[Senate Hearing 107-856]
[From the U.S. Government Publishing Office]
S. Hrg. 107-856
PREDATORY LENDING
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JOINT HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
SPECIAL HEARING
MAY 14, 2001--BALTIMORE, MD
__________
Printed for the use of the Committee on Appropriations
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COMMITTEE ON APPROPRIATIONS
TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky TOM HARKIN, Iowa
CONRAD BURNS, Montana BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama HARRY REID, Nevada
JUDD GREGG, New Hampshire HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio TIM JOHNSON, South Dakota
MARY L. LANDRIEU, Louisiana
Steven J. Cortese, Staff Director
Lisa Sutherland, Deputy Staff Director
Terrence E. Sauvain, Minority Staff Director
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Subcommittee on VA, HUD, and Independent Agencies
CHRISTOPHER S. BOND, Missouri, Chairman
CONRAD BURNS, Montana BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama PATRICK J. LEAHY, Vermont
LARRY CRAIG, Idaho TOM HARKIN, Iowa
PETE V. DOMENICI, New Mexico ROBERT C. BYRD, West Virginia
MIKE DeWINE, Ohio HERB KOHL, Wisconsin
TED STEVENS, Alaska (ex officio) TIM JOHNSON, South Dakota
Professional Staff
Jon Kamarck
Carolyn E. Apostolou
Cheh Kim
Paul Carliner (Minority)
Gabrielle A. Batkin (Minority)
Administrative Support
Isaac Green
Nancy Olkewicz (Minority)
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PHIL GRAMM, Texas, Chairman
RICHARD C. SHELBY, Alabama PAUL S. SARBANES, Maryland
ROBERT F. BENNETT, Utah CHRISTOPHER J. DODD, Connecticut
WAYNE ALLARD, Colorado TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming JACK REED, Rhode Island
CHUCK HAGEL, Nebraska CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania EVAN BAYH, Indiana
JIM BUNNING, Kentucky ZELL MILLER, Georgia
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN ENSIGN, Nevada DEBBIE STABENOW, Michigan
JON S. CORZINE, New Jersey
Wayne A. Abernathy, Staff Director
Steven B. Harris, Democratic Staff Director and Chief Counsel
Geoffrey P. Gray, Senior Professional Staff Member
Jonathan Miller, Democratic Professional Staff Member
C O N T E N T S
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Page
Statement of Senator Barbara A. Mikulski......................... 1
Statement of Senator Paul S. Sarbanes............................ 3
Statement of Hon. Martin O'Malley, Mayor, Baltimore, Maryland.... 5
Statement of Harry Smith, Citizen................................ 8
Statement of Chassie Adams, Citizen.............................. 9
Statement of Vincent Quayle, St. Ambrose Housing Aid Center...... 10
Statement of Kenneth Strong, Director of Research and Policy,
Community Law Center, Baltimore, Maryland...................... 14
Prepared statement........................................... 18
Statement of Paul T. Graziano, Commissioner, City of Baltimore,
Department of Housing and Community Development................ 34
Joann Copes, Director of Development, Baltimore Housing and
Community Development.......................................... 34
Prepared statement of Paul T. Graziano........................... 37
Statement of Laurie Maggiano, Director, Asset Management and
Disposition, Single Family Division, Department of Housing and
Urban Development.............................................. 41
Prepared statement........................................... 45
Baltimore Predatory Lending and Flipping Task Force Year One
Accomplishments................................................ 47
Statement of Stephen M. Schenning, Acting United States Attorney,
District of Maryland........................................... 49
Prepared statement........................................... 51
PREDATORY LENDING
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MONDAY, MAY 14, 2001
U.S. Senate, Committee on Banking, Housing, and
Urban Affairs, and Committee on Appropriations,
Subcommittee on VA, HUD, and Independent
Agencies,
Baltimore, MD.
The subcommittee and committee met at 9:12 a.m., in the
Curran Room, Baltimore City Hall, 100 North Holliday Street,
Baltimore, Maryland, Hon. Barbara A. Mikulski presiding.
Present from the Committee on Appropriations: Senator
Mikulski.
Present from the Committee on Banking, Housing, and Urban
Affairs: Senator Sarbanes.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
statement of senator barbara a. mikulski
Senator Mikulski. Good morning, everybody. I would like to
convene this hearing. It is a joint hearing between the Senate
Appropriations and the Senate authorizing committee on the
issue of flipping. In the United States Senate, Senator
Sarbanes and I are a one-two punch on the issue of housing.
Senator Paul Sarbanes is the ranking member of the Committee on
Housing and Banking and in charge of all of the housing
authorization. In addition to that, he is on the Budget
Committee. I am on the Appropriations. So he is the Federal law
book guy; I am the Federal checkbook lady as the ranking member
on the Subcommittee on VA-HUD in Appropriations.
Senator Sarbanes and I do work as not only Team Maryland,
but Team USA on the whole issue of housing opportunity and
empowerment. So we are here this year to hold an anniversary
hearing on what has happened on the subject of flipping.
We are delighted that Mayor O'Malley could join us this
morning. Mayor, your two United States Senators have some very
good news for you. We wish this morning to announce a $5
million grant from the Department of HUD to the Baltimore
Housing and Community Development Agency to establish a
victims' clearinghouse and to provide funds for the city to
rehabilitate Baltimore's neighborhoods, particularly those that
have been gouged by the locusts of predatory lenders.
First we have $3 million for something called the Healthy
Neighborhood Initiative, and this will provide funds for
homeowners in Bel Air-Edison, Gwynn Oak, Midtown, Belvedere,
Reservoir Hill, and Southern Mondawmin for home improvements,
to help attract more homeownership to targeted neighborhoods.
One hundred fifty million dollars for neighborhood
stabilization to stabilize neighborhoods by supplying money to
purchase and repair vacant housing in Baltimore. I know Mr.
Graziano wants to elaborate in more detail on this.
Last, but not at all least, a $500,000 grant for a flipping
victim clearinghouse in which an expert in housing counseling
at Baltimore's St. Ambrose will run a clearinghouse to serve as
a one-stop shop for victims of predatory lending, otherwise
known as flipping. You know, flipping has destabilized
neighborhoods, gouged the poor, and ripped off the taxpayer,
and we have been fighting this issue from the very able work of
the U.S. Attorney, the FBI, and the Postal Inspector.
But the battle is really being done in the neighborhoods.
We are looking forward to hearing from them.
Before I elaborate more on my opening statement, Senator
Sarbanes, did you want to say something about the grant?
Senator Sarbanes. No.
Senator Mikulski. We hope that these funds will help the
victims of flipping and also help with neighborhood
stabilization. As I said, flipping does three things: It
destroys the dreams of those who wish to be first-time home
buyers; it wrecks neighborhoods; and it gouges taxpayers. Once
again, we say to the flippers: You can run, but you cannot
hide. We will be prosecuting you. We will be investigating you.
We will be driving you out of the neighborhoods.
But we not only want to stop flipping, we want to be able
to restore the neighborhoods and we want to be able to restore
what has happened to the people in the neighborhood.
I want to thank Council President Dixon for allowing us to
meet here. As a once-again city councilwoman, I am happy to be
back here in City Hall. You know, once a city councilwoman,
always a city councilwoman.
I want to thank John O'Donnell for his pioneering work on
this. But most of all, I want to thank all of the neighborhood
groups that have fought so valiantly: St. Ambrose, ACORN, the
Community Law Center, people like Andrew Weitzman, who is a
metaphor for other dedicated pro bono lawyers.
Today's hearing is to answer three questions: What have we
learned over the past year? What has worked and what has not?
Where do we go from here? What happens to the victims of
flipping? What are we doing to prevent flipping, and what are
we doing to clean up the mess created by flipping?
Last year I met with local community leaders in church
basements to hear what is going on. That is what prompted the
whole issue of our involvement in it. FHA has become an
unwitting participant in an epidemic. Flippers were actually
targeting low-income people, mostly African Americans.
Regrettably, Baltimore was the worst in the Nation through lax
property disposals and lax oversight. FHA was actually
supplying some of the houses to the flippers.
We went directly to Secretary Cuomo and we began a reform
effort. Senator Sarbanes jumped right in and created
outstanding authorizing legislation to prevent and deal with
predatory lending. Congressmen Cardin and Cummings were most
helpful, and our Federal agencies stepped in to prevent
flipping. Law enforcement has been sending crooks to the
slammer, where they belong. We are going to look forward to
hearing from the U.S. Attorney to tell us more about it.
Unfortunately, HUD underestimated the size and complexity
of the flipping problem in not only Baltimore, but everywhere.
Senators come up to me every day and say: What is happening, so
we can get cracking on the Detroits, the Chicagos, and others?
I know the HUD administration is involved aggressively.
Senator Sarbanes and I met recently with Secretary Martinez to
make sure a process that had gotten off track is back on track.
I want to thank Secretary Martinez for his most prompt and
collegial response. I know he has delegated the responsibility
to Ms. Maggiano, who we will be hearing today, to really take a
good look at Baltimore so we can get our momentum going once
again.
We have heard about broken dreams and we want to make sure
that we are dealing with the stabilization of the
neighborhoods. This morning we want to hear about the troops on
the front lawn. We want to hear from a very able prosecuting
team and we want to hear from HUD about where do we go from
here, what lessons will we learn.
I will not let the flippers win. We will not let the
flippers win. Baltimore is going to win. We went to the
Superbowl, we have won the heavyweight champion of the world,
and we will be a model of the Nation on how to clean up and
clear out the flippers and restore our neighborhoods.
Now I would like to turn to my colleague, Senator Paul
Sarbanes.
statement of senator paul s. sarbanes
Senator Sarbanes. Thank you very much.
I want to commend Senator Mikulski for scheduling this very
important hearing of the VA-HUD Appropriations Subcommittee to
review how much progress has been made or has not been made, as
the case may be, in resolving the problem of flipping since we
held such a hearing last year. I think it is only through such
oversight that we can assure ongoing accountability to the
people who have been victimized by this terrible practice.
Last year Secretary Cuomo and Commissioner Apgar, the
Commissioner of FHA, responded to the stories of the misuse of
FHA insurance. First, working with local representatives, two
of whom will testify today, they developed a series of tools to
address the flipping cases where FHA was involved. These
included re-underwriting the mortgages to a level where the
buyer could afford to pay, helping to repair credit, providing
relocation assistance where ownership was not a reasonable
option.
Unfortunately, the Department has been slow to make good on
those commitments. Now, you know, we can engage in a long sort
of effort at blame-placing or we can try to move ahead and get
things back on the right track. I think we have made the
judgment that we want to do the latter. In other words, we want
to move ahead. We want to solve this problem and we want to see
what can be done about it.
Senator Mikulski and I have met a number of times with
Secretary Martinez. Our staffs have been in close touch with
his office. We think the Secretary wants to solve the problem.
We urged him to appoint a person at HUD headquarters to be the
point person and to make sure we did not lose momentum again.
We are putting someone right on the griddle with the spotlight
trained on them, and that is Ms. Laurie Maggiano, who is here
with us this morning. We are delighted she is here and we look
forward to great things from her.
Second, in addition to providing redress to those
victimized by the fraud, we want to work with HUD to prevent
these problems from going forward. To that end, Senator
Mikulski and I will soon be introducing legislation to put the
HUD credit watch program into statutory language. This will
help identify FHA lenders who make too many bad loans and get
them out of the program.
Simply put, a part of that legislation will also seek to
ensure that HUD has the authority to invoke the remedies
proposed by the task force for here in Baltimore and elsewhere.
HUD actually has a draft of that legislation now which has been
sent down to them. We are currently awaiting their comments and
suggestions and look forward to their very prompt response.
Let me just say as an aside, because I do not want to lose
a broader focus, FHA continues to be a strong and effective
program for the vast majority of Americans. Millions of
families have achieved the American dream because they had
access to mortgages through FHA, mortgages they would not
otherwise have been able to obtain.
But the program is being abused. It is clear that some very
fast operators have moved in and are playing this to every
advantage and that lots of people are suffering as a
consequence. These predatory lenders who target vulnerable
people offer high-cost loans packed with unnecessary and unfair
fees, costly to the borrowers, extremely profitable to the
lenders, stripping equity right out of the homes.
We have got the regulators increasingly sensitive to this
issue and, as Senator Mikulski said, we are going to stay with
this thing until these people are vanquished.
Now, just a day or so ago we received a letter from the
Department, and I am hopeful that the local people will comment
on this, indicating the steps the Department has put in place
as a consequence of our meetings with Secretary Martinez: One,
the appointment of a team of senior officials and staff
dedicated to supporting the work of the Baltimore Flipping and
Predatory Lending Task Force. I have already mentioned Laurie
Maggiano, Director of Asset Management in the Disposition
Division, is coordinating the actions of this team.
Second--and I am laying this out because we want the local
people to sort of give us their reaction, in a sense, in terms
of exactly what is happening on the ground--foreclosures have
been suspended on all loans that have been referred to the
Department as potentially predatory by mortgage interest groups
or housing counseling agencies.
Three, HUD and the task force have revised the scope to
include any properties that were overvalued as a result of
either flipping or a severely deficient property condition at
the time of loan origination.
Four, expanded the geographic area for flipping assistance
to victims, now to include the entire city of Baltimore. I am
anxious for our local people to react to that.
Finally, let me say I join Senator Mikulski in being very
pleased at this announcement of the grant, the $5 million
grant. Mr. Mayor, we never want to come with empty hands here,
and we are delighted that you are able to be here with us this
morning.
These funds will enable us to establish a flipping victim
clearinghouse, a neighborhood stabilization program, purchase
and repair vacant housing in Baltimore neighborhoods, and a
Healthy Neighborhoods Initiative for homeowners in particular
areas in order to upgrade their properties and to seek to
attract more homeowners into the target neighborhoods. We think
all of this will give the city some additional tools with which
to move ahead to improve investment in the neighborhoods, and
not only to deal with the flipping, but also to deal with the
broader problem of making these neighborhoods more attractive
so people will want to stay in them and other people will want
to move into the neighborhoods.
So I am very pleased that we are able to hold this hearing
this morning. I look forward to hearing from the witnesses.
Again, I want to close by once again thanking Senator Mikulski
for scheduling the subcommittee to have this hearing this
morning in Baltimore so we could maintain ongoing oversight
over what is taking place.
Thank you very much.
Senator Mikulski. Thank you, Senator Sarbanes. I want to
thank you for being here this morning. I know you had some very
difficult scheduling situation and rearranged your time to be
with us, and it is a great joy to work with such an able
colleague.
We are really honored this morning that Mayor O'Malley
could join us. Mayor, we welcome you to the table for any
comments that you wish to make. We congratulate you on your
effort to cut all of the rates that bring a city down, whether
it is the homicide rate or the trash rate. This is another way
of going after the trash, the flippers, the predatory lenders.
STATEMENT OF HON. MARTIN O'MALLEY, MAYOR, BALTIMORE,
MARYLAND
Mayor O'Malley. Absolutely. Thank you, Senator. Thank you,
Senators. On any moment's notice, whenever the two of you want
to come here and give us $5 million, I will always rearrange my
schedule to be here. So let me say that right up front.
Senator Sarbanes. We do not want to overly intrude into
your schedule.
Mayor O'Malley. It is never an intrusion. In fact, what are
you doing this afternoon? I can--
But in all seriousness, on behalf of all of the neighbors,
all of the neighborhoods, who have been victimized by flipping,
I sincerely want to thank you for your advocacy, for your
oversight, for your interest in this, and for your persistence
on this tough issue. This is not something that lends itself to
a quick and easy fix.
But the $5 million that you are able to produce for
Baltimore is going to go a long way toward helping us repair
neighbors and repair neighborhoods.
I want to thank you for letting me say just a couple of
words. Mr. Graziano, as you know, will be following me, but I
want to just touch briefly about this problem. You have already
mentioned the way it destroys dreams, devastates neighborhoods,
and cripples communities. I want to thank both Senator Mikulski
and Senator Sarbanes for being national leaders, really
national leaders on this problem.
Baltimore is not the only city that has been victimized by
this. This is a national problem that affects a great many
cities. Because of your leadership, Baltimore is at the
forefront of solving this national problem. I would submit to
you and our guests who are here from HUD that there is no
better place to start than Baltimore, especially at this time.
Neighborhoods throughout our city are really teetering,
many neighborhoods are teetering between stability and decline,
and it is because they have been pushed to that tipping point,
and some would argue into a free fall, by the scam artists who
defraud home buyers, a lot of time first-time home buyers, a
lot of time single moms who are first-time home buyers.
For the last year we have ramped up our education and our
public relations campaign, our awareness campaign, to warn
consumers, to warn buyers, to toughen up our own rules, so that
when we have opportunities to take a look at these prospective
sales through the SELT program and other things, that we are
very aware, that we are very watchful and that we get right
involved in the front end now wherever the city has an
opportunity.
But despite these efforts, despite the public education and
the prevention efforts that we have taken, flipping continues,
with several thousand such deals every year. I think we have to
continue to work towards making sure that every new homeowner
is an educated homeowner. We have to continue, through
aggressive prosecution, to throw the book at flippers.
But our efforts have to be really focused in two ways. Yes,
we have to focus on prevention, but not only on identifying the
means of prevention. We also have to focus on repairing the
damage that has already been done, on repairing the damage that
has already been done, not just because it is the just and fair
and right thing to do, not just because it is the compassionate
thing to do, but because from a public policy perspective it is
the most cost-effective thing to do.
We spend a lot of money at the State level and the Federal
level investing in programs to strengthen neighborhoods, trying
to help people own part of the American dream, getting people
invested in cities, getting people invested in their own home,
so that they can make a better way for their families and have
an ownership in this great experiment called the United States
of America.
But we need to address the damage that has already been
done. Without creating red tape, without creating self-
defeating Catch-22's, we have to, and without making home
ownership more difficult, we have to find ways the put the
brakes into the system to stop flipping before the money
changes hands, to prevent government entities from becoming
unintentionally complicit in flipping.
In order to do this, I think there is two things that you
have to have on the ground. You have to have the capacity and
you have to have the climate. In Baltimore we have both the
capacity and the climate.
Commissioner Graziano will speak with you about our strong
community groups, advocacy groups, non-profits who are working
to address this travesty already in our city. With your
leadership, we are hopeful that the Department of Housing and
Urban Development will use Baltimore as a national laboratory
to develop cost-effective strategies to prevent flipping.
We are not the only city where this is happening, as I
said. This is a national problem. But it is far more cost-
effective to fix it now, before the houses totally deteriorate.
It is far more effective to get these home owners into homes
that they can afford to keep up. It is far more effective
simply from a cost standpoint to fix this now, to prevent it
for the future, than it is to let it linger while we scratch
our heads and chase our tail.
The second thing that is necessary in addition to the
capacity, which I mentioned we have here, is the climate. This
is the right time to do this in Baltimore. Baltimore currently,
according not to the braggadocious Mayor, but the National
Association of Realtors, has the hottest residential real
estate market in the country. Home sales in Baltimore are way
up compared to what they were last year. In January I think
they were up 61 percent, and this is across the board.
There are literally bidding wars going on in many of
Baltimore's strongest neighborhoods for homes, because people
have confidence. They know what happens to a great American
city with the assets like ours has when the people come
together and resolve to reduce violent crime and make their
city a more livable place. Our students' test scores are
improving now at a faster rate than in any other jurisdiction
in the State and last year--key determiner for whether or not a
person lives in the city is where the person works--we created
more jobs than we lost for the first time in 11 years last
year.
