An epidemic of defaults

July 16, 2002

WITH ROUGHLY 140 foreclosure petitions filed each week, Baltimore is headed for a bumper year in real estate repossessions. That's bad news all around: Buyers lose investments, the federal government must redeem bad mortgages it has guaranteed, and fragile city neighborhoods are confronted with further instability.

This flurry of foreclosures comes in the wake of the so-called property flipping (the quick purchase and resale of houses at inflated value) and predatory lending fraud that racked Baltimore from 1996 to 2000. Forty-seven people so far have been indicted or convicted. Thousands of families have lost their homes in foreclosures; insurance losses to the Federal Housing Administration total $75 million. The situation was so bad that Baltimore's default rate on FHA loans was 17.8 percent -- three times the national average.

Recognition of this continuing problem must be the starting point as Maryland's U.S. senators, Barbara Mikulski and Paul Sarbanes, prepare for a hearing later this year on a federal response.

The FHA insures 33,271 single-family loans worth nearly $2 billion in Baltimore. Most of those pose no problems. But whenever an FHA foreclosure occurs, the federal government is left holding the bag. In the first three months of this year alone, HUD took back 454 foreclosed houses in the city.

What's more, HUD routinely deals with investors who practice flipping, and with real estate and financing companies that have extraordinarily high rates of foreclosures and mortgage defaults. This only keeps the cycle going.

Instead, HUD should adopt and enforce meaningful sanctions for high-default lenders, and the worst should be excluded from making FHA loans. The agency also should develop a program to evaluate appraisers and discontinue its association with those whose work is questionable and produces high defaults.

Many foreclosure petitions now involve refinancing scams where a homeowner is given a jumbo loan with a high interest rate, steep loan fees and onerous repayment terms that cause the borrower to default quickly. HUD, to its credit, has increased its monitoring of such loans.

But clearly, as the Senate Appropriations Subcommittee on Veterans, Housing and Urban Development prepares to review progress in curbing real estate scams, this area deserves closer scrutiny. Even though consumer awareness is the best defense against fraud, government regulators have an obligation to exercise diligence in preventing swindlers from taking advantage of consumers -- especially when taxpayers' dollars are at stake.

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