increase in price since 1996. Some real estate experts believe that figure underestimates the problem.

While many of the flips are financed by conventional mortgages that covered 60 percent to 80 percent of the purchase price, hundreds of others got FHA insurance for the full price.

In one typical transaction, a Northeast Baltimore house was sold for $30,000 in June 1999 and resold the next day for $79,900 with a mortgage for $79,850 that was insured by FHA. A foreclosure suit was filed in February. The current market value of the house is estimated at $45,000.

No figures are available on the number of FHA mortgages that have financed flips.

But of the 1,600 mortgage foreclosure cases filed in Baltimore in the first three months of the year, one-third involved FHA-insured loans, according to Vincent P. Quayle, who heads the St. Ambrose Housing Aid Center.

Halt to foreclosures

The new FHA move is the second major step HUD has taken in Baltimore this spring.

Last month, the agency imposed a 90-day moratorium on foreclosures by lenders who hold FHA-backed mortgages. The moratorium, which prevents new foreclosures and stops action on existing cases, was imposed to give HUD time to assess the situation here.

Among other things, the agency is closely examining foreclosures filed this year on FHA--backed loans issued since 1997, according to Quayle. He and his staff are working closely with the agency to pinpoint loans that were issued for more than the value of the house.

Of 143 appraisals that they have examined, "We've found 53 that are probably OK, 59 that are bad and 31 that are questionable," Quayle said.

A HUD document that outlines the plan to move against lenders who provide inflated mortgages based on inflated appraisals says: "These predatory practices serve to destabilize neighborhoods, impose financial hardship on unsuspecting homebuyers and undermine the financial integrity of the FHA program."

Pattern set by lawsuit

The effort to get lenders to cut the amount of their mortgages follows a pattern set in the settlement of a lawsuit that involved dozens of buyers of flipped houses sold by Robert L. Beeman, a Wilmington, Del., man who was indicted by a federal grand jury in March. The suit did not involve FHA deals.

"This is what they need to do," said Andre Weitzman, the lawyer who filed the suit and a member of a local task force set up by HUD to look into the Baltimore problem.

Weitzman estimated that "this could be $30 million or more in debt relief" for 1,000 homeowners."In the next five years, all these loans would go bad," Weitzman predicted.

HUD also has a national task force that is investigating predatory lending. That group will hold today's hearing, beginning at 9:30 a.m., at the Sheraton Inner Harbor Hotel.

In addition to debt relief, HUD also plans to counsel borrowers who are in default and offer them assistance, identify flipped properties before a deal is finalized so FHA insurance can be denied, restrict the fees and points lenders can charge, target "unscrupulous appraisers" and bar them from work for FHA and take similar steps with mortgage brokers.

The agency already has a similar program to target lenders and ban those with unusually high default rates.

That program has run into problems in Baltimore, however. Its attempts to sanction two lenders, Capitol Mortgage Bankers Inc. and American Skycorp Inc., have been thwarted by federal judges who said the agency didn't have the authority to take that step.

HUD has appealed the decision in the Capitol Mortgage case to the 4th U.S. Circuit Court of Appeals, which heard arguments early this month. The American Skycorp case was decided in U.S. District Court this week.

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