So this is the right time to make this cost-effective
investment in turning the tide against flipping. Our housing
market is there, the job market is there. Baltimore is on the
rise.
I want to thank both of you for your leadership on behalf
of the people of this city, on behalf of the victims of
flipping and the neighborhoods that have fallen victim. I want
to encourage you to keep going, and I will have a reliable
partner in Paul Graziano and myself and the City Council and
the local government officials here in the city of Baltimore.
Thank you.
Senator Sarbanes. Good.
Senator Mikulski. Thank you very much, Mr. Mayor. We want
to let you get back to running the city. You are right, we want
to do two things: stop the flipping; and we also want to
restore the neighborhoods with these vacant FHA houses. We see
Baltimore as the laboratory to help solve the very big national
problems.
But we thank you for your continued advocacy for our city,
and we will be working with your team.
Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Mayor.
Mayor O'Malley. Thank you, Senators.
Senator Mikulski. We now move to one of two panels we have.
Our first panel is comprised of the advocacy groups who brought
this problem to our attention and citizens who experienced both
flipping and the attempts to restore the situation. So we would
like to call: Mr. Vinnie Quayle of St. Ambrose Housing; Mr. Ken
Strong, formerly of SECO, now of the Community Law Center; and
then two citizens who have had to endure this despicable
situation: Mr. Harry Smith and Ms. Chassie Adams, who was with
us last year and we actually toured her home.
Well, good morning. We want to welcome you once again to
appearing before our committee.
We would like to first hear from the citizens. Mr. Smith,
we would like you to lead off, and then, Ms. Adams, if you
would follow. If you could just tell us your name and your
community and your story about what happened to you, how you
got into being targeted by a predatory lender and what has
happened to you since. Mr. Smith, please proceed, sir.
STATEMENT OF HARRY SMITH, CITIZEN
Mr. Smith. Thank you. Good morning, Senators. Senator
Sarbanes, Senator Mikulski, thank you for having me.
My name is Harry Smith. I am a 53 year old single African
American proud father of two sons. In 1996 after my separation,
I heard about over a radio station, Heaven 600, about a program
where I could get a home for me and my sons, my two sons,
through Lucky Realty.
I called them up. I made an application. I was brought in,
put through the process, and we were taken over to a vacant
house that was under renovation several times. It was a
situation where we had to move from where we were to another
situation. During that time we were taken several times as the
house was progressing through the renovation process.
Finally, we were brought in, the house was finished, and I
sat down and I signed a number of documents, a contract that I
was the homeowner of this particular piece of property. My sons
and I, we moved in in September of 1996. At that time I was
working and I had to take on a part-time job to make sure that
all the bills would be paid, including my mortgage. That was a
flexible mortgage that seemed to just keep flexing, if you know
what I mean.
As the years went by, it became increasingly difficult to
maintain my property. At that time, sometimes I would talk to
the neighbors in the community and they would tell me--we would
talk, as neighbors do--Mr. Smith, you have a real nice home and
I moved here 20 years ago and my house was like $27,000,
$30,000. And I had to bite my tongue, because I told them our
house cost me $70,000. As people would move out of the
neighborhood, they would sell their homes for maybe $35,000 or
$40,000, at the same time I was still at $70,000.
As the years went by, it became increasingly difficult to
maintain the property. A case in point: In this past January I
was downsized on my job. As I sit here today, my house is in
foreclosure because I have been unable to make any more
payments on my mortgage since then. My sons, my two sons and
myself, are in a situation where we will be homeless unless we
can get some type of remedy.
Basically, that is my story.
Senator Mikulski. It is a very compelling story.
Ms. Adams, will you please proceed.
STATEMENT OF CHASSIE ADAMS, CITIZEN
Ms. Adams. Good morning. My name is Chassie Adams and how I
came to be in this situation is I heard through friends about
they having homes where you only have to put down a certain
amount of money and you could become a homeowner. I decided to
look into it because at the time I really had not decided to
buy a home, but I was going to check it out anyway because it
was something that I always wanted.
So a man by the name of Mr. Beeman, he came to my home and
discussed with me about this. He told me all, everything, my
bills and everything, I did not have to worry about nothing
like that. So after talking to him, he convinced me that I had
no problem in getting this home. So I decided to go ahead and
go through with this.
He took me around and I looked at a lot of different
places, and I decided on 610 North Robinson Street. So he told
me it would be ready at a certain length of time. He called me
and he told me that it was time for me to go to my closing. I
went to Owings Mills for my closing. At the time, he waited
until like about a half an hour before my closing to take me to
this home, to look at it, go through it, and make sure that
everything was in working order. So I only had like a half an
hour to do this.
I went and signed my papers. After I signed my papers, my
mortgage was $650 per month. I started out paying this. I paid
it up until the problem with this lady who had her house, it
was knocked down or something, and she discovered that there
was a problem with Mr. Beeman and all the homes that he had
sold. Then we got into all this litigation and everything, and
that is when the lawyer had told us that we needed to stop
making payments and do all this, and that is what I did, okay.
Then last year we went through this with you, Senator
Mikulski and Senator Sarbanes. They had promised that we were
supposed to get some satisfaction. I have not had any so far. I
have been told to go to closing about three times and every
time we get near closing they give me a call and tell me
something else is wrong.
Senator Mikulski. Closing on what?
Ms. Adams. On my home. They are supposed to have reduced
the mortgage, and to go through a whole new closing all over
again. I am also supposed to have had my repairs done on my
home. Nothing has been done.
I have been--my water, hot water tank, has broken. I have
not had a hot water tank in my home for over a year. My roof is
leaking. The ceiling in my upstairs back bedroom is falling in.
My porch steps, everything is just--I have just got so many
repairs that need to be done.
My furnace was out. I did not have heat. I had to use
electrical heaters to heat. I did, back a few months ago, I
called in and out of my own pocket I had to have them come in
and do some work on my furnace.
So at this point that is where I am. I do not really know
where I am, that is the point of it.
Senator Mikulski. So you are no better off?
Ms. Adams. No.
Senator Mikulski. We will come back to have a larger
discussion. Mr. Quayle, do you want to take it from there.
STATEMENT OF VINCENT QUAYLE, ST. AMBROSE HOUSING AID
CENTER
ACCOMPANIED BY FRANK FISHER
Mr. Quayle. Senator, I would also like to have Frank Fisher
to come up. I cleared this with Paul. Frank is the person in my
office who has been talking to hundreds and hundreds of victims
that have been coming in, I knew you would want to hear.
Senator Mikulski. Sure, absolutely. Can he pull up a chair
and sit next to you?
Mr. Quayle. Bring your chair up, Frank.
Senator Mikulski. Pull up a chair next to Ken. Could we
move a chair next to Mr. Strong, please.
Mr. Quayle. I'm going to be very brief.
Senator Mikulski. Mr. Fisher, you are going to be in front
of Channel 13, please.
Mr. Fisher. I would just as soon get my picture taken any
place.
Senator Mikulski. Could you go ahead, Mr. Quayle.
Mr. Quayle. I am going to be very brief, but I want to talk
to this single piece of paper that you have in front of you. I
want to make sure you have this. It has got some statistics in
the middle of it. Are you with me?
Senator Mikulski. We are with you.
Mr. Quayle. I am not going to talk to the first point, what
have we learned. I think we all know what we have learned.
Senator Mikulski. I would like you to go over it for the
record, please.
Mr. Quayle. What we have learned, okay. Well, first of all,
we were working very closely with the Baltimore task force and
HUD up until shortly before the election. Things began to fall
apart around that time. While we were working successfully, HUD
tried some dramatic steps. They tried to get the lenders to
reduce the mortgages on these high-cost loans, these
overinflated loans. But the lenders' attorneys challenged them
and said, you have no authority to do this, and the lenders
refused to cooperate.
HUD then, in trying to get some control over the numbers of
this, they tried to set parameters and limit the number of
eligible clients who could come in for assistance. That is when
you two Senators and your offices got back involved in this and
went to see Secretary Martinez and the parameters were dropped,
and we have opened it back up to anyone who is legitimately a
victim of this can come forward and try to get some relief.
We feel we are very much back on track with HUD. This
Laurie Maggiano, I have met with her a number of times. She
seems to be wonderful. She is willing to look outside the box
and try to come up with some real creative ideas on this.
The hardest thing, the point I wanted Frank to address,
is--and maybe he should do it right now--the clients that are
coming to us are very difficult to work with in terms of
solving their problem. These are people who should not have
bought the home in the first place, many of whom then have been
put into bankruptcy by another group of scammers, attorneys who
just sit down there at the foreclosure circuit court office and
go out and for $1,300 put families in bankruptcy to stall the
foreclosure.
Frank, if you could just say a couple of words about the
families who are coming and why it is so hard to try to help
them.
Mr. Fisher. Well, in the old days when people bought a
house when we first started St. Ambrose, people would come to
us and say: Can we buy a house? And we would tell them: Yeah,
you cannot buy it yet; you have got to do A, B, and C; maybe
next year you can do it; get $500 together, do this. We had
prepurchase counseling.
That seems to have disappeared. Now people go on without
having really got ready to purchase. As a result, you get a
buyer who is on the brink at purchase time, not after purchase,
but at purchase time. It is a marginal thing to begin with.
Then the house for some reason or other or the buyer or
whatever happens to marginal people, they lose their job, they
bought something that is too expensive, their credit has been
bad. They get into foreclosure and the house--they come to St.
Ambrose for default counseling.
Almost always we can do nothing. If it is an FHA loan, we
have a ballpark chance of doing something. At least there are
some programs with the FHA. We have to know, too, besides the
FHA there is--of the 5,000 foreclosures last year, petitions to
foreclose, about 1,000 of them were for people, homeowners, who
refinanced their house. That is, the term ``flipping'' really
started there, where you own a house, refinance it, refinance
it again, refinance it again, refinance it again.
I did a study of 36 loans and only 2 of them, in
foreclosure, only 2 of those people had refinanced only once,
some as many as 7 times, some as many as 5 times, some as many
as 3 times.
Anyway, these folks come in and they are very difficult to
help. The house goes to foreclosure and they keep calling us
and saying: We cannot find a place to go. Out of the 5,000
petitions to foreclose, probably, if we forget about the
investors--there are about 1,200 investors who lost--1,200 of
those houses were investor houses that went to foreclosure. But
of the other ones, people were renting previous to buying this
house. They had a place to live. They did not like it,
apparently, so they tried to buy something better.
They ended up with something worse, because it is extremely
difficult to purchase--I mean, to rent another property after
foreclosure. Fortunately, HUD is coming through with relocation
money and that is a big help. It allows the family to give a
double security deposit or sometimes even a triple security
deposit. But without that, I do not know.
I think the biggest problem right now is what are we going
to do with all these folks who have lost their house? Where are
we going to move them? They are going into the basement of ma's
house, they are doubling up. It is tough. It is a terrible
situation. I do not know. That is the only thing I can say.
Mr. Quayle. Thanks, Frank.
That is--it is almost an impossible situation that I am
putting my counselors in here when these folks cannot even find
rentals. But that is the reality of it.
I would like to go over the statistics in the middle of the
page there, because I really think this presents the issue as
it is. What we did at St. Ambrose, we did a study of every
petition to foreclose for calendar year 2000. A year ago when
we met, I said, let us find out what is going on in this town,
let us look at every family who goes into foreclosure this year
and see what we can find.
So that sale to homeowners, we are not talking--this is not
a big city. We are not talking about tens of thousands of
sales. We only had 8,400 sales, homeowner sales, last year in
Baltimore. I put that down just to put it in perspective, and
it is up a little from 1996. The Mayor commented on that. Maybe
that is a good sign.
The next line item is the frightening one. The number of
foreclosures that were initiated in the year 2000 were 5,197.
That is what we had the moratorium. If you remember, we had an
FHA moratorium for the whole city for 3 months, and then we had
another 3 months in 5 selected zip codes, very hot, busy zip
codes. So we probably would have had close to 6,000 loans going
to foreclosure had it not been for the moratorium.
All of this has happened in the last 4 years. Back in 1996
and prior, 1,900 was your typical number of loans that went bad
in a given year. Now last year we are up to 6,000 and we expect
at least 5,000 this year from the few months.
But the more frightening thing is the FHA-insured loans. If
you look in calendar 2000, FHA insured 3,100 loans in the city.
That is 37 percent of the market share. Nationally, FHA
controls about 30 percent, but we are an FHA town. We have
always been an FHA town, so we have a higher percentage of our
people using FHA.
While those 3,100 loans were being originated, the number
of FHA loan foreclosures initiated were 1,453. If you just look
at the 3,100--and I am not saying the 3,100 went into
foreclosure, although many of them did. Many of the loans going
into foreclosure in this town are going in in the first year,
which is something new.
Senator Sarbanes, Matt Franklin, I am not sure he is with
HUD any more, but I remember last year you had a hearing and
Matt came and when we began to hit him with some of these
frightening statistics he said: Wait a second; we have a 3
percent default rate nationwide in FHA--which is true. I am not
denying that. But that was his--that was where he was coming
from, 3 percent. The industry itself, if the default rate goes
from .4 of 1 percent to .5 percent it is on the first page of
the Wall Street Journal. It is a national crisis.
In this town we are seeing as many as 40 percent of these
FHA loans over the last 4 years go to foreclosure, 40 percent.
It is absolutely incredible. The reason I put the 8,400 up on
top is because the numbers of foreclosures are beginning to
approach the number of loans in our city.
Then the last item is the number of houses that HUD
actually took back, these vacants that are sitting out there in
the neighborhoods. That has doubled again from 1996 to 2000.
Last year, 1999, it was 850 as well, or close to it, and we
expect this to continue because the bad loans are in the
pipeline. They are going to be in the pipeline at least for the
next 3 or 4 years.
I know you want to ask me, are we still making bad loans.
We cannot prove it. FHA and HUD are trying electronically to
prevent future bad loans, especially the flips. They are
starting to catch the flips. But our gut instinct at St.
Ambrose is that we are continuing to make bad loans, and by
that I mean loans to people who really cannot afford to make
that loan work.
I just have two suggestions on where do we want to go from
here. I know you want to get to that. I personally, I have been
at it 33 years. We have got to restore HUD's oversight. We have
got to do something extraordinary in Baltimore because the
situation is extraordinary. I put down the suggestion and it
sounds facetious, but it is almost as if I think we should have
a couple of FHA employees who call the buyers up as they are
applying for their loan and say: Let me ask you a couple of
questions; are you really putting $500 down or $1,000 down? Is
your grandmother really going to live in the house with you? Is
this income really your true income?
Because that is what it looks like when FHA gets the
paperwork, but that is not what the people tell us when they
come to our office. They tell us that the real estate agent
told them to put the grandmother on the deed and say that she
was going to live in the house. So I really almost think we
need to be talking as part of the oversight, HUD's oversight,
to the future homebuyers.
The second big issue is the failure--and we all know this
and it is the hardest thing because as policy FHA does not want
to do this, but, unlike VA that does it--when the house becomes
a failure, we need to do something to correct that wrong. We
really--what I suggest is I really think we need to develop a
system where that house is renovated, truly renovated so it is
in excellent shape, and then use the real estate board, use the
private people as much as possible, to market it and sell it to
a homeowner.
To let it go in lousy shape to an investor who is going to
slap some paint on it is the beginning, the first sign of a
neighborhood's deterioration.
I have got to tell you, this dollar house program is
wonderful. We bought 63 houses since last October. We have
completed ten of them and sold all ten immediately. The real
estate industry has lists of our houses. They know we are
repairing them to the best house in the market. The
neighborhoods, Bel Air-Edison is calling me saying: Vinnie, I
cannot believe how beautiful these homes are. The neighbors are
telling us.
This is exactly what should be done with the FHA houses.
That is the confidence the neighborhood should have in FHA and
did have in FHA when I started in the sixties and seventies.
That was the way FHA operated.
Anyway, thank you very much. I am sorry, I did not mean to
go this long.
Senator Sarbanes. No, no, no. Very good.
Senator Mikulski. Thank you very much.
STATEMENT OF KENNETH STRONG, DIRECTOR OF RESEARCH AND
POLICY, COMMUNITY LAW CENTER, BALTIMORE,
MARYLAND
Mr. Strong. Thank you, Senators. My name is Ken Strong. I
am the Director of Research and Policy for the Community Law
Center in Baltimore. For the past 6 months I have also served
as a consultant to the Baltimore City Department of Housing,
coordinating Baltimore's flipping and predatory lending task
force.
You called the hearing this morning to learn where we stand
on the issues of mortgage scams, flipping schemes, and
predatory lending, abuses of the FHA and HUD's inventory of
vacant houses in Baltimore. Many of us in government and the
community have worked hard to prevent illegal and unethical
real estate practices and to respond to the damage done already
to families and to neighborhoods. You will hear about that
today.
But the bottom line, Senators, is that we are not winning
the war. Property flipping, according to my research, has not
decreased. Its character has changed somewhat. There are more
investor schemes now than bilking of first-time homeowners, but
there is still a lot of that. But it has not decreased. New
flippers have replaced old flippers.
Even with all the publicity, all the investigations and
people going to jail, all the consumer education efforts, all
the counseling, there are still too many people trying to make
a fast buck in Baltimore's housing market, whether illegally or
unethically, and too many witless and hapless buyers, both
investors and homeowners.
The resources that we have brought to bear on the problems
are inadequate to the need. In terms of the National Task Force
on Predatory Lending that you helped get started with the
previous HUD Secretary, there are reams of reports from around
the country that we are not alone in this problem, but that
Baltimore has experienced some of the worst of it. In terms of
the local task force that has been meeting every 3 weeks over
the past year with good participation from community groups and
government and HUD, the full report of where we have come with
that task force and the fact that we have worked hard is
contained in the attachment to my testimony on the progress
report and I will not reiterate that.
But I do want to emphasize the criminal investigations and
prosecutions. We have had nearly three dozen individuals
prosecuted, indicted, and charged with crimes by Federal
authorities. The Attorney General's office is also undertaking
cases. The FBI and the U.S. Attorney's office and other Federal
agencies have done, Senators, exactly what you told them and
asked them to do. They are going after fraudulent actors in the
buying and selling of Baltimore with a vengeance.
Special Agent Jim Costigan of the FBI and Assistant U.S.
Attorney Joe Evans deserve some special recognition for their
work. There is some positive sign that it is having an effect.
A group of investors and developers met recently with me and
with city housing officials. They were complaining that it is
harder to buy and sell properties quickly in Baltimore now and
that appraisers have become more cautious and lenders more
skeptical. Thank goodness.
I recommend that Federal authorities keep that pressure on
and even increase their efforts, because it does have a
positive effect. It does chill some of the people who are
trying to make those fast bucks. Illegal flippers and mortgage
scam artists have to know that there is a risk of jail time at
the end of their real estate joy ride.
One of the major frustrations in working with HUD to help
families victimized in mortgage scams--that has been one of the
major frustrations. Vinnie Quayle and Frank Fisher have
addressed that.
The point I want to make was that the task force in
Baltimore had hoped to have the FHA fraud prevention and victim
assistance program already in gear, running smoothly, so that
we could turn our attention to investor schemes and predatory
refinancing of mortgages, equity stripping of seniors and
people who have invested in their homes over time. We still
want to pursue those issues with HUD and with the Baltimore
Housing Department as our partners. Hopefully, with the
turnaround that we have been seeing lately, with the creative
problem-solving on the FHA part of the problem, we can begin to
do that.
Senator Mikulski, last year after our hearing on March 27th
you joined me and Congressman Cardin and we walked through the
600 block of North Robinson Street. We visited families sold
houses for upwards of $80,000. We saw the cosmetic repairs
inside some of these homes. We saw a vacant HUD house and other
vacancies on the block, magnets for trash and rats. And we met
good, honest, hardworking homeowners and tenants trying to
maintain their dignity and raise their families in spite of the
real estate mayhem all around them.
Figuratively speaking, I want to take you back to that
block today and it is not a pretty picture. Some of the
pictures--and I will leave them up on the easel and we can look
at them later in the hearing--tell, as pictures do, a lot more
than words can at times.
A year ago there was one HUD house on that block. Now there
are three. The vacant and dilapidated house at 600 North
Robinson Street that Robert Beeman sold to somebody for $85,000
is still vacant and now more dilapidated. I believe the
criminal information has recently been filed by the U.S.
Attorney's office against some sellers who were getting FHA
mortgages arranged and selling houses for over $50,000. One of
those buyers was banned by FHA. One of the houses that he sold
on that block has gone into foreclosure. The other house, I
think the homeowner is struggling to pay an inflated mortgage
and should not have to do that.
I question whether any of the houses on this block are
worth more than $50,000. There is no question at all that none
of the houses were ever worth $80,000 plus.
There are two new bank foreclosures on the block. A
company, Milton Robinson LLC, owned 605 North Robinson Street--
we have a picture of it--last year, after acquiring the
property for $17,500. Brent Reed bought it from the company for
$47,000 and on the same day flipped it to Andrew Bogdan in a
sale recorded the same day for $64,000. Mr. Bogdan has the
distinction of being the number one person with foreclosure
petitions in the year 2000. Forty nine of his properties have
been filed for foreclosure.
It has been announced by the U.S. Attorney's office that a
criminal information has been filed against Mr. Bogdan. But the
aftereffects of what he has done is continuing on this block.
Right next door to 605 is 607, and it was bought by
Cadillac properties recently for $13,000. I fear that house
could be a candidate for the flipping and the scams and the
continued deterioration of the block. The reason I fear that is
that Milton Robinson LLC and Cadillac Properties are owned by
the same individual. The principal in both of them is William
W. Wright and the resident agent is the same person.
We have so much work to do to step this tide. I want to go
back to the HUD houses for a minute, because we hope that they
will be bought by homeowners and owner occupants. It seems that
the one last year did. But the chances are in this neighborhood
that the properties will languish and eventually be sold to an
investor who may flip the property and continue the cycle of
deterioration.
We have provided HUD with a list of former HUD properties
that have been bought by investors and quickly flipped for
large profits. They deserve investigation. HUD has recently
shared with me a list of their most frequent investors and
buyers of their property.
One of the big recommendations I want to make to you and to
HUD is that there be eligibility criteria for people, companies
and investors who buy property. There is eligibility for so
much else. You should not be able to buy a HUD house if you
have a criminal record in real estate or economic crimes. You
should not be able to buy a HUD house if all you do is leave
them vacant, waiting for the market to change, or if you have
housing code violations on your record.
The purchase of HUD homes ought to be encouraged and made
easy for real homeowners. The purchase of HUD homes by
investors and speculators ought to be more difficult, and for
illegal flippers and scammers it ought to be impossible.
I was infuriated when it appeared that HUD was reneging on
its promises to help Baltimoreans afflicted in FHA-insured
mortgage scams and I know you were. The actions that you took
then have begun to show progress.
We are thrilled with the personnel assignments that HUD has
made to work with us: Laurie Maggiano, Engram Lloyd, excellent
people working hard. We have to avoid the bureaucratic
tendencies in the bureaucracy they work within, that this is
not a short crisis solved quickly and move on to the next
crisis. This is a long-term problem. It arose over years. We
need to work through it and put the resources that are
necessary to deal with this into Baltimore and turn it around.
I have enclosed in my testimony a letter from the Finney
family, who has been waiting for more than a year to find out
if HUD is going to help them with their problem. All they want
is a fair mortgage at a fair appraised value of the house. They
are still waiting. I believe they are in the audience today.
Hopefully, they will not have to wait much longer.
I am so glad that Ms. Chassie Adams has joined us this
morning and that you heard her story. We are hoping that Ms.
Adams may be one of the lucky ones because she had a good
lawyer, Andre Weitzman, she has had a good housing counselor,
Carl Cleary in Southeast Baltimore. We have gotten a
cooperative lender to consider a rewritten mortgage in her
situation and the Abell Foundation to consider guaranteeing the
loan part for repairs on her house.
We are not out of the woods yet. That has not settled yet.
Ms. Adams is still suffering. But we hope that this is the last
winter that she has to live without a furnace.
There are some other people who are being helped through
that system, but not nearly enough. Last Friday night, Senator
Sarbanes, you joined us at Solid Foundations in its kickoff
fundraiser, Senator Mikulski is on our honorary committee, to
try and raise some private funds that are flexible and that can
provide small grants to people who are in recovery from
mortgage scam victimization.
That will help in part, but it does not solve all of the
problem. We have to regroup and redouble our efforts to work,
not only with the victims of FHA-insured scams, but also of
conventional loan scams, and be creative in how we solve that
problem. Ruth Louie, the Mayor's Coordinator of Community
Investment, is working with a group of bankers and Fannie Mae
in trying to think through how we can do that. We do not have
it solved yet, but we are hoping that we can make some progress
over the next several months to create a system to help people
get refinanced and back on their feet.
Mayor O'Malley talked about neighborhoods that are at risk.
One of them is Brooklyn, a strong Baltimore neighborhood. We
need a strong Brooklyn. There are a lot of strengths to that
community in Baltimore. But there is a pocket within Brooklyn,
the 800 and 900 blocks of Jack Street and Stoll Street, that
investors have undermined. We have to pay attention to the
investor schemes as well.
So I have made some recommendations in my testimony. I will
not spell them out. They are pretty straightforward.
Senator Mikulski. Please, spell them out.
Mr. Strong. I would be happy to. Number one, we want to
keep HUD's feet to the fire to follow through on the cases
already submitted and to be open to the new cases that we are
just now discovering. People are calling every day to report
their victimization. So that has to be in place and strong.
We have to pursue new ideas for increasing the HUD sale of
HUD's inventory to actual homeowners, to keep the speculators
and investors out.
We have to seek substantial Federal support to help
Baltimore City deal with the vacant house crisis that is left
in the wake of this bad business. We deeply appreciate the
Federal support announced today and that we have been working
to use, but it does not match the need. We need to really look
at what the need is and then seek the support at State and
Federal levels to really bring the neighborhoods back in
recovery.
We have to test out the requirement of prepurchase
homeownership counseling, exactly what Mr. Fisher described in
his testimony.
prepared statement
Lastly, we need to look at authorizing HUD and FHA to tap
the huge funds in the FHA for programs that reduce fraud,
prevent foreclosure, repair and maintain HUD's inventory, and
provide for neighborhood recovery.
I want to thank both of you for the leadership you have had
on these issues and for your support.
[The statement follows:]
Prepared Statement of Kenneth J. Strong
Good morning. My name is Kenneth J. Strong, I am the Director of
Research and Policy for the Community Law Center in Baltimore,
Maryland. For the past 6 months I have also served as a consultant to
the Baltimore City Department of Housing and Community Development
coordinating Baltimore's flipping and predatory lending task force. On
March 27, a year and 6 weeks ago, I testified before this committee in
my capacity then as the Director of SECO (South East Community
Organization) and as a founder of the Coalition to End Predatory Real
Estate Practices.
You have called this hearing to learn where we stand on the issues
of mortgage scams, flipping schemes, predatory lending, foreclosures,
abuses of the FHA, and HUD's inventory of vacant houses in Baltimore.
Many of us in government and in the community have worked hard to
prevent illegal and unethical real estate practices--and to respond to
the damage done already to families and to neighborhoods--you will hear
about that today. But the bottom line, Senator, is that we are not
winning this war. Property flipping, according to my research has not
decreased, it's character has somewhat changed, but it hasn't
decreased. New flippers have replaced old flippers. Even with all the
publicity, all the investigations and people going to jail, all the
consumer education efforts, all the counseling--there are still too
many people trying to make a fast buck in Baltimore's housing market,
whether illegally or unethically, and too many witless or hapless
buyers, both investors and home owners. The resources we have brought
to bear on the problems are inadequate to the need.
As a direct result of your hearing last year, a National Task Force
on Predatory Lending was formed and a Baltimore Task Force on Flipping
and Predatory Lending. Both groups had excellent participation from
government, community, and the private sector. Early on, it was
determined that Baltimore would serve as a national laboratory for the
understanding of these issues and the testing of solutions. We
documented the dramatic increase in foreclosures in Baltimore and four
other cities--New York, Chicago, Atlanta, and Los Angeles--and their
relationship to subprime lending. In the 1990s the subprime lending
market, lending at higher rates of interest to borrowers with imperfect
credit, exploded.
In Baltimore, the number of subprime refinance loans increased over
tenfold between 1993 an 1998. These loans were seven times more likely
in low-income neighborhoods, six times more likely in predominantly
African-American neighborhoods, and four times more likely in middle
class African-American neighborhoods. Subprime loans had a
disproportionate share of the foreclosures in Baltimore's low-income
and African-American neighborhoods. They resulted in foreclosures more
rapidly than prime or FHA loans. The mean lag time between origination
and foreclosure petition filing was less than 2 years in the subprime
category. These findings related to subprime lending were consistent
with disturbing national trends. Even more disturbing were the accounts
of families abused by predatory lending practices within that market.
Excessively high interest rates and fees, severe pre-payment penalties,
the deceptive sale of credit life insurance financed into the mortgage,
balloon payments, negative amortization, aggressive refinancing and
equity stripping are the kinds of practices that turned a large part of
the subprime market into what we call predatory.
In addition to our fair share of the national problem of predatory
lending, Baltimore also experienced, and still experiences, an unfair
share of mortgage scams and flipping schemes in the conventional
mortgage market and loans insured by FHA. Baltimore has had the highest
per capita rates of FHA defaults, foreclosures, and vacant house in the
HUD inventory. These problems are exacerbated by neighborhood
concentrations of the flipping and mortgage scam problem. The
neighborhoods of Patterson Park, Belair-Edison, Waverley, Govans, and
Southwest Baltimore--neighborhoods where racial change is taking
place--have been especially hard hit. Last year I showed you maps that
graphically demonstrated the problems with hundreds of pins. More
recently, I have studied the real estate transactions in Baltimore
between 6/1/99 and 11/15/00, roughly an 18 month period. I identified
over 1,800 properties that were bought and sold quickly for
suspiciously high profits in neighborhoods where the sales prices
seemed over-valued. In more than a thousand of those transactions, the
purchase and the sale were recorded on the same day, leaving no excuse
that rehabilitation or market changes could account for the profit
margins.
A great deal, though not all, of the property flipping in Baltimore
is illegal. Nearly three dozen individuals have been prosecuted,
indicted, or charged with crimes by Federal authorities. The Attorney
General's Office is undertaking additional cases through its criminal
and consumer protection divisions. Last year, you called on the FBI,
the U.S. Attorney's Office and other Federal agencies to do exactly
what they are doing--going after the fraudulent actors in the buying
and selling of Baltimore with a vengeance. Special agent James Costigan
of the FBI and Assistant U.S. Attorney Joe Evans deserve special
recognition for their work. The investigations and prosecutions are
having some of the effect we want. A group of investors and developers
met recently with me and with city housing officials. They were
complaining that is harder to buy and sell properties quickly in
Baltimore--appraisers have become more cautious and lenders more
skeptical. Thank goodness. I recommend that Federal authorities
maintain and increase their efforts. Law enforcement cannot solve our
broader problems in Baltimore's housing market, they can't touch the
unethical but not illegal activities, but they are a critical part of
the solution. Illegal flippers and mortgage scam artists have to know
there is a risk of jail time at the end of their real estate joy ride.
In addition to playing our part in the National Task Force on
Predatory Lending and supporting law enforcement, the Baltimore Task
Force and its members have been active on several fronts. We have
encouraged civil law actions on behalf of home owners and
neighborhoods. One of our members, Civil Justice Inc., recently
announced a new program, funded by the Abell Foundation, to provide
legal advice to first time home buyers prior to settlement as an
antidote to housing fraud. A task force subcommittee developed an urban
appraiser training course now required for new and renewed licensure.
How to avoid becoming a party to mortgage scams and flipping schemes is
part of the course. Ms. Ruth Louie, Mayor O'Malley's community
investment coordinator, chairs a committee looking at new mortgage
products that are safe and economical, and ways to refinance victims of
mortgage scams. Local and national banks are active on her committee.
We have co-sponsored town hall meetings with Attorney General Joseph
Curran taking prevention messages and pamphlets on the road. We have
supported a number of other consumer education efforts that you will
hear about in other testimony. We are thrilled that HUD is now working
acorn to expand consumer education at the grass roots level.
Legislative and regulatory reform efforts have been frustrating.
The Maryland general assembly has failed two years in a row to pass any
major bills to curb predatory lending or real estate practices. Last
year, a comprehensive anti-predatory lending bill died in committee.
And this year four targeted pieces of legislation--restricting ``yield
spread'' premiums, banning single premium finance credit life
insurance, requiring the escrow of taxes and insurance, and mandating
home ownership counseling for government supported loans--all failed.
We have not succeeded in getting legislators outside Baltimore city to
sufficiently appreciate the problems or understand that they threaten
their constituents as well. We have yet to reach a consensus locally on
what power the Baltimore city council has to enact anti-predatory
lending laws or how best to use that power. Nationally we expressed
support for the Sarbanes-LaFalce legislation but current congressional
leadership has not moved it forward. At every level of legislative
initiative--Federal, State, and local--we need to increase our efforts
to build concensus, to broaden constituencies, to forge bi-
partisanship, and to involve industry in crafting solutions.
Our other major frustration has been in working with HUD to help
families victimized in mortgage scam abuses of the FHA program. Vinny
Quayle will testify more directly about these issues, as will HUD. The
point I want to make was that the task force had hoped to have the FHA
fraud prevention and victim assistance programs well underway by now.
We wanted to move to turn our attention and energy to predatory
convention loans and refinancing--the other two thirds of Baltimore's
skyrocketing foreclosure problem. We wanted to pursue the investor
schemes that degrade neighborhoods and frequently involve mismanaged or
neglected rental property. We still want to pursue these issues with
HUD and Baltimore's housing department as our partners. With HUD's
renewed commitment to creative problem solving on the FHA part of the
problem, and renewed compassion for the families in FHA-insured housing
crises, maybe we can.
Senator Mikulski, last year you and Congressman Cardin walked with
me through the 600 block of North Robinson Street. we visited families
sold houses for upwards of $80,000, we saw the cosmetic repairs inside
some of these houses, we saw a vacant HUD house and other vacancies on
the block, magnets for trash and rats--and we met good, honest, hard-
working home owners and tenants trying to maintain their dignity and
raise their families in spite of the real estate mayhem all around
them. Figuratively speaking, I want to take you back to that block--it
is not a pretty picture. A year ago there was one HUD house, now there
are three. The vacant and dilapidated house at 600 North Robinson
Street that Robert Beeman sold to someone for $85,000 is still vacant
and now more dilapidated. Each of the three new HUD homes had been sold
to home buyers for over $50,000; I believe that criminal information
has recently been filed by the U.S. Attorney's Office against one of
the sellers; a second seller was banned from doing business with HUD.
The banned buyer sold another house to someone on this block for over
$50,000 but it has not gone into foreclosure. The home owner is
probably struggling to keep up with inflated mortgage payments. HUD
ought to offer this home owner mortgage reduction assistance if it is
warranted but they don't have a way of doing that now until after
default and foreclosure proceedings. I question whether any of the
houses on this block are worth more than $50,000. There's no question
at all that none of the houses were ever worth $80,000 plus.
There are two new bank foreclosures on the block. Milton Robinson
LLC owned 605 North Robinson Street last year after acquiring the
property for $17,500. Brent Reed bought the property for $47,000 on 4/
7/00 and flipped it to Andrew Bogdan in a sale recorded the same day
for $64,000. Mr. Bogdan has the distinction of being the number one
person with foreclosure petitions in the year 2000; 49 of his
properties fell into that category. Next door at 607 North Robinson
Cadillac Properties, Inc. has purchased the property for $13,000. I
hope this property is not flipped in the same way the one next door was
but I have reason to fear it might. William W. Wright is, according to
State records, the resident agent and a principal of both Cadillac
Properties and Milton Robinson LLC.
Let's go back to the new HUD houses. We hope that they will be
bought by owner occupants; it does seem that the one last year did. But
the chances are in this neighborhood, that the properties will languish
and eventually be sold to an investor who may flip the property and
continue the cycle of neighborhood deterioration with a new victim
buyer or lender. I am providing to HUD today a list of former HUD
properties that have been bought by investors and quickly flipped for
large profits. While there is nothing inherently illegal in this, I am
suggesting that HUD examine and analyze these sales with an eye toward
preventing fraud. People who HUD knows have abused FHA as sellers
should not be eligible to buy HUD properties at auction. I would go
further in recommending that HUD establish eligibility criteria for
purchasers of HUD properties, particularly investors. You shouldn't be
able to speculate on HUD houses if you have a criminal record in real
estate or economic crimes. You shouldn't be able to buy a HUD home if
you have a record of selling to unqualified buyers and contributing to
our foreclosure problems. You should be able to buy HUD houses if all
you do is leave them vacant waiting for market conditions to change in
your favor. You should not be able to buy them if the city's housing
department says you have a significant record of housing code
violations. The purchase of HUD homes by real homeowners ought to be
encouraged and made easier. The purchase of HUD homes by investors and
speculators ought to be more difficult. For illegal flippers and
scammers it ought to be impossible.
As you know I was infuriated when it appeared that HUD was reneging
on its promises to help Baltimoreans afflicted in FHA-insured mortgage
scams. I know you were too. Thanks to your efforts and those of Senator
Sarbanes, we are seeing signs of progress today. HUD will testify, I am
sure, about renewed efforts to assist victims. I am cautiously
optimistic about these efforts. There are no quick fixes to these
problems, this is why the Baltimore Task Force needs to continue; we
have a very long way to go to right the wrongs that have been done and
prevent their recurrence. As I said before we are not yet winning that
war. But I am pleased with HUD's staff assignments to this work--Engram
Lloyd from Philadelphia, Laurie Maggiano and Vance Morris from DC are
working hard. They and we have to be vigilant against bureaucratic
tendencies to circumscribe and minimize the problem we face, to offer
gestures and band-aids that don't heal the wounds or prevent injury, to
move quickly to the next crisis in the next city without learning the
most we can from the Baltimore experience. And we have to reject the
tendency to throw up hands and say we don't have the authority or the
capacity to act. If the agency feels it is unable to act fully to
address and redress FHA-insured mortgage scam issues, the agency should
ask for legislative and budgetary help from Congress. I will be more
than cautiously optimistic when the Finney and the Chriscoe families
find out whether HUD is going to help them or not. I have enclosed the
letter from the Finney that they gave to our task force. Larry
Chriscoe's story was told in the Sunpapers (copy attached). These
families have been waiting a long time; they should not have to wait
much longer.
Let me share some good news with you. Last year you visited Chassie
Adams at 610 North Robinson Street and Cheryl Hargrove at 625 North
Robinson Street. Ms. Adams bought her home from Robert Beeman; the
sales price was $84,000. She had a monthly payment on the first note
amounting to $650 per month. It was a 13 percent interest loan with an
infamous balloon payment at the end of fifteen years; Through the
assistance of her lawyer Andre Weitzman, housing counselor Carl Cleary,
First Mariner Bank, and the Abell Foundation, Ms. Adams is in the
process of getting a new mortgage for $27,500 at 7 percent with a
monthly payment of $345. The new mortgage includes several thousands of
dollars of repairs to her home. Hopefully the winter of 2000-2001 is
the last one Ms. Adams will spend without a furnace.
The story of Ms. Cheryl Hargrove is similar. Her $83,000
cosmetically repaired house is becoming a $31,300 house with $6,795 of
real repairs structured into the mortgage and $700 worth Ms. Hargrove
is paying for herself. Her monthly mortgage payment of $611 is changing
to $420. Ms. Adams and Ms. Hargrove have a few more hurdles on the road
to recovery but there is light at the end of the tunnel. Unfortunately
they are exceptions to the rule. Most people don't have lawyers like
Mr. Weitzman, housing counselors like Carl Cleary, and cooperative
local bankers like First Mariner.
Many mortgage victims, even those on the road to recovery, need a
helping hand to continue as homeowners. Some families need help in
transition to safe rental properties. Others need help in preventing
foreclosures and making homes liveable. Solid Foundations is emerging
as a private flexible fund to help families with small grants in these
circumstances. You know about this because you serve as one of our
honorary committee chairs and you attended our first annual fundraiser
last Friday night. Solid Foundations was the brainchild of a Baltimore
businesswoman, Mimi Kapiloff, who read about the plight of at-risk home
owners and decided to do something about it. Families working with
housing counseling or non-profit agencies may apply for small grant
assistance through such organizations. It is an exciting new
development.
When we have the HUD/FHA aspects of prevention and victim
assistance under control and in gear, we do have to invest intensive
research and resources into the companion issues of investor scams and
predatory refinancing. The investor scams involving the flipping of
vacant properties or properties with tenants are not victimless crimes.
Neighborhoods suffer from the vacancies left in the wake of this bad
business. Over a thousand foreclosure petitions in 2000 were filed
against multiple property owners who had invested in get rich quick
schemes. A great many of these properties have or had tenants who
suffer from the conditions of these houses and their instability. A
prime example is an area of Brooklyn, the 800 and 900 blocks of Jack
Street and Stoll Street. Brooklyn, as you know, is a long-standing
working class community with a good housing stock and many strengths.
In this pocket of Brooklyn, where property flipping is concentrated,
conditions are more like a third world country. The trash, debris, the
physical environment is appalling. In this area, a number small two
story brick houses were purchased by an investor for $64,000 each; the
State Department of Assessment and Taxation considers those values
inflated. Many are owned by Eugene Manning or his companies; Mr.
Manning has the distinction of having the second highest number, 41,
properties petitioned for foreclosure in 2000. So many foreclosures in
such concentrated areas of south and southwest Baltimore will wreak
havoc on those neighborhoods, disrupt the lives of tenants, and create
pockets of real estate rot with negative impacts on all the surrounding
houses.
Investor schemes are a growing part of Baltimore's flipping
problem. Mr. Russ Whitney advertised on cable TV last week that he is
hosting a series of free seminars in Baltimore starting tomorrow on how
to build wealth. One of his strategies is flipping properties. He said
he would teach how to buy HUD houses cheaply, make modest repairs, and
sell them quickly for large profits. He said he would teach how to get
government grants and first time home buyer incentives on the way to
building wealth. Mr. Whitney says he started with $1,000 and after 18
months had over $4,000,000. Apparently he wants to share these secrets
of success with me and you and everyone else. He is not the only person
selling the snake oil of getting rich quick in urban real estate, there
are real estate investment clubs that meet monthly in Baltimore and a
website www.flippinghomes.com.
The arena of predatory refinancing is best appreciated by looking
at the vulnerability of senior citizens, many of whom have equity built
up over decades or who own their homes outright. Congress has received
substantial testimony that some refinancing companies target seniors to
loan money for repairs or other needs using their homes as collateral,
to churn those loans getting the borrower deeper and deeper in debt,
and then to strip their equity in their homes. Last Monday, the
Community Law Center and Fannie Mae sponsored a seminar on predatory
refinancing. AARP provided information after surveying a cross section
of citizens over 50 years old. They found that 59 percent own their
homes outright. Eighty six percent of them have seen or heard home
equity loan ads. Nearly a quarter did not think that they had enough
money set aside for home repairs and about the same percentage actually
took out home equity loans. Of those borrowers more than half did not
talk to more than one lender, they did not shop. More than a quarter
selected their lender based only on the lender's mailing, phone calls
or door-to-door solicitations. Many of the lenders who push their
products on seniors and strip their homes of equity are the same
lenders who originate or buy subprime mortgages. The subprime lending
industry, like most industries, will tell you they are over-regulated
and no new legislation is needed to curb abuses within their industry.
I couldn't disagree more. I strongly support the Sarbanes-LaFalce
initiative and all other efforts to better protect consumers,
especially senior citizens and lower-income families.
In conclusion, I would like to make the following recommendations:
Keep HUD's feet to the fire to follow through on the cases already
submitted for victim assistance in FHA-insured houses. Establish some
benchmarks for accountability and require progress reports.
Pursue HUD's new ideas for increasing the sale of HUD's inventory
to actual home owners, owner-occupants, and decreasingly the sale to
speculators and investors.
Establish eligibility for people and companies who buy multiple
properties from HUD. Ensure that they are law-biding, honest,
competent.
Seek substantial Federal support to help Baltimore City with the
vacant house crisis, thousands of vacant houses, a problem exacerbated
by mortgage scams, flipping schemes, and predatory lending.
Test out the requirement of pre-purchase home ownership counseling
in a selected area of Baltimore as an antidote to abuses of FHA.
Authorize HUD and FHA to tap the FHA fund for programs that reduce
fraud, prevent foreclosure, repair and maintain HUD's inventory, and
provide neighborhood recovery funds to communities where HUD abuses are
concentrated.
In the broadest sense, all of our efforts to address these problems
need to be redoubled. Law enforcement needs to continue and be
intensified. Civil law actions need to continue and be multiplied.
Consumer education must be promoted through all media and in every
community. Victims' assistance through government and private channels
has to grow, expand, and become easier. Neighborhood recovery has to be
revisited and expanded, especially as it relates to vacant housing.
Legislation and regulatory must be pursued to keep professionals in
real estate and lending more honest and ethical. The issues we are
discussing today are not Democratic or Republican, not city or
suburban. Every part of our society is threatened by the explosion of
predatory lending practices and the destabilization of neighborhoods.
Thank you for your leadership on this issue, for your consistency,
your caring and your strength. It has been an inspiration and a support
to me.
Senator Mikulski. Well, thank you very much, Ken, and to
all of those people who have testified.
Vinnie, I want to ask you a couple of questions and then go
to Ken Strong and Ms. Adams, Mr. Smith as well. Let us go to
your sheet, ``What Is Happening In Neighborhoods.'' Those 8,400
sales to homeowners were conventional, VA, and other forms.
Mr. Quayle. And FHA.
Senator Mikulski. So that is the total mortgages in
Baltimore City.
Mr. Quayle. That is right.
Senator Mikulski. In all of the neighborhoods.
Mr. Quayle. That is right.
Senator Mikulski. Then of that, 5,000 foreclosures were
initiated. Do you mean that only 3,400 mortgages----
Mr. Quayle. No, the foreclosures are not those 8,400 loans.
The foreclosures are loans that were made previously.
Senator Mikulski. Okay, fine. Then FHA-insured loans. Of
that 8,400, 3,100 were FHA.
Mr. Quayle. That is correct.
Senator Mikulski. Then of that 3,100, 46 percent, some in
the first year, were foreclosed.
Mr. Quayle. No. That is the same question you asked before.
While 3,100 FHA loans were being originated in calendar 2000,
at that same time 1,453 FHA loans made in previous years and in
2000 as well went bad.
Senator Mikulski. I got it. But the point is that of all of
the loans in Baltimore City by FHA, 46 percent last year?
Mr. Quayle. The last couple of years, and it will be in the
future, because this is just one year, 2000. A lot more of
these loans than the 3,100 will go bad in the next few years.
Senator Mikulski. Well now, let me get to a couple of
questions with you, and then perhaps Senator Sarbanes would ask
some questions, and we will go back and forth in rounds.
Now, let us go to prevention, because you and Frank spoke
eloquently about this. I am going to throw out something else,
because what you are talking about is so retail, I am not so
sure that retail a loan with preventive pre-housing ownership
counseling is going to be effective. Given the magnitude of
this, there is just not enough employees in nonprofits, HUD,
and FHA to be doing this.
So here is my question. Do you envision that there could be
more what I will call wholesale advice, for example workshops
and given President Bush's idea of involving faith-based
organizations--and there is always the issue of constitutional
compliance on service. But really, to use both the community
advocacy groups and faith-based groups for wholesale workshops
getting people ready for homeownership, I think one person at a
time is great, but I do not see how we can get to it.
What do you think about what I am saying and do you think
we ought to go wholesale, or do you think my intentions are off
the mark?
Mr. Quayle. We at St. Ambrose do not have a lot of
confidence in the education piece. The industry, the real
estate industry, the banking industry, are all saying what we
need are more consumer education. In our 30 years we have not
seen that work.
Is that right, Frank?
Mr. Fisher. Yes.
Mr. Quayle. But I share your concern, because not everyone
can get pre-purchase counseling. I share that. We do not have
the counselors, we do not have the quality counselors. But the
problem is that we have lost HUD's oversight. Once the lenders
started endorsing the loans themselves, we lost HUD's
oversight.
We have got to figure out some way to get some oversight
back in there.
Senator Mikulski. So that is the issue.
Mr. Quayle. That is the issue, yes.
Senator Mikulski. But I am not so sure random phone calls
are----
Mr. Quayle. I know. Maybe if we took the bad lenders, the
lenders where--this new legislation is coming that is going to
identify who the lenders are who are making these questionable
loans----
Senator Mikulski. But am I correct in saying when there was
a national policy change that enabled FHA to go directly to the
lenders, that created the window for the predatory lenders to
come in?
Mr. Quayle. Absolutely, absolutely.
Senator Mikulski. Well, I think it is something to be
considered, and we look forward to your advice. I know this is
something that would need to be dealt with in the authorizing.
Mr. Strong. Senator, could I answer that question just very
briefly?
Senator Mikulski. Which question? You mean the wholesale?
Mr. Strong. The one about the wholesale education, because
I think it is an important part of the solution. Reaching into
churches and community groups with real seminars, lengthy
things, not just ads on TV or hot line numbers to call, but
real education, is part of the solution and ought to be
supported. But I do not think it will be a panacea by any means
for what we are dealing with.
I think HUD is working now with ACORN to try and do some
more grassroots education in neighborhoods that have been
targeted by flippers. That is a good thing.
Senator Mikulski. Well, I do not know if that answers my
question. We can always point to individual organizations doing
individual things. I am talking about a significant government-
organized, not based on volunteers or the kindness of
strangers, really intervention, with real workbooks and
resources.
We have a very robust ministerial community of a variety of
faith organizations, probably one of the richest nonprofit
organization towns in America. That is what I was trying to
consider.
But let me--I have been asking questions for 5 minutes. I
am going to turn to my colleague and then, Ken, I will come
back to your point, and then I am going to talk to Ms. Adams.
Senator.
Senator Sarbanes. Thank you very much.
First, Ken Strong, I was pleased to hear that we may work
Ms. Adams' situation out here now, that you are hopeful that
that will come through. Who is going to be left holding--I
mean, the sales price on her home was $84,000, right?
Mr. Strong. That is correct.
Senator Sarbanes. Now, in the reworking of this thing she
is going to come back with a mortgage of $27,500.
Mr. Strong. That is correct.
Senator Sarbanes. Which more approximates the value of the
home, I take it, and would put the payments more within her
grasp, so to speak; is that correct?
Mr. Strong. That is correct.
Senator Sarbanes. Now, Beeman walked away with $84,000, is
that right?
Mr. Strong. Yes.
Senator Sarbanes. Who is going to absorb that loss, the way
this thing will be structured?
Mr. Strong. Ms. Adams was one of several dozen people
represented by Andre Weitzman, who sued the lenders, the
appraisers, the title companies, and everyone who was involved
in the transactions of Robert Beeman and another individual who
has recently been charged criminally, Walter Dirsh. So it is
only through the lawsuit that the agreement to reduce the
mortgages on these houses has been made.
HUD has had a frustrating time getting lenders to do that
voluntarily. But without the lawsuit, we would not have the
possible solution. It is coming to conclusion soon. We are not
at settlement on the new mortgage and Ms. Adams is still
suffering in a bad house, but we are getting there, but only
through the lawsuit.
Senator Sarbanes. Now, does the lender then bear the loss
or do they get back at Beeman?
Mr. Strong. Well, the lender--Beeman is serving time in
Federal prison. I am not sure what resources you can go after
in his case that are left. He has been fined in Federal court
and is serving close to 3 years in Federal prison.
The lenders were victims in this as well and they had to
take the loss in the lawsuit, along with the insurance
companies of the professionals who were involved in the case
who did wrong.
Senator Sarbanes. Now, you are working some others out, I
gather, as well along the same path; is that correct?
Mr. Strong. Yes. But the point I make is they are
exceptions to the rule. I wish we had more----
Senator Sarbanes. Why are they exceptions? Why cannot the
process that is working for Ms. Adams and the others that you
have indicated be institutionalized as a regular process to
provide remedy for, if not all, at least most of the people who
have been affected?
Mr. Strong. The case that Mr. Weitzman brought against
Beeman and Dirsh and their cohorts was a 3 to 4-year process of
civil litigation. There is civil litigation that is being
undertaken by Civil Justice, Incorporated. Its director is here
this morning, Dennis Murphy. St. Ambrose has undertaken some
legal actions.
But in the private bar we do not have enough people with
either the expertise or patience or ability to take on these
very big cases. I wish we did.
Senator Sarbanes. Why should not the city and HUD, working
together, pick up this burden, so you would have a joint legal
task force, that in effect you did not have to depend on
people? I commend Andre Weitzman. I think he has made really a
very significant and substantial contribution. But he has
really in a sense performed a real act of public service. He
has invested an enormous amount of his time and effort trying
to correct these terrible wrongs.
I do not know why we should be dependent or look to that
kind of private contribution. Why is there not a public
obligation here to be picked up on by, say, a joint legal task
force by the city and by HUD to pursue these matters?
Mr. Quayle. There is an effort going on, Senator Sarbanes.
HUD has established a program of reducing these mortgages for
the people who qualify, the people they judge as eligible. It
is not always that easy because, as Frank tried to say, for
many of the borrowers even when you reduce the mortgage to the
fair value the people cannot buy the house, they cannot afford
it. Their credit has been destroyed. They are in bankruptcy.
It is very complicated. It is very complicated. So what HUD
is trying to do is say, well, in that case, the people that
have judgments on them for not paying gas and electric bills or
other things, what we are doing with one case--and hopefully it
is going to be the beginning of others--is HUD is going to sell
the house to a nonprofit, who will rent it to the family for
the few years it takes for the family to get back on their feet
and the family will then buy it at the fair price.
That is one avenue that we are pursuing. That would be the
solution for Mr. Smith's case here, to take that house--his
house is worth maybe $40,000. He bought it for $70,000; reduce
it to $40,000. He is in a situation where as he gets that full
employment back he will be in a position to afford that house
at $40,000.
There are families out there like Mr. Smith's, but there
are also a lot of others who, even at the new price, cannot
afford to buy the house.
Senator Sarbanes. Well, they were lured in, in a sense,
lured into buying a house and it was way over their head in
terms of being able to handle it, correct?
Mr. Quayle. Right. What we are hoping to do there is get
them relocation money so they can go out and at least rent a
decent place. But as Frank mentioned, the landlords do not want
to rent to them because they are coming out of a foreclosure,
their credit has been destroyed, they are in bankruptcy. It is
very hard to get the landlords to agree to rent to these folks.
Mr. Strong. Senator, I think your idea is excellent and
that we ought to pursue it with HUD and HCD. It is exactly what
I was saying. We need to put the kind of resources into
resolving these problems that it requires. Too often,
government lawyers tell you what you cannot do. We need
government lawyers, as the strike force tells us, to tell us
what we can do to make it right for these families.
Senator Sarbanes. Well, I think I have used up my question
time. I yield back.
Senator Mikulski. Senator Sarbanes, your line of
questioning, as usual, is quite excellent.
Ken, as I understand it, though, when HUD actually took
action in terms of the lender community, they challenged HUD's
authority and therefore slowed down the whole process. Am I
correct in that?
Mr. Strong. I think HUD in its testimony should address
that. If they need additional authority to do the right thing,
they ought to seek it.
Senator Mikulski. Was that your observation?
Mr. Strong. Yes. They attempted to do this and were
frustrated by the lenders administratively. I do not think we
had the full legal team going after it the way Senator Sarbanes
suggested.
Senator Mikulski. Well, I think the purpose of this hearing
was that we view this situation as a work in progress. But
while we work, we must make progress. It seems to me we have
really gotten bogged down. We have gotten bogged down in HUD
rules, legal rules, the plight of the community. I think there
needs to be among all of us a greater sense of urgency, both in
terms of the families that have been victimized, the
prevention, and the cleanup.
Now, let me go to Ms. Adams here. In your testimony on
pages 7 and 9, you said she was one of the lucky ones. Well,
first, luck does not count. Luck is great in a lotto. It is
terrible in homeownership.
Ms. Adams, you do not seem to feel you are one of the lucky
ones. As I understand from your testimony, you are not only no
better off this time, this year, but you are worse off because
of the collapse of the infrastructure of your home.
Ms. Adams. Yes.
Senator Mikulski. Yet you seem to be in limbo as to where
you should go, what you should do, what you should be paying,
and what you should be listening to. Am I correct?
Ms. Adams. You are correct.
Senator Mikulski. I am not doubting you, Ken, but in your
testimony it sounds like the Adams situation is straightened
out, when the Adams situation is not straightened out.
Mr. Strong. No, I described it as light at the end of the
tunnel. It is not straightened out yet. It has been a
frustrating negotiation, taking longer than anyone wanted.
First Mariner Bank with the lawyer and the housing counselor,
and the Abell Foundation had to step in during the process to
guarantee the loan part.
It should be closing soon, in a month, but we are not there
yet.
Senator Mikulski. Could I interject.
Mr. Strong. Yes, ma'am.
Senator Mikulski. I understand it is a frustrating process,
believe me. But could you identify each step, how it can be
different next time for the next person?
Mr. Strong. Yes.
Senator Mikulski. So what happened with the bank? Do you
see what I am trying to get at?
Mr. Strong. I do.
Senator Mikulski. And how at the end of this hearing Ms.
Adams can know where to go to and have a 9-1-1 safety net.
Mr. Strong. After this hearing we will arrange with Ms.
Adams to sit down with the housing counselor, the bank, the
lawyer. It is close, as has been reported to me, it is close to
resolution. That has not been communicated clearly. We are
going to close that gap. This is one case that I do believe we
are close to resolving, but we need to be better communicating.
Senator Mikulski. What happened when you went to First
Mariner? What happened at each step?
Mr. Strong. Well, at first--at first the bank had
difficulty with the value of the house, given the condition of
the house. So they were unwilling to make the loan if the house
was not in good condition. That took some negotiating. That
took a while, to get to that point.
That is when we went to the Abell Foundation and said: In
some of these cases, could you guarantee the repair portion of
the loan? They considered that.
Senator Mikulski. So that is an issue.
Mr. Strong. Yes, it is.
Senator Mikulski. In other words, the bank was right in the
sense of looking at what they were getting back into.
Mr. Strong. That is correct.
Senator Mikulski. Again, I am into pinpointing, not
fingerpointing.
Mr. Strong. That is right.
Senator Mikulski. So there needs to be another force where
some of the houses are so deteriorated.
Mr. Strong. Exactly.
Senator Mikulski. Go ahead.
Mr. Strong. And HUD has found this also in its attempts to
help people.
Senator Mikulski. Now, keep going on to each step.
Mr. Strong. In its attempts to help people, the repairs
issue has been a frustration. I think Ms. Maggiano will speak
to that.
Senator Mikulski. What was the next step?
Mr. Strong. The next step was--actually, prior to that were
the continuing steps that took a very long time in the lawsuit
against Beeman and the other people involved.
Senator Mikulski. Okay.
Mr. Strong. So we could not get to the help point until
that lawsuit was resolved fully.
So the bank, the repairs, and the Abell Foundation's
guarantee. The housing counselor, Carl Cleary, has been doing a
great job working with very many families.
Senator Mikulski. I am sure.
Mr. Strong. So he has been working with Ms. Adams and
trying to help arrange for the repairs. She had, Ms. Adams had,
a 13 percent interest loan with a balloon payment after 15
months.
Senator Mikulski. I remember that. That was so horrifying.
You were going to owe $57,000. I will never forget that
when you said that. I have shared your story with my colleagues
in the Senate.
So then you had to renegotiate the loan.
Mr. Strong. That is right, and the new loan will be at 7
percent. The monthly payment used to be $650. It will be around
$345. But I understand there are a couple steps in the
settlement process that have yet to get to settlement, but that
that should be soon.
Senator Mikulski. Well, again, we will talk that over, but
it seems to me that Mr. Cleary, doing an outstanding job, has
more than he can handle. Is this not what is happening in our
advocacy groups?
Mr. Strong. Yes, it is.
Senator Mikulski. There is a limit to being able to handle
all of these cases--Frank, excuse me. Frank. Is this another
resource issue?
Mr. Strong. That is correct, yes, you are.
Senator Mikulski. For the nonprofits working on cleaning up
the swamp that the predators have left.
Mr. Strong. These are difficult, intense cases, and we need
more resources.
Senator Sarbanes. What is the lender that lent the money to
sustain Beeman's $84,000 sales price?
Mr. Strong. The originating lender in many of these cases
was McCowan Funding and the president is in jail today. Then
those loans were quickly sold to any number of people in the
sub-prime market, companies that buy up loans at high interest
rates.
Senator Sarbanes. So I want to be clear. First Mariner was
not the lender involved?
Mr. Strong. They were not.
Senator Sarbanes. They are coming in now in a sense trying
to be helpful and be a good corporate citizen, is that correct?
Mr. Strong. That is correct.
Senator Sarbanes. I wanted to be clear about that on the
record, because my understanding is that it is the combination
of First Mariner and the Abell Foundation working together that
is making it possible to work out Ms. Adams' situation.
Mr. Strong. That is exactly right.
Senator Sarbanes. Well, Vinnie is right, it is very
complicated, no question. We have a number of people who have
taken on a homeownership responsibility who never should have
done so. They were just enticed into that situation. Would that
be a fair description?
Mr. Quayle. Yes, absolutely.
Senator Sarbanes. For them, probably the only remedy is
relocation to rental housing.
Mr. Quayle. Right.
Senator Sarbanes. Now, is HUD and the City HCD providing
the assistance that is necessary in order to do this
relocation?
Mr. Quayle. HUD has been providing $2,000 to a half a dozen
families so far that we know of and that is solving those
families' problems. We are hoping there will be a lot more of
that and we are hoping that our landlord community will come
forward and say: Listen, we will be willing to overlook that
foreclosure and find an apartment. That would be wonderful, if
you could use your influence with the property owners
association here in Baltimore to see if they would not step
forward and help some of these families even though they have
bad credit.
We are able to put down 2 months security deposit or maybe
even 3 months as added security for the lender.
Senator Sarbanes. Now, these are people that, even if the
loan were written down, crammed down, as we are going to do
with Ms. Adams, they still would not be able to handle it, is
that correct?
Mr. Quayle. That is right.
Senator Sarbanes. What percent of the total affected would
you say are in that category?
Mr. Quayle. Frank, you see these families. Are you awake,
Frank?
Mr. Fisher. I just dozed off for a minute. Yes.
What percent? I do not know. The case of Ms. Adams is the
sub-prime lender. It has nothing to do with HUD. There are
1,200 houses last year went to foreclosure that were not FHA,
they were not refinance. They were purchase money mortgages,
somewhat similar to the Beeman type scam, where they inflated
sale price, just a paper sale price of $85,000, first mortgage
of $50,000 and a bad house.
Ms. Adams is one of, I do not know, an awful lot, I will
tell you that. There is a carload of people out there like Ms.
Adams.
Senator Sarbanes. Well, actually Ms. Adams as I understand
it is in a situation where if she can get the mortgage crammed
down to a realistic figure, she can then handle the payments
and continue to move ahead on owning her home. Is that correct?
Mr. Quayle. Yes. Frank?
Mr. Fisher. I would say yes.
Senator Sarbanes. Unlike people who, even if the mortgage
were crammed down, cannot handle the home. They actually have
to move over into the rental.
Mr. Fisher. If the house was okay, if the roof did not
leak, if the furnace worked, if the plumbing was okay, if the
electricity is in there, and the price was right, the family
could probably--she would probably be okay. You would be okay.
Put Ms. Adams in a good house and she will be okay. Put her in
a lousy house--she is lucky enough to have gone to Carl Cleary
and he did something.
But the folks who do not get to the Carl Cleary's lose
their house.
Mr. Strong. Senator, I think we do not know exactly how
many need relocation help because homeownership is not in the
cards for them, was not then, is not now. HUD is reviewing all
of the cases that we have referred, over 300 of them, to their
office and trying to examine exactly that: Who can be helped to
remain as homeowners and who really needs relocation
assistance?
Senator Sarbanes. What do we do with the houses that the
people are in who cannot handle them, who need to be relocated
into rental housing? Let us assume you can accomplish that.
That is a big challenge. But then if they move into rental
housing and then there is a house left there, right?
Mr. Quayle. Right.
Senator Sarbanes. What happens there?
Mr. Quayle. If it is in a good neighborhood, like Bel Air-
Edison, it is going to go back on the market and be sold either
to a homeowner or to an investor, who would convert it to a
rental or flip it again. If it happens in Patterson Park, 600
block or 700 block north of the park, it is going to sit there.
No one is going to buy it. No one wants to do anything with it.
So it depends on where the houses are, the neighborhoods.
This dollar house program, I have to be honest with you, I am
not buying dollar houses down in East Baltimore on bad streets.
I am buying dollar houses in Waverly, Bel Air-Edison, Hamilton.
I bought one in Guilford, 300 block Southway.
So to answer your question, if it is in a decent
neighborhood something good can happen to it. If it is in one
of the--you have three categories of neighborhoods, Senator
Mikulski----
Senator Mikulski. Stable, stress, and siege.
Mr. Quayle. If it is the siege neighborhood, the chances
are it is going to sit there and just continue to deteriorate.
Senator Sarbanes. That is the sort of portfolio that HCD
confronts, then.
Mr. Quayle. That is right. It will go into their portfolio
of vacant houses, right.
Senator Sarbanes. I see my time is up.
Senator Mikulski. Mr. Smith, first of all, we thank you for
coming. We know it is not easy to come forward, as Ms. Adams
knows, and admit that you have been cheated. But the fault was
not yours. We salute you, trying to hold your family together.
We further commend you for trying to find not only a better
house, but a better way of life for your children while you are
struggling with this. So do not feel bad, and we are glad to
see you.
Let me ask the question about your predatory situation. You
are in a foreclosure situation because you lost your job and
now you are in the process of getting back into the
marketplace. But where did the flipping occur? Do you know what
that house sold for? Did you have an appraisal that you looked
at? Did you have a home inspection that you knew what you were
getting into?
Mr. Smith. It is my belief that all of that took place
prior to me sitting down at the table with Lucky Realty
Company. All of that had been done. The price they came up with
with me for that particular house was $70,000. We had visited
the property with one of their agents several times during the
construction or reconstruction or renovation period and we saw
it at one phase, then the next phase, then the next phase.
When we sat down at the table, we started signing papers--I
started signing papers.
Senator Mikulski. Well, Mr. Smith, as you know, I am very
much interested in the prevention aspects. If we look at a
public health model, if we were hit by an epidemic, which this
is, our first thing is prevention. What do you think you would
have liked to have been able to turn to or what would have
helped you from getting into this situation in the first place?
Mr. Smith. Someone has said it before: education. Maybe
being aware of this type of practice. I had no idea of what a
flip was. I thought I was getting into a situation where I was
going to have a better home for me and the boys. As a matter of
fact, as we talked to these people, that is all they talked
about, was a better situation for me and my two sons.
Senator Mikulski. But Lucky Realty filed all the papers for
you, is that correct?
Mr. Smith. Yes, when I sat down at the table I just started
signing.
Senator Mikulski. That was at settlement.
Mr. Smith. Yes.
Senator Mikulski. But prior to that, they submitted all the
papers; is that correct?
Mr. Smith. Yes, ma'am. Yes, Senator.
Senator Mikulski. So then you did not even talk to a
mortgage lender? They arranged that for you?
Mr. Smith. He was at the table, too, Bank of Virginia or
some kind of bank in Virginia. He was there, too. As a matter
of fact, I talked to him first. He was at the long table, him
and I.
Senator Mikulski. We all know about those long tables and
those tons of papers. But you did not go to Bank of Virginia?
Lucky Realty went for you?
Mr. Smith. That is correct.
Senator Mikulski. I see.
Well, I think Mr. Smith is a perfect example of an honest
man, an intelligent man, a guy who would want to be very
rigorous in protecting his family and his pocketbook. So this
is an indication.
Let me go to the last part of what my questions are. This
goes to what to do about something called HUD houses. You know,
a HUD house should have a good name to it, but the minute you
hear ``HUD house'' tremors go through neighborhoods. Vinnie,
could you tell us, what is this dollar program that you are
talking about?
Mr. Quayle. The dollar house was started, I believe----
Senator Mikulski. Because we had the old dollar house from
old homesteading.
Mr. Quayle. No, it is not like the dollar house from the
seventies. Because of HUD's large inventory in cities like
Baltimore, HUD made agreements with the local jurisdictions
that if they could not market their failures within 6 months
through the real estate industry and through the company that
they hired to manage them, they would offer those houses for
one dollar to the City of Baltimore, our Housing Department.
The Housing Department then has--I think there are three
nonprofits participating right now. They will assign that house
to either St. Ambrose, Ed Rukowski's group in Patterson Park,
or Park Heights, a group up in Park Heights. They are the only
three nonprofits participating.
I think Michael Guy is here. I think he said----
Senator Mikulski. Is this a good idea?
Mr. Quayle. Oh, it is an excellent, excellent idea.
Senator Mikulski. Then what happens after they assign these
houses and they go to you? Why is it an excellent idea and what
should we learn from it?
Mr. Quayle. Two things happen at St. Ambrose. Because of
this dollar house program, we are able to get private money
from Freddie Mac and Fannie Mae to renovate these houses. We
are renovating them totally. We are overimproving them so that
they are the best house in the neighborhood. Then we are
selling them through the real estate or through the private
real estate market.
We are going to do 50 houses this year. I will bet it is
more than any nonprofit in the whole country who is dealing in
scattered site single family houses. We have never done more
than ten a year.
Senator Mikulski. So this dollar house idea is a good idea.
Mr. Quayle. Oh, it is wonderful, wonderful.
Senator Mikulski. Ken, could you tell us other ideas on
what to do with HUD houses, because I know we are running a bit
late now.
Mr. Strong. Yes, I will be brief. The dollar house idea is
excellent for another reason. It takes those HUD houses out of
the hands of investors and speculators who are not going to do
good things with them and puts them in the hands of nonprofits,
like St. Ambrose, that are.
The other thing that we need to look at with HUD houses is
who repairs them. A HUD house stays vacant in a neighborhood
far too long. Even the dollar houses are there for 6 months
before they are available to nonprofits. We need to invest some
of that FHA success, the billions of dollars in the FHA fund,
in maintaining the HUD inventory and making it available more
quickly to homeowners and to nonprofits, people who are doing
good things with them in the neighborhood.
Senator Mikulski. Well, we are going to talk to Mr.
Graziano and Ms. Maggiano about some of the others.
Senator Sarbanes.
Senator Sarbanes. I just have a couple of questions,
because I know we want to go to the next panel. Vinnie, on your
statistics, I want to be clear about this. You have FHA
foreclosures initiated of 1,453.
Mr. Quayle. Right.
Senator Sarbanes. That is in the entire city of Baltimore?
Mr. Quayle. That is right.
Senator Sarbanes. Then you compare that with Matt
Franklin's assertion about nationwide. But what was the number
in 1996, do you know? The 1,453, what would that number have
been in 1996?
Mr. Quayle. You know, I do not know the answer to that. I
can get it for you.
Senator Sarbanes. Would you, please?
Mr. Quayle. You know, I think HUD is going to have to get
me--we do not have that. I do not have that number. That does
not appear in the Lusk Real Estate Reports, which is where we
get all this information. But HUD certainly has that number.
They can tell us how many loans went into foreclosure in
Baltimore in 1996.
Senator Sarbanes. That would be a better way to judge how
much of an upswing there was.
Mr. Quayle. Right, right.
Senator Sarbanes. Now, on the 3,100 loans originated, FHA
loans originated in the year 2000, is that in the entire city
of Baltimore?
Mr. Quayle. Yes.
Senator Sarbanes. Now, if you took the hot areas, as we
described them, where these practices--because there are some
areas of the city presumably where the FHA-originated loans--
where these practices either do not take place or are very
rare; is that correct?
Mr. Quayle. You would be surprised at how large an area of
the city this is happening in. All of Northwest, West, East
Baltimore, and now more and more in Northeast Baltimore as
well. But certainly not in Locust Point, and I do not even know
if there are any FHA loans down in Locust Point, but certainly
not in the real healthy neighborhoods you do not have this
going on.
Senator Sarbanes. All right. Now, what if you took--would
you say half of the loans originated are in these difficult
neighborhoods?
Mr. Quayle. I would say more. I would say two-thirds.
Senator Sarbanes. Two-thirds, so that would be 2,000.
Mr. Quayle. That is right, at least, at least.
Senator Sarbanes. All right. Now, suppose the FHA required
a loan being originated in the difficult areas to get a signoff
from an FHA employee based on a phone conversation with the
prospective purchaser, in effect where you said this thing
cannot go through unless--well, let us say call instead of
meet, because that is even more complicated, but unless you
call in and we go through this checklist of questions for you,
and where they ask the sort of questions we were talking about
earlier before they will let that loan originate.
Mr. Quayle. That would be beautiful. That is exactly what I
think should happen. The first question could be: Did you get a
home inspection? That is exactly. I would have thought that was
too much to ask for, but if someone could be talking to that,
and it could be an FHA employee, in the vulnerable
neighborhoods and just ask a few simple questions, we would get
a lot better understanding of whether or not this is going to
be a workable loan.
Senator Sarbanes. Well, maybe I am missing. I will ask the
HUD people when they get here. If you had 2,000 loans and they
did a half an hour question on each loan, that is 1,000 hours,
right? So that is within one person's capabilities in a year's
time.
Mr. Quayle. Absolutely.
Senator Sarbanes. So it is not an overwhelming thing in
terms of staffing.
Mr. Quayle. No.
Senator Sarbanes. Okay. Thanks very much.
Senator Mikulski. Well, we want to thank our panelists and
our constituents. We hope that before you leave today there is
even more clarification on how to help. Thank you for your
ideas and your advocacy.
We would now like to go to the second panel to get a sense
of where government is in all of this. We call: Mr. Paul
Graziano, the Commissioner of the Department of Housing for the
City of Baltimore; Ms. Laurie Maggiano, HUD's Single Family
Division Director of Asset Management; and Mr. Stephen
Schenning, the Acting U.S. Attorney for the State of Maryland.
Senator Sarbanes has to take care of a phone call and will
be returning shortly. We want to welcome all three of you. Mr.
Graziano, why do you not lead off and, Ms. Maggiano, we will
hear from you, and then we will hear from our very able, of
course, Mr. Schenning, who has been doing an outstanding job as
the Acting U.S. Attorney.
STATEMENT OF PAUL T. GRAZIANO, COMMISSIONER, CITY OF
BALTIMORE, DEPARTMENT OF HOUSING AND
COMMUNITY DEVELOPMENT
ACCOMPANIED BY JOANN COPES, DIRECTOR OF DEVELOPMENT, BALTIMORE HOUSING
AND COMMUNITY DEVELOPMENT
Mr. Graziano. Thank you, Senator Mikulski, and Senator
Sarbanes when he arrives back as well, for your leadership on
this issue and including calling this very illuminating hearing
this morning. For a relative newcomer to the area, this has
been very, very helpful for me as well and I have been taking
furious notes and I think that there are a lot of things that
we are doing and more that we can do. I would like to just read
my opening statement and then of course be available for
follow-up questions.
Much has been written concerning the nature of property
flipping and predatory lending and the terrible toll they have
taken. Others at this hearing have spoken eloquently about this
issue, so I will not repeat the sordid details. But I do want
to point out that, beyond the very real harm inflicted upon
victimized buyers, property flipping and the resulting
abandonment causes a tremendous drain on public resources and
dramatically obstructs broader community revitalization
efforts.
A cornerstone of the city's program to revitalize these
communities is sustainable homeownership. We must create a
climate where current owners wish to and are able to stay and
where new home buyers from a broad range of incomes will have a
stake in the neighborhood's future.
Some of our current efforts to address the problems include
a public awareness campaign, the Attorney General's town hall
meetings on flipping, and the pamphlet for prospective home
buyers, the Bankers Association consumer education program, a
hotline. Also, the city is moving toward requiring housing
counseling to all home buyer incentive programs, including our
SELT program. Participating lenders in all city home buying
initiatives are being asked to outline plans to detect and
deter real estate fraud in their transactions.
All the loans that are underwritten by the city staff are
carefully evaluated and prospective buyers are also urged to
engage a home inspection service for evaluation of the
property.
I would like to at this time also thank you for the
announcement this morning of the $5 million award. Let me just
talk a minute about what kinds of activities will be undertaken
with that money. The city has designed something called the
neighborhood recovery program, which really is in three parts:
a $1.5 million community-based stabilization initiative, a half
million dollar flipping victim clearinghouse operated by St.
Ambrose--and I should point out there that currently victims
have to go to five or more different organizations to obtain
services to address their needs. This will bring all the
services into one clearinghouse. And the healthy neighborhoods
initiative funding. $3 million in Federal funds for this grant
will be supplemented by State and local dollars to provide
things, including 3 percent loans for 30-year terms both for
current homeowners who want to do rehabilitation work on their
property and for those who are being encouraged to purchase and
rehabilitate properties in these targeted neighborhoods.
Something that has not come up this morning, but I think it
is a very important related issue the section 8 program.
Section 8 is a program that we believe can be utilized to help
create sustainable homeownership as well. It is a program we
will be embarking upon, and as we design this program we will
be very mindful of the pitfalls and the concerns about
sustainable homeownership.
Also, as an aside I will say that the section 8 program
unfortunately has been utilized by some of the same predatory
real estate folks to drain the life out of neighborhoods. So we
are going to have at least a two-pronged approach. One is
dealing with predatory lending and flipping schemes. The other
is to clean up our section 8 program so that neighborhoods will
not be hurt by either FHA action or by our operation of the
section 8 program.
Also in relation to this effort, we will be coordinating
the efforts with those related to our strategic demolition
program. This is something extremely important. We talked about
some of these properties that will be taken back.
Unfortunately, some of them probably need to be slated for
demolition, and we want to make that part of our strategic
program.
On the HUD side, they have strengthened their fraud
detection procedures, including property appraisal reviews.
They have re-
reviewed 500 previous loan referrals to determine if there is
an inflated mortgage. Where fraud has likely occurred, HUD is
offering various types of assistance to borrowers. As part of
its commitment to try new methods and ideas, HUD agreed that
the city could assign dollar house contracts to qualified
nonprofit developers so the houses could be redeveloped to a
high standard of resale or rental. We heard an enthusiastic
endorsement of that, obviously, from Vinnie Quayle. To date,
the city has contracted for about 85 FHA properties, which are
turned over to three nonprofit developers.
Much has been accomplished, but we do see a number of
statutory and regulatory changes that need to be addressed to
continue the effort. On behalf of the flipping task force, I
have collected these suggestions and recommendations from the
task force in recent days. I will just walk through these
quickly.
First, FHA needs the authority to use insurance funds as a
way to prevent foreclosure, not waiting until after
foreclosure, but to free up some of these dollars in advance,
and we think that may require some legislative authority.
Second, we believe HUD would be more successful in
disposing of its REO from FHA foreclosures if it hired a local
agent to handle these dispositions and provided resources to
bring properties up to full FHA standards before marketing. The
HUD foreclosed properties would then become an asset in a
neighborhood, not a further drain on property values. It is
extremely important that they be rehabilitated to the highest
levels and sold at market rates.
The FIRREA legislation set a monetary threshold which
classifies mortgage transactions below $250,000 as de minimis.
Only those transactions exceeding that amount require the use
of licensed or certified appraisers. The de minimis provision
should be eliminated so that all appraisers in all mortgage
transactions are held to the highest standard.
The fourth point: All licensed and certified appraisers
nationwide are required to subscribe to uniform standards of
professional appraisal practices. Federal law should define
violations of these standards as criminal.
Five, direct assignment of appraisal work to FHA-approved
appraisers by mortgage lenders subject to appraisers to
potential--subjects appraisers to potential lender pressure to
come up with the right value, that is values that will support
the contract sale price of the property. The appraisers are
sometimes reluctant to say no. They are fearful that they will
not be selected again.
FHA should go back to a HUD-approved appraiser panel, with
appraisers assigned on a rotating basis by FHA. In addition,
FHA needs to institute a local appraisal review system.
Currently, appraisals for FHA loans are sent to far distant
review appraisers who are not familiar with the Baltimore
market and that can have a profound impact. Small distances
make big differences in terms of the value of a property, block
to block differences.
Number six, the direct endorsement system has allowed many
bad loans which in no way meet FHA underwriting standards.
While the credit watch system can eventually catch lenders with
high foreclosure rates, FHA's direct endorsement system needs
to be eliminated or substantially modified.
Number seven, the Federal Real Estate Settlement and
Procedures Act, the RESPA, should be amended to provide for
penalties against title agents who fail to make the necessary
verifications of the financial details shown on the settlement
sheet. We have certainly heard stories today about people
fabricating information to make a loan qualify.
Number eight, on a pilot basis a Baltimore neighborhood
should be designated wherein every first-time home buyer
seeking an FHA loan would be required to complete counseling
prior to home purchase. Foreclosure rates in this neighborhood
would be compared with those in comparable neighborhoods where
counseling is not required.
Number nine, investors with criminal backgrounds or with a
record of shoddy property management or maintenance practices
should not be allowed to purchase HUD properties.
Number ten, HUD said it would demand that lenders reduce
mortgages to appropriate levels when it found mortgages that
exceeded 120 percent of fair market value. Unfortunately,
lenders refused to voluntarily make the mortgage reductions and
FHA apparently may not have the authority to do so. This needs
to be changed. It may require some statutory change.
Number 11, one of the penalties for banishment from FHA
programs because of fraudulent lending practices should be an
ability by FHA to decline to pay further claims.
PREPARED STATEMENT
I will close by saying certainly, the task force certainly
supports Senator Sarbanes' authorization bill and I am sure a
number of these matters will be addressed there. In closing, I
would just say these reforms will go a long way toward
addressing the flipping problems and we are certainly committed
to remaining vigilant to attack the new schemes and make
recommendations, more recommendations as appropriate.
Thank you for the opportunity to testify.
[The statement follows:]
Prepared Statement of Paul T. Graziano
Thank you Senator Mikulski and Congressman Cummings for your
leadership on this issue, your encouragement in the formation of the
Baltimore City Flipping and Predatory Lending Task Force and your
support of its work over the past year. Your demand that HUD come to
the table to uncover the facts about this crisis in Baltimore and to
craft a response, has made all the difference in our ability to get a
handle on this problem and to begin to cooperatively and collectively
devise solutions.
I must commend the Task Force for all the groundwork to investigate
and frame this problem and its effect on individuals and our
neighborhoods. The work of the task force has been a model of
cooperation and mutual support from many sectors and at all levels. I
would be remiss if I did not acknowledge many of those who have been
around the table tirelessly working on this problem. We have had
participation and input from advocacy groups, community based
nonprofits, private attorneys representing victims, law enforcement
agencies at the Federal and State level, secondary market leaders like
Fannie Mae and Freddie MAC, the State Department of Assessments and
Taxation, regulatory bodies and professional associations for lenders,
appraisers, and Realtors, and many victims who have told their stories
to help us understand how these schemes work. This has truly been a
sustained, collaborative effort.
Much has been written concerning the nature of property flipping
and predatory lending, and the terrible toll they have taken. Others at
this hearing have spoken eloquently about this so I will not repeat all
the sordid details. But I do want to point out that, beyond the very
real harm inflicted upon victimized buyers, property flipping and the
resulting property abandonment, causes a tremendous drain on public
resources and dramatically obstructs broader community revitalization
efforts.
Baltimore has an estimated 13,000 units of vacant and largely
abandoned housing and growing disinvestment in certain neighborhoods.
In these areas stable homeownership is declining and absentee ownership
and speculation are on the rise.
A cornerstone of the City's program to revitalize these communities
is sustainable homeownership. We must create a climate where current
owners wish to and are able to stay, and where new homebuyers from a
broad range of incomes will have a stake in the neighborhood's future.
Obviously, flipping schemes have a devastating impact on all these
efforts.
Current efforts to address the problem
Local Efforts
The City, in partnership with the Greater Baltimore Board of
Realtors, Maryland Center for Community Development and Fannie Mae and
Freddie Mac provided funding and developed a public awareness campaign
which included bus advertising, radio spots, T.V. public service
announcements and printed brochures.
Attorney General Joseph Curran has sponsored a series of Town Hall
Meetings on flipping and predatory lending, and produced a useful
pamphlet for prospective homebuyers--``Beware, Don't Buy Trouble.''
The Maryland Bankers Association is producing a consumer education
program designed to reach churches and community groups.
The Maryland Center for Community Development staffs a hotline and
makes referrals to non-profit housing counselors. This on-going service
allows homeowners and prospective homebuyers to get information
regarding suspected fraud and prevention of fraud in home purchase.
The City has moved to require housing counseling on all homebuyer
incentive programs as a means of prevention through education.
Participating lenders in all City home buying initiatives are also
being asked to outline plans to detect and deter real estate fraud in
their transactions, and to investigate fraud that may have occurred in
prior identified transactions.
All loans that are underwritten by the City staff are carefully
evaluated with checks on appraised value, previous sales price and
prior purchase date prior to approval. In addition, the City is
encouraging prospective buyers to select an independent home inspection
company for an evaluation of property condition prior to purchase.
We are also in the process of developing a low interest
rehabilitation loan fund to improve property, raise housing values,
strengthen civic involvement and increase confidence on targeted blocks
in selected neighborhoods--our Healthy Neighborhoods Initiative. Those
funds will begin flowing shortly. This is both a restoration and
preventive measure. It is low values and a weakened market which makes
communities vulnerable to those investors looking for opportunities to
flip properties. Improved conditions and neighborhood confidence will
deter predators.
HCD has worked with Neighborhood Housing Services to assist in
several fraud victims to remain in their homes by providing
rehabilitation assistance to put the house in a safe and habitable
condition.
HUD/FHA Efforts
HUD, through FHA, has strengthened its fraud detection procedures,
including property appraisal reviews.
HUD has re-reviewed over 500 previous loan referrals to determine
if there is an inflated mortgage based on an over valuation of the
property, and to look at the condition of certain FHA insured property
which might not have met FHA standards as certified at purchase.
Where fraud has likely occurred, HUD is offering various types of
assistance to borrowers including credit repair letters, relocation
expenses if necessary, the opportunity to repurchase the property at a
fair market value if the buyer can qualify for a new mortgage, and a
lease-purchase arrangement if it cannot. While lease-purchase
arrangements may work to help some victims eventually repurchase,
everyone recognizes this will not likely work on a large scale. We need
to come up with more tools to help in these circumstances, which I will
address more fully when I get to ``Recommendations.''
HUD is continuing as part of the Task Force and has affirmed its
commitment to try new ideas and processes, using Baltimore as its
laboratory.
The City has used the HUD Dollar House Program fairly extensively.
HUD's Dollar House Program allows local jurisdictions the opportunity
to purchase FHA foreclosed property that has been on the market for 6
months or more, for a dollar. As part of its commitment to try new
methods and ideas, HUD agreed that the City could assign Dollar House
contracts to qualified nonprofit developers, so houses would be
redeveloped to a high standard for resale or rental. To date, Baltimore
has contracted for about 85 FHA properties which have, in turn, been
assigned to three nonprofit developers--Patterson Park CDC, St. Ambrose
Housing Aid Center, and the Development Corporation of Northwest
Baltimore. Renovations are underway and houses are selling,
legitimately, at the top of the market.
So, much has been accomplished. But we see a number of Federal and
regulatory changes that could be made to address the effects of this
problem and to deter it in the future. On behalf of the Task Force I
make the following recommendations:
FHA needs the authority to use insurance funds as a way to prevent
foreclosure
Current law prohibits HUD from expending FHA insurance funds to
address victim relief or other activities to preserve property and
protect the FHA security in property prior to foreclosure. This is both
short-sighted, and an impediment to assisting flipping victims who have
taken their mortgage responsibilities seriously and have remained
current on payments for those inflated mortgages. In many cases, we
know these properties will remain at risk of default and foreclosure
because of the failure of the sellers to make promised repairs and to
bring the properties up to FHA standards. As conditions deteriorate,
buyers cannot meet repair costs.
FHA recognizes this, but its hands are tied in using the insurance
fund to help those buyers bring the properties up to a satisfactory
standard.
We believe it would be more cost effective to provide funding for
repairs, than to pay the insurance claim on a foreclosed property, and
the costs of trying to dispose of an unmarketable property.
Revise FHA disposition practices
We believe HUD would be more successful in disposing of its REO
from FHA foreclosures if it hired a local agent to handle those
dispositions, and provided resources to bring properties up to full FHA
standards before marketing. Currently FHA takes an average $31,000 loss
on a foreclosed property by the time it is eventually disposed of.
We believe this loss can perhaps be decreased, while at the same
time assuring timelier disposition of property by putting it in
marketable condition, attractive to purchase by owner occupants, rather
than bottom-fishing speculators.
Furthermore, HUD foreclosed property will then become an asset in a
neighborhood, not a further drain on property values. The HUD houses
can set the market standard as opposed to evidencing the bottom of the
neighborhood market as is often currently the case.
An agent could expeditiously complete high quality rehabilitation
and then sell property at a market rate to homebuyers not restricted by
income or first time buyer status.
FHA already has the authority to institute such a system and we
encourage HUD to pilot such an effort in Baltimore as soon as possible.
Eliminate de minimus amounts specified under FIRREA
The Financial Institution Recovery Reform and Enforcement Act of
1989 (FIRREA), Title 11, has set a monetary threshold which classifies
mortgage transactions below $250,000 as de minimus. Only those
transactions exceeding that amount require the use of licensed or
certified appraisers.
Approximately 95 percent of all mortgages fall below the de minimus
standard. The de minimus provision should be eliminated so that all
appraisers in all mortgage transactions are held to the highest
standards, and are accountable to regulatory bodies. An unlicensed
appraiser is not held to any ethical standards.
Impose criminal penalties on negligent & fraudulent appraisers
All licensed and certified appraisers nationwide are required to
subscribe to the Uniform Standards of Professional Appraisal Practices
(USPAP). Violation of these standards results only in administrative
penalties. Federal law should define violations of USPAP as criminal,
enabling Federal (and, by extension, State) prosecutions when
appraisers are found to be complicit in fraudulent transactions.
Related to this is the FIRREA provision allowing States to make
appraiser licensing optional. It is probably no accident that the
States with the highest rates of property flipping and predatory
lending are license-optional States, such as Maryland. We believe
FIRREA should be amended to eliminate that choice.
Restore FHA appraiser panels and a local appraisal review process
The elimination of the appraiser panels and the local review of
appraisals by HUD are likely two major reasons that appraisal fraud
increased dramatically after 1996. The VA did not make this change and
has experienced only a fraction of the problem that exists with FHA-
insured properties. Direct assignment of appraisal work to FHA-approved
appraisers by mortgage lenders subjects appraisers to potential lender
pressure to ``come up with the right value''--that is, values that will
support the contract sale price of the property. Some appraisers are
vulnerable to this pressure, fearing their work pipeline will be cut
off by the lender if they do not cooperate.
FHA should go back to the system used by VA--a HUD approved
``appraiser panel'' with appraisers assigned on a rotating basis by
FHA.
In addition, FHA needs to institute a local appraisal review
system. Currently, appraisals for FHA loans are sent to far distant
review appraisers who are not familiar with the Baltimore market. Those
of us who live here understand that the distance of a few blocks on a
map can put you in very different real estate market conditions. Unless
you have this local geographic perspective, you are unlikely to pick up
bogus comparable sales used by some unscrupulous appraisers. FHA needs
local review if it is to cut down on appraisal fraud in its programs.
Re-evaluate the lender direct endorsement system
The direct endorsement system allows the lender to certify that it
has underwritten the loan in accordance with all FHA requirements
without further review by FHA. Unfortunately, as is often the case, a
few bad apples can spoil the barrel. The direct endorsement system has
allowed many bad loans which in no way meet FHA underwriting standards,
to make their way into FHA's portfolio.
While FHA's Credit Watch System can eventually catch lenders with
high foreclosure rates and lead to their eventual loss of privilege to
be a direct endorsement lender or to be banned from FHA programs, this
is only an after-the-fact method of enforcement. By the time it is
caught, the damage has been done.
We believe FHA's direct endorsement system needs to either be
eliminated, or substantially modified to assure the bad actors cannot
participate.
Hold settlement agents accountable
Fraudulent real estate transactions can only occur with the
collusion of a number of parties, or at least the willingness of some
parties to look the other way. Title companies also need to be held
accountable. The Federal Real Estate Settlement and Procedures Act
(RESPA) requires that settlement agents verify that the cash attributed
to the buyer toward purchase is in fact money brought by the buyer to
the transaction. However, there are no penalties for failure to do so.
RESPA should be amended to provide for penalties against title agents
who fail to make the necessary verifications of the financial details
shown on the settlement sheet.
Initiate mandatory pre-purchase counseling
On a pilot basis, a Baltimore neighborhood, perhaps Belair-Edison,
should be designated wherein every first time homebuyer seeking an FHA
loan would be required to complete counseling prior to home purchase.
Foreclosure rates in this neighborhood would be compared with those in
comparable neighborhoods where counseling is not required in order to
determine the effectiveness of this effort.
Establish stringent standards for investor purchasers of HUD properties
Investors with criminal backgrounds or with a record of shoddy
property management or maintenance practices should not be allowed to
purchase HUD properties. We are in full agreement with Ken Strong's
recommendation that pre-qualification standards be set for investors
who want to purchase FHA foreclosed property. HUD needs a system to
assure that the bad guys do not use FHA property as a resource to
continue their illegal business practices.
Provide legislative authority for FHA to require mortgage reductions
As part of its effort to pilot remedial measures in Baltimore, HUD
said it would demand that lenders reduce mortgages to appropriate
levels when it found loans that exceeded 120 percent of fair market
value. Unfortunately, lenders refused to voluntarily make the mortgage
reductions, and FHA apparently has no authority to force them to do so.
Adding insult to injury, if those inflated mortgages then end up in
default and foreclosure, FHA must make good on the entire mortgage
amount through the insurance fund.
This needs to be changed. As it stands, lenders have no incentive
to be more careful in checking values on lending, and secondary market
purchasers have no incentive to do more due diligence with regard to
the loans they are purchasing.
Ban FHA insurance payments to disqualified lenders.
In the course of investigating predatory lending, HUD has
determined that some lenders should be banned from its programs.
However, claims by those lenders for transactions which took place
prior to their disbarment, are still honored by FHA. One of the
penalties for banishment from FHA programs because of fraudulent
lending practices should be an ability by FHA to decline to pay further
claims.
Assure enough review appraisers to make timely reviews of cases
referred for determinations of inflated mortgages
We are very pleased with the recent HUD response to our plea to
look again at the more than 500 cases of possible mortgage fraud which
had been referred by the advocacy organizations and attorneys. This
second review has resulted in determinations that a number of borrowers
previously rejected for assistance have now been determined to be
eligible for FHA's victim assistance programs.
However, the initial review of cases and the re-reviews were
hampered by the unavailability of sufficient review appraisers on the
HUD list. This led to long waits on determinations. This is
unacceptable as the affected households are in a crisis situation and
may not be able to hold out for long periods of time without knowing if
help is on the way.
In closing, these reforms would go a long way in addressing the
flipping problem and we are committed to remaining vigilant to attack
new schemes and making additional recommendations as appropriate.
Senator Mikulski. Thank you very much.
Now we turn to Laurie Maggiano, who Secretary Martinez has
personally designated as his liaison to the Baltimore predatory
lending task force. We understand from all concerned that you
have really been very actively engaged in this and express our
thanks to Secretary Martinez for it.
Ms. Maggiano. Thank you very much.
Senator Mikulski. So now let us hear what you found and
where you think we need to go.
Senator Sarbanes. The Secretary very graciously placed her
in the frying pan, I think.
Senator Mikulski. Well, I do not know if you thank the
Secretary, but we do.
STATEMENT OF LAURIE MAGGIANO, DIRECTOR, ASSET
MANAGEMENT AND DISPOSITION, SINGLE FAMILY
DIVISION, DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT
Ms. Maggiano. Well, first of all let me say that the
Secretary has asked me to thank both of you for the opportunity
to come before you today to describe the recent progress that
both HUD and the task force have made since your meeting with
him.
In April of last year, at your urging, HUD convened the
predatory lending task force and last month at a meeting with
both of you Secretary Martinez reaffirmed the Department's
commitment to work with the task force and he promised some
very specific and swift action on a number of issues. My
remarks today will focus on HUD's progress on those issues, as
well as some other priorities of the task force.
During that April 3rd meeting, you suggested that a senior
HUD official from headquarters be appointed to work with the
Baltimore task force on a regular basis and, despite the fact I
knew I would be on the griddle with the spotlight, in your
words, Senator, I was honored when the Secretary asked me to
assume that responsibility.
For the last 4 weeks I have been dedicated nearly full-
time, heading a team of 15 senior staffers representing program
development, the Philadelphia Homeownership Center, the Office
of General Counsel, and Quality Assurance Division of HUD. The
Secretary has also asked his Special Counsel, Bryant Applegate,
to monitor our progress and to keep him personally informed.
This is a significant commitment of resources and it
demonstrates the importance that the Secretary places on the
outcome of the work of the task force.
Immediately following the April meeting and again at your
request, the HUD team met with other task force participants to
redefine criteria that had been used to evaluate 560 loans that
had been referred as potentially predatory. Our first action
was to notify mortgage servicers to suspend foreclosure actions
on the loans in this group that were in default and to suspend
eviction actions on those loans that had already been
foreclosed. These suspensions will continue to be in effect
until the task force completes the re-review to determine which
loans are overvalued and which borrowers can be assisted.
HUD's initial review approach had been to aim for a burden
of proof that would support enforcement against the
perpetrators and therefore it was to some extent purposely
narrow. The re-review parameters focused on borrower assistance
rather than enforcement. The expanded parameters are not
limited by zip code, but encompass all of Baltimore City. The
eligibility date was pushed back to January 1st, 1997, and the
review was expanded to focus on overvaluation as well as simply
flipping.
Using information available to us, the HUD team has now
completed a re-evaluation of all 560 cases. 225 of those
borrowers did purchase homes that were overvalued. Of
particular note are the 41 cases referred for re-review by
Senator Mikulski, and of these 21 met the task force criteria
for overvaluation and assistance will be provided to those
borrowers. A list of the loans that did not meet our very broad
redefinition of overvaluation has been delivered to the
nonprofit task force participants with the request to them to
provide us with any additional supplemental information that
they may have that would support an overvaluation
determination.
HUD is committed to work with the task force on a case by
case review so that no homeowner is arbitrarily denied
assistance. Assistance is being provided to borrowers by HUD
and the task force, though the type of relief available is
dictated by circumstances unique to the borrower and the
property. To date, the following assistance has been or is
being provided:
Foreclosure suspensions are enforced. Twelve borrowers have
received relocation assistance checks. Mrs. Charlotte Ware is
receiving funds from HUD to reinstate her mortgage and cure her
delinquency, and these are funds she will not have to repay.
Mrs. Sheila Marabell will be able to retain possession of her
property following foreclosure through a lease-purchase from
St. Ambrose, and we thank St. Ambrose very much for working
with us to make that available to this homeowner. Without them
it would not have happened.
One hundred seventy eight credit explanation letters have
been provided by HUD and 93 borrowers have recently received
letters--they were mailed last week--providing them with the
option of either relocation assistance, loss mitigation to
reinstate their loans, or consideration for a property repair
buyback option. I should say in all honesty that the number of
borrowers who are going to be able to qualify based on the
condition of their title and their credit history for the
property repair buyback option is going to be small. That is a
great disappointment to all of us.
Beginning next week, HUD is detailing staff to the
Baltimore office to work directly with these 93 borrowers and
the task force counseling partners to expeditiously review each
borrower's circumstance and provide available assistance.
Senators, the HUD staff has been working with many of these
borrowers for months. We have heard their stories. We have
visited their homes and are intensely aware of the real and
personal tragedies that they and their families have suffered.
No one at HUD takes their suffering lightly.
One of my greatest frustrations and one that I know is
shared by everyone on the task force--and you heard it this
morning--is the limited ability that the Department has to
provide any direct assistance to the these homeowners. We do
recognize the sense of urgency that you alluded to earlier and
are committed to working with you to find the means that we
need.
As it is, the Department is pushing the envelope of its
statutory and regulatory authority by providing the level of
assistance that I have already described. One notable area of
weakness is our ability to provide assistance to borrowers that
are either current or only slightly delinquent on their
mortgages, but who need help to pay for emergency property
repairs. As an interim measure, HUD has proposed that the City
of Baltimore re-allocate $1.5 million from the pending
neighborhood initiative grant that you announced this morning
and earmark this money for assistance to borrowers affected by
predatory lending. But this will not go very far. In the near
future other sources of funding will be necessary to provide
for repairs and help borrowers permanently reduce overinflated
debt.
While borrower assistance has provided the greatest
challenges and will continue to be an area of focus and
concern, HUD believes that the most effective long-term
solution to predatory lending is prevention. Since the
initiation of the task force, HUD has focused, its prime area
of focus has been on prevention.
One of the lessons learned is that predatory flipping
cannot happen without corrupt appraisers. During the past year,
HUD has implemented a wide-ranging appraisal reform initiative
that is already helping to prevent predatory appraisal
practices by requiring licensing and testing of all FHA
appraisers. This is especially important in Maryland, where
there is no appraisal licensing requirement. The appraisal
reform initiative also expands the appraisal report to include
a full description of property condition and requires that the
borrower receive a copy of the property condition report prior
to closing.
Finally, it provides a quality assurance statistical review
of 100 percent of FHA appraisals that are made for origination
purposes.
Another preventative measure is a provision of the new
government-supervised enterprise rule that became effective in
January which specifically disallows housing goals credit for
loans with predatory features. Soon to be issued is a proposed
rule that will make flipped loans ineligible for FHA insurance.
Also under consideration are policy and regulatory changes that
would require mortgagees to use fraud prevention tools to
screen new applications for indications of flipping, place
strict limits on costs and fees that can be charged in the
origination of an FHA loan, and provide increased authority to
hold mortgagees more accountable for the quality of the loans
that they purchase and/or service.
Consumer outreach and education is another important
element of prevention. HUD has provided a grant to ACORN to
produce brochures and develop consumer education materials
warning of predatory practices for use in housing counseling
and at home buyer fairs. These materials will be tested here in
the Baltimore laboratory, but will eventually be made available
on a nationwide basis.
Upcoming Baltimore community outreach events include
training for all Baltimore area nonprofits on indicators of
predatory lending, a series of bimonthly consumer education
programs to begin later this month at the Pratt Library, and a
June 16 trolley ride homeownership event, and a bank fair on
June 30. That is just indications of some of the consumer
outreach activities that are currently scheduled, but this will
be an ongoing process.
Also, through the neighborhood initiatives grant HUD is
funding a predatory lending clearinghouse that will work
directly with HUD staff on a review of the new predatory
lending referrals that we have alluded to earlier in the
testimony.
Following closely behind prevention activities are HUD's
efforts to get the perpetrators of such practices off the
streets. In the past year the Department has initiated a wide
range of enforcement actions against more than 140 individuals
and organizations involved in FHA-insured loans in Baltimore.
The origination and servicing practices of 54 lenders were
reviewed, resulting in 13 referrals to the mortgagee review
board, eight lenders who were terminated or proposed for
termination under the credit watch initiative, and four more
who have been placed on warning status. Ten lenders are under
investigation by the Office of the Inspector General and 12
lenders are on a probationary status that requires a 100
percent post-endorsement technical review of the loans that
they originate.
Additionally, two real estate brokerage firms have been
barred from the purchase and sale of HUD homes, 15 appraisers
have been removed from the FHA roster, and 32 individuals have
been referred for debarment, meaning that they will not be able
to participate in any HUD program.
Senator Mikulski. Is this in Baltimore or nationwide?
Ms. Maggiano. This is in Baltimore.
This is a strong record of accomplishment, but we know that
there is a lot more to do. For example, in April a new task
force subcommittee was established to explore strategies to
better target the marketing of HUD-owned properties. I attended
the first subcommittee meeting on May 3rd along with Cheryl
Walker, the HUD REO director responsible for properties in
Baltimore. During that meeting Cheryl agreed to several actions
that will increase opportunities from owner-occupied sales of
HUD homes.
Specifically, we will expand the time period during which
owner occupants have the exclusive right to bid on properties
before they become available to investors. We will partner with
nonprofit members of the task force to develop a property
repair pilot to ensure that more properties are in move-in
condition, and we will sell those repaired properties
exclusively to owner occupants.
Finally, we have encouraged the city and nonprofit partners
to submit a proposal for the purchase of HUD-owned properties
that is consistent with the goals of the healthy neighborhoods
initiative. Harold Young, our senior community builder in the
Baltimore office, is helping to coordinate this proposal.
Throughout HUD's year-long participation in the Baltimore
predatory lending task force, much good work has been
accomplished, but there is much left to do. Let there be no
mistake that Secretary Martinez and the U.S. Department of
Housing and Urban Development are fully engaged in the effort
to combat predatory lending in Baltimore City and across
America. We will continue to work aggressively on borrower
assistance, consumer education, prevention, and enforcement.
But HUD does not stand alone in this effort. It will require
the combined energy and contribution of all task force
partners, as well as conventional lenders and mortgage
insurers, to protect the citizens of Baltimore from predatory
and abusive lending practices.
PREPARED STATEMENT
We wish to thank both of you for your continued attention
to this cause and we look forward to working with you and your
staffs in the future. Thank you very much.
[The statement follows:]
Prepared Statement of Laurie Maggiano
Introduction
I am Laurie Maggiano, and Secretary Martinez has asked me to thank
you for the opportunity to come before you today and describe recent
progress that has been made by HUD and the Baltimore Predatory Lending
Task Force.
The Federal Housing Administration plays a key role in expanding
homeownership opportunities by providing mortgage insurance to nearly
130,000 Baltimore families. However, many low and moderate income
neighborhoods in Baltimore have been destablized by predatory and
abusive lending practices, turning the American dream of homeownership
into a nightmare for families who have been duped into purchasing homes
at inflated prices or with significant undisclosed repairs.
In April of last year, at the urging of Senator Mikulski, HUD
convened the Predatory Lending Task Force to involve a diverse group of
citizens, elected officials, community advocates, legal and government
staffers in the task of combating predatory practices in Baltimore
City. Last month at a meeting with Senators Mikulski and Sarbanes,
Secretary Martinez reaffirmed the Department's commitment to the work
of the Task Force and promised specific and swift action on a number of
issues. My remarks today will focus on HUD's progress on those issues
and other priorities of the Task Force.
Resource Commitment
During your April 3, 2001 meeting with the Secretary, you suggested
that a Senior HUD official from Headquarters be appointed to work with
the Baltimore Task Force on a regular basis. I was honored when the
Secretary asked me to assume this responsibility. As Single Family
Division Director of Asset Management and Disposition, I have policy
responsibility for loan servicing, loss mitigation, foreclosure and HUD
owned property sales. The important issues before the Task Force are
directly in my sphere of responsibility, and I have the perspective to
apply lessons learned from the Baltimore laboratory to refinement of
national policy.
For the past four weeks I have been dedicated nearly full time to
heading a team of 15 senior staffers from Program Development, the
Philadelphia Homeownership Center, Office of General Counsel, and the
Quality Assurance Division. The Secretary also asked his Special
Counsel, Bryant Applegate to monitor progress and keep the Secretary
informed. This is a significant commitment of resources, and it
demonstrates the importance the Secretary places on the outcome of the
work of the Task Force.
Foreclosure Suspension and Re-review Completed
Immediately following the April meeting and again at your request,
the HUD Team met with other Task Force participants to redefine
criteria to be used to reevaluate the 560 loans previously reviewed.
Our first action was to notify mortgage servicers to suspend
foreclosure actions on loans in this group that were in default and to
suspend eviction actions on those loans that had already been
foreclosed. These suspensions will be in effect until the Task Force
completes its re-review to determine which loans were overvalued and
which borrowers can be assisted.
HUD's initial review approach had been to identify flipping
activity and aim for a burden of proof that would support enforcement
against the perpetrators. Working with the Task Force we developed re-
review parameters focused on borrowers assistance rather than
enforcement, and overvaluation rather than flipping. All 560 cases have
been reevaluated based on these parameters:
--FHA insured loans on properties in Baltimore City
--Origination date on or after January 1, 1997
--Appraisal indicates that the property was overvalued by at least
120 percent or $10,000, OR
--An automated value analysis indicates that the purchase price
exceeded an acceptable range of fair market value for other
neighborhood homes at time of origination, OR
--Evidence of grossly deficient property condition at origination.
Based on information available to HUD, the re-review identified 225
borrowers whose properties are believed to have been overvalued. A list
of the loans that did not meet the very broad criteria for
overvaluation has been delivered to the members of the Task Force who
generated the initial case referrals, with a request to provide HUD
with any additional information that would support a finding of
overvaluation.
Of particular note is the disposition of the 41 cases referred for
re-review by Senator Mikulski. Of these, 21 met the Task Force criteria
for overvaluation and assistance is being provided to the borrowers as
more fully described below.
Borrower Assistance Completed and In Progress
Affected borrowers (plus others to be added in the future) are
being provided some assistance by HUD and the Task Force, though the
type of assistance available is dictated by circumstances unique to the
borrower and the property. To date, the following assistance has been/
is being provided:
--Foreclosure suspensions enforced
--178 credit Explanation Letters mailed to borrowers
--12 checks have been issued to provide relocation assistance
--1 loan is being reinstated using HUD funds (partial claims)
--1 borrower has qualified to retain possession through foreclosure,
sale to St. Ambrose and subsequent lease purchase.
--93 borrowers have been offered the option of (1) relocation
assistance (2) loss mitigation or (3) or consideration by Task
Force housing counseling partners for the occupied conveyance/
property repair/buy back option.
Though the available assistance options do not fully address the
damage suffered by many of these borrowers, it is important to
understand that the Department is pushing the envelope of its statutory
and regulatory authority in providing this level of assistance. One
notable area of weakness is our ability to provide assistance to
borrowers who are either current or only slightly delinquent on their
mortgage but who need help to pay for emergency property repairs. The
HUD team is working aggressively with the Task Force to leverage the
Department's commitment with resources available through the City of
Baltimore and other community based organizations to offer grants or
low interest loan for property repairs. Specifically we believe there
is opportunity to reallocate up to $1.5 million from the pending
Neighborhood Initiatives Grant from HUD and earmark this money for
assistance to borrowers affected by predatory lending.
New Case Referrals
The City of Baltimore has established a Predatory Lending
Clearinghouse and awarded a contract to St. Ambrose Housing Aid Center.
The new evaluation criteria agreed upon by the Task Force is as
follows:
--Property is located in Baltimore City
--The loan is currently insured by FHA and was originated later than
January 1, 1997
--The borrower is not under investigation by the Inspector General or
Attorney General for complicity in a predatory scheme.
--The property was resold at least once within 12 months of loan
origination at a price at least 120 percent of the original
sale price (or $10,000 more). OR
--The property was in grossly deficient physical condition at the
time of origination, and this was fraudulently misrepresented
on the appraisal or loan documents.
In concert with St. Ambrose, GOVAN and ACORN, the HUD team has
developed effective, written procedures for the Clearinghouse,
including a uniform intake process, a referral tracking log and clear
delineation of responsibilities to ensure that borrower concerns about
predatory activities are evaluated quickly and fairly. These procedures
are in place, and new referrals are being processed.
Community Outreach
The HUD team is focusing a significant level of attention on
prevention of predatory lending activities through consumer education
and community outreach. ACORN continues to be a valuable partner in
this effort. Using funds provided in a special discretionary grant from
HUD, ACORN is preparing brochures for general distribution, writing a
predatory lending module for existing homebuyers counseling courses,
developing curricula for consumer and non-profit organization training
and developing materials for use at Homebuyer Fairs. All of these
materials will be tested in Baltimore but will eventually be made
available on a nationwide basis. During the next 60 days, HUD, ACORN
and other Task Force Members are cooperating on these community
outreach events:
--May training for all Baltimore Area non-profits on indicators of
predatory lending and Clearinghouse referral procedures
--Bi-monthly consumer education programs at the Pratt Library
beginning in May
--June 16th Trolly Ride Homeownership event
--June 30th Bank Fair.
Ownership Focus in the Disposition of HUD Homes
The Department is pleased to report that, consistent with an
overall decrease in foreclosures nationwide, the number of properties
foreclosed in Baltimore is also down for the first half of fiscal year
2001 by nearly 15 percent over the same period last year. Still, there
are currently more than 600 HUD Owned homes in Baltimore City. In
April, a new Task Force subcommittee was established to explore
strategies to better target the marketing of these properties so that
they will be available to owner occupants. I attended the first
subcommittee meeting on May 3, 2001 along with Cheryl Walker, the HUD
REO Director responsible for properties in Baltimore.
During the meeting Cheryl agreed to expand the time period during
which owner occupants have the exclusive right to bid on properties and
to reinstate that exclusive bid period each time a property is re-
listed with a price reduction. We also offered to partner with the non-
profit members of the Task Force to pay for repairs on properties in
their catchment areas if they are willing to identify and supervise
qualified contractors. Finally, we discussed creating more flexibility
within existing discounted sale programs to better meet community
needs. HUD has encouraged the City and non-profit partners to submit a
proposal for purchase of HUD owned property that is consistent with the
goals of the City's Healthy Neighborhoods Initiative. Harold Young,
Senior Community Builder in the Baltimore office is helping to
coordinate this proposal.
conclusion
Throughout HUD's year-long participation in the Baltimore Predatory
Lending Task Force much good work has been accomplished. This
testimony, focused as it is on the progress of the past 4 weeks, did
not recount the impressive strides made in identification of predators
or the enforcement actions already taken or in progress against them.
Neither did it focus on preventative actions being considered by FHA
and the mortgage industry to make it harder to commit predatory acts.
Let there be no mistake that Secretary Martinez and the U.S.
Department of Housing and Urban Development are fully engaged in the
effort to combat predatory lending in Baltimore City and across
America. But HUD does not stand alone in this effort. It will require
the combined energy and contribution of all Task Force partners to
protect the citizens of Baltimore from predatory and abusive lending
practices. Thank you.
______
Baltimore Predatory Lending and Flipping Task Force Year One
Accomplishments
Borrower Assistance
Since April 2000, the U.S. Department of Housing and Urban
Development, in conjunction with the Baltimore Task Force has received
and reviewed 557 cases of alleged predatory lending in Baltimore City.
Of these 227 have met the Task Force definition of overvaluation and
are being provided some type of assistance:
--12 borrowers have received relocation assistance checks
--1 borrower is receiving funds from HUD to reinstate her mortgage
and cure her delinquency
--1 borrower has qualified to retain possession of her property
following foreclosure
--178 Credit Explanation Letters have been provided by HUD
--93 borrowers have received letters detailing the assistance options
available to them.
Prevention Actions
While borrower assistance will continue to be an area of activity
and concern, HUD believes the most effective long term solution to
predatory lending is prevention and has made this a primary focus. One
of the early lessons learned by the Task Force is that predatory
flipping cannot happen without corrupt appraisers. During the past year
HUD has implemented a wide ranging Appraisal Reform Initiative that
will prevent appraisal fraud by:
--requiring licensing and testing of FHA appraisers
--expanding the appraisal report to include a full description of
property
--condition and the requirement that the borrower receive a copy of
the property condition report prior to closing
--providing for 100 percent statistical review of every FHA
appraisal.
Other preventative measures include a provision of the new GSE Rule
that became effective in January, which specifically disallows housing
goals credit for loans with predatory features, and a proposed rule now
in the concurrence process, that will make flipped loans ineligible for
FHA insurance.
Also under consideration are policy and regulatory changes that
would require mortgagees to use fraud prevention tools to screen new
applications for indications of flipping; place strict limits on cost
and fees that can be charged in the origination of an FHA loan; and
provide authority to hold mortgagees more accountable for the quality
of the loans they purchase and/or service.
Consumer Outreach
Consumer outreach and training is another important element of
prevention. HUD has provided a grant to ACORN to produce brochures and
develop consumer training materials for use in housing counseling and
at homebuyer fairs. These materials will be tested in Baltimore but
will eventually be made available on a nationwide basis. Upcoming
Baltimore Community Outreach events include:
--May training for all Baltimore Area non-profits on indicators of
predatory lending and Clearinghouse referral procedures
--Bi-monthly consumer education programs at the Pratt Library
beginning in May
--June 16th Trolly Ride Homeownership event
--June 30th Bank Fair.
Through the Neighborhood Initiatives Grant program, HUD is also
funding a Predatory Lending Clearinghouse that will be work directly
with HUD staff on the review of new predatory lending referrals in the
Baltimore area.
Enforcement Actions
The Department initiated a wide range of actions against more than
140 organizations and individuals involved in FHA-insured loans in the
Baltimore area. The origination and servicing practices of 54 lenders
have been reviewed resulting in:
--13 referrals to the Mortgagee Review Board for action
--8 Lenders terminated, or proposed for termination under the Credit
Watch initiative; 4 placed on warning status
--10 lenders under investigation by the Office of the Inspector
General
--12 lenders placed in 100 percent post-endorsement technical review
status.
Additionally, 2 real estate brokerage firms have been barred from
purchase and sale of HUD Homes, 15 appraisers have been removed from
the FHA Roster and 32 individuals have been referred for debarment,
meaning that they will not be able to participate in any HUD program.
Continued Commitment
Throughout HUD's year long participation in the Baltimore Predatory
Lending Task Force much good work has been accomplished but there is so
much left to do. Secretary Martinez and the U.S. Department of Housing
and Urban Development are fully committed to the effort to combat
predatory lending in Baltimore City and across America.
Senator Mikulski. Thank you for that very thorough
contribution.
We now want to turn to Mr. Stephen Schenning the Acting
U.S. Attorney from the State of Maryland, to tell us
essentially where we are on the Federal prosecution of property
flipping.
STATEMENT OF STEPHEN M. SCHENNING, ACTING UNITED STATES
ATTORNEY, DISTRICT OF MARYLAND
Mr. Schenning. Thank you, Senators. Thank you, Madam
Chairman and Senator Sarbanes. I am pleased to be here this
morning to report to you on what Federal law enforcement is
doing in this area.
Senator Mikulski. Do you want to pull that microphone up?
Mr. Schenning. I want to tell you what Federal law
enforcement is doing in this area of mortgage flipping.
Together with the FBI, the Postal Inspection Service, the
Internal Revenue Service, and of course HUD IG, our office
formed a task force to address criminally the problem of
flipping. We assigned about ten Assistant United States
Attorneys in Baltimore to address this. As Mr. Strong
mentioned, Assistant U.S. Attorney Joe Evans is leading,
chairing that effort in Baltimore.
To date we have opened about 40 different investigations
into mortgage flipping. That gives you some idea the breadth of
the problem. To date we have charged 40 defendants, we have
convicted 15, 2 have been acquitted, and there are 23 pending.
Of those 23 individuals who are pending, we filed criminal
informations against those. A criminal information instead of
indictment indicates that there have been negotiations and
there is a likelihood that the case will be resolved by way of
a guilty plea.
In terms of breakdown of defendants that I just mentioned,
16 of those are flippers, the person behind the deal, the
person who is buying the houses at a low price and then selling
them quickly at a higher price and is usually the person that
is orchestrating the whole scheme. Sixteen of those have been
charged, 8 convicted, 8 pending trial. There have been 4
mortgage brokers charged, 3 have been convicted, 1 is pending.
Appraisers, there have been 3 charged, 1 convicted, and 2
acquitted. Loan officers, 3 have been charged, they are all
pending. There have been 11 straw purchasers, with 1 convicted
and 10 pending. There have been 4 settlement agents, 2
convicted and 2 pending. Two of those, I might add, of the
settlement agents, were licensed attorneys.
In terms of sentencing, the eight defendants that have been
convicted that have been sentenced, one received probation, one
who cooperated substantially with law enforcement received an
18-month sentence, and the other six received sentences between
30 and 36 months. Of course, in the Federal system that is no
parole, so for white collar offenses those are substantial
sentences.
In one of the cases, the Beeman investigation, the
sentencing judge agreed with our analysis that an enhancement
of the sentence ought to be made. In other words, the sentences
that two of the defendants got were higher than the guidelines
ordinarily called for because of the impact on the community.
This was in the north of Patterson Park area and the government
argued and the judge agreed that the impact was so
destabilizing that that justified an enhancement.
There was also in that case, the government tries to, when
it can prove restitution, we try to obtain that and get it
ordered by the court. In two instances we were able to
negotiate payments by the convicted defendants to the Patterson
Park Community Development Corporation in order to help fund
that agency's work at restoring that part of Baltimore City and
to undo in small measure the harmful effects that flipping has
inflicted on that neighborhood.
I also want to mention, we have a Greenbelt office in the
other part of the State and that office has been busy, too. In
the past 18 months, the subdivision attorneys, U.S. Attorneys,
have obtained five indictments. In my remarks I submitted I
indicated four indictments. I found out over the weekend we
actually unsealed another indictment, so the proper count is
five indictments against 11 individuals involved in mortgage
fraud schemes.
Senator Sarbanes. Where is that located in the southern
district?
Mr. Schenning. Prince Georges County.
Senator Sarbanes. Prince Georges County.
Mr. Schenning. Yes, sir.
There are indications and it is true that Baltimore is not
unique in this mortgage flipping, that other jurisdictions, New
Jersey, Milwaukee, St. Louis, and Los Angeles just to name a
few, have also been hit. But in terms of our impression, we
think that Baltimore has been hit harder. It is difficult to
say with any, certainly for a prosecutor to say with any
certainty, why Baltimore is more susceptible, but we think that
there are a few features about Baltimore that may enable this
scheme.
First, the Baltimore row houses create an opportunity to
make it appear that individual houses and individual
neighborhoods are comparable when they are not. I am sure both
Senators understand you can go three or four blocks in a given
place in Baltimore City and the values are quite different just
a few blocks away.
The house market in Baltimore has traditionally been less,
I think, than other places, so that out of town lenders, some
of the--most of these houses involve FHA or HUD type loans, but
there is also a sub-prime market that is involved. The lenders
in the sub-prime market tend to be from out of State. So that
when they are reviewing materials, looking at a house that is
perhaps valued at $50,000, that will not leap off the page at
somebody from Ohio or Chicago and think that it is perfectly
reasonable, not realizing that $50,000 may be $30,000 inflated.
Then of course, once this flipping starts it really can
pollute, if you will, the whole database. Appraisals rely in
large measure to comparables. You compare other houses in the
neighborhood. Once these flippers start, and we have had a few
instances of that, the same house, a house that was flipped was
then used as a comparable for another flip.
Senator Mikulski. Faux appraisals.
Mr. Schenning. Exactly. So that one actually acts as
polluting the whole database for people to come in and look.
We have opened about 40 investigations, as I have
indicated. We have about 25 still pending that we are still
working on.
I would like to make just two other points. That is that in
the earlier testimony from Mr. Strong and the other people up
here they were talking about the 600 block of North Robinson
Street. We charged and convicted Robert Beeman, who was
involved in activity there. We have pending charges by way of
criminal information against Walter Dirsh, George Schiafano,
Kay Realty, and just this Friday Andrew Bogdan. So just in that
one block, just the 600 block of North Robinson Street, our
office has gone after six individuals. So it gives you some
idea how pervasive and how destructive it can be, just the one
city block.
I also want to endorse in terms of what can you do about
it, prosecutors can prosecute. I think people understand you go
after people for fraud. But the one thing that we have seen,
and Mr. Graziano and Ms. Maggiano both echoed it, is the key
point in the whole process, at least from our view, is the
appraisal process. In every case that we investigate, in every
case that we have prosecuted, the sine quo non of the scam, it
does not work unless you have a faulty appraisal.
PREPARED STATEMENT
That is the point, it seems to me, in terms of prevention.
Of course, I am just a prosecutor. I am not here to tell the
experts how to do it. But if there can be more attention
focused on the appraisers, because the flippers cannot make it
work unless they have got that phoney appraisal. If someone
there is licensing through oversight at that part of the
process, I think that there can be effective oversight of this
problem.
I think, from a prosecutor's standpoint, that is where I
would start and that is where I would focus the attention.
[The statement follows:]
Prepared Statement of Stephen M. Schenning
Senator Mikulski and Members of the Committee: I am pleased to be
here today to report on the status of Federal prosecutions of property
flipping in Baltimore. The first subpoenas were issued in late February
of 1998. Since that time, the United States Attorney's Office, in
conjunction with the United States Postal Inspection Service, the
Federal Bureau of investigation, the HUD Inspector General, and the
Internal Revenue Service has opened some forty separate investigations.
These investigations invariably involve multiple individuals and
entities, and oftentimes, there is substantial and dizzying overlap. In
Baltimore, these investigations are monitored by approximately ten
different Assistant United States Attorneys who have full caseloads in
addition to the flipping matters. Nonetheless, in the past 2 to 3
years, Federal law enforcement has made significant and, I think,
commendable progress.
While I cannot comment on pending investigations, I can speak to
prosecutions that are in the public record. In that regard, let me
provide the following statistics:
Defendants charged................................................ 40
No. Convicted..................................................... 15
No. Acquitted..................................................... 2
No. Pending....................................................... 23
Of the 23 pending charges, 12 of those are charges which were filed
by Criminal Information.
Types of Defendants Charged and Convicted:
--Flippers--16 charged, 8 convicted, 8 pending
--Mortgage brokers--4 charged, 3 convicted, 1 pending
--Appraisers--3 charged, 1 convicted, 2 acquitted
--Loan Officers--3 charged, all of which are pending
--Straw Purchasers--11 charged, 1 convicted, 10 pending
--Settlement Agents--4 charged, 2 convicted, 2 pending. The two
convicted settlement agents are both licensed attorneys
So far, only 8 of the convicted defendants have been sentenced. One
of those defendants received probation, and one who cooperated with law
enforcement received an 18 month sentence. The others all received
sentences between 30 and 36 months, without parole. Where it was
possible to identify direct losses, restitution was ordered. In two
instances, we were able to negotiate payments by the convicted
defendants to the Patterson Park Community Development Corporation in
order to help fund that agency's work at restoring this part of
Baltimore and undoing many of the harmful effects that flipping has
inflicted on that very fragile part of the City. Indeed, in a number of
the cases we were able to convince the sentencing judge that enhanced
sentences were appropriate by reason of the impact that flipping has
had on the Patterson Park area.
Additionally, over the past 18 months, the Southern Division of the
U.S. Attorneys Office, located in Greenbelt, Md. has obtained 4
indictments against 7 individuals engaged in mortgage fraud schemes. We
have obtained five convictions to date. In one particularly complex
Greenbelt case, the defendant refinanced his own properties using
inflated appraisals, fictional lenders and phony pay off letters to
defraud unsuspecting lenders. The funds that this individual sought to
receive by way of this scheme amounted to over $500,000.
There are some other Federal prosecutions of mortgage flipping
across the country--some in New Jersey, Milwaukee, St. Louis, and Los
Angeles to name a few. Nonetheless, it is our impression that Baltimore
has been hit harder than other areas. It is difficult to know with any
certainty why Baltimore would be particularly susceptible, but our
general sense is that there are a few features that serve as enabling
circumstances. First, Baltimore's row houses create the opportunity to
make it appear as though individual houses and individual neighborhoods
are comparable when they are not. Additionally, Baltimore housing
prices appear modest to out-of-town investors and lenders who do not
realize that a house selling for ``only'' $50,000 north of Patterson
Park may be over-valued by $30,000. Finally, once the snowball starts,
it becomes an avalanche so that property databases become polluted with
flips thereby making additional flips appear to be normal transactions;
neighborhoods deteriorate because of vacancies and foreclosures,
thereby making more houses available to be snatched up by flippers; and
unethical business practices become so customary that any normal moral
compass that an appraiser, settlement agent or mortgage broker may have
becomes skewed.
I mentioned that we have opened about 40 separate investigations in
the last 3 years. About 25 of those still remain open, not counting
cases that have now been charged or concluded. Federal law enforcement
in general, and the United States Attorney's Office in particular,
views property flipping not only as a significant violation of Federal
fraud statutes, but also as a practice that leads directly to the
destruction of neighborhoods that are essential to the continued
vitality of cities like Baltimore. Putting a stop to these predatory
practices deserves as much prosecutorial effort as can be mustered, and
this Office is committed to that effort.
Senator Mikulski. Thank you very much, Mr. Schenning.
Moving along in our hearing, I am going to do some of my
first questions to you, Mr. Graziano. First of all, I just want
two general comments. Flipping is a national problem. The Mayor
said it. Secretary Martinez said it, Ms. Maggiano said it. The
policy solutions, either legislative or regulatory are so
enormous that we want to continue to use Baltimore as the
laboratory, recognizing that Baltimore is not the only city.
This is why we so appreciate your efforts, Ms. Maggiano, and we
also will continue to follow up.
In June there will be the HUD hearing before Appropriations
Committee and we will have one segment of our questions devoted
to this. Then I know Senator Sarbanes will be pursuing his
legislation.
Mr. Graziano, I am really hot on this prevention issue,
because when we hear of all the resources that are going into
cleaning up and clearing up, it shows why prevention is so
important.
Number one, I would like to ask from you a set of
recommendations on how we can prevent section 8 in its efforts
to move into homeownership. I do not want it here. I would like
it to be submitted to the committee in writing, in terms of the
prevention on section 8. That is the subject of essentially a
different type of hearing. But I believe Ms. Maggiano and
Secretary Martinez would be keenly interested in your
recommendations.
Second, your Baltimore City task force gave to Senator
Sarbanes and I a list of what HUD FHA promised under Secretary
Cuomo, what has happened and what needs to be happening. We
would like an update on that. So as I understand it, HUD
promised where the mortgages have been inflated it would be
conducting its own appraisal reviews on cases. You say what
needs to be happening is that FHA needs to deal with slow
review appraisal processes.
Has that improved or where are we on that?
Mr. Graziano. That has improved at this point, but we need
to make sure that there are adequate resources at HUD and FHA
dedicated to continue that. But it has improved.
Senator Mikulski. Well, Ms. Graziano, I know that is an
issue that will be an interest of yours.
The other issue was that after review FHA would insist
insured buyers who were found to have mortgages above 30
percent of appraised value to be able to be helped. Could you
tell us what happened there? That is recommendation number two.
Mr. Graziano. Yes, yes. My understanding is that HUD, FHA
has in fact dropped a number of the limiting conditions and is
looking at a much broader range. They are looking city-wide at
this point, rather than just the five zip codes, and they have
pushed the date back earlier, to an earlier date. I do not know
the exact date on the reviews.
Ms. Maggiano. It is January 1st, 1997.
Senator Mikulski. Well, we will come back. There are a
couple of other issues. One, that FHA would demand that lenders
reduce the inflated FHA-insured mortgages to the appropriate
levels, and if lenders refuse the mortgage--I am on page 2--
they would allow the borrower to sign over the deed to FHA and
FHA would resell the property back to the borrower at the
appropriate level.
Now, this is one of the core of our making whole efforts.
Could you elaborate on what you think has happened there and
what more needs to be done by either you or HUD.
Mr. Graziano. Well, my understanding is that HUD has made
these efforts in a number of cases. They have been resisted by
the lenders. They have refused to reduce the loans. As I
understand it, there is some lack of clarity as to whether FHA
has the current authority to impose that where the lender is
not willing to voluntarily do it.
I am not an expert on that particular section, but that is
the advice I am being given. I would say that----
Senator Mikulski. Well, Mr. Graziano, let us hold you there
and turn to Ms. Maggiano, because this is one of the pillars on
which our reform must stand.
Could you comment? Do you have that chart, ma'am? Could my
staff take that to Ms. Maggiano? You will see what it is. You
are going to like this chart. I think you are the kind of lady
who likes these Powerpoint checklists to get things done.
Ms. Maggiano. I certainly see that written there, Senator
Mikulski. What I would say is that FHA perhaps overcommitted
what it was able to deliver. The section 203(e) of the National
Housing Act has a clause called the incontestability clause,
and that clause prevents us from denying an insurance claim--
excuse me. That prevents us from forcing a mortgagor to cram
down a mortgage by threatening to deny the insurance claim if
they do not. That was, unfortunately, really the bitter pill
that we have learned over the last few months in trying to
resolve the Baltimore problem.
We had great hopes initially that we would be able to go
back to mortgagees and ask them to do the right thing. We
demanded that they do that, and they pointed to this clause and
said: You cannot make us and we are not going to.
Senator Mikulski. So essentially, Ms. Maggiano, you need
new statutory legislation? You need new statutory authority?
Ms. Maggiano. In order to use the insurance fund to pay
borrower claims and to cram down mortgages or to require
mortgagees to do that, it would require statutory authority.
Senator Mikulski. Well, again, this is very complex
information and I would appreciate if you could furnish to
Senator Sarbanes and myself what your legal counsel and others
have told you to really correct this situation, so we can
ponder it and, again working with our Republican colleagues, I
certainly will be discussing this with Senator Bond.
I must comment, though Senator Bond is not at this hearing,
he finds this whole predatory lending to be as despicable as
us. So this is not Democrat-Republican. This is Team USA here.
So I think we would appreciate getting your recommendations
or a white papers so that the authorizers can ponder it and we
can look at it as their appropriator colleagues. I think this
would be a very important tool for us to get to it.
Senator Sarbanes, do you want to pick up?
Senator Sarbanes. Well, right on this point actually. First
of all, we are awaiting from HUD your recommendations as to the
statutory changes you need in order to enhance your authority
to deal with some of these problems.
Second, I want to encourage HUD to push the envelope on its
authority under its existing legislation. For example, you had
a credit watch situation in which your authority was
challenged, as I understand it, to disqualify lenders; is that
correct?
Ms. Maggiano. I believe so, sir.
Senator Sarbanes. That case went against you at the initial
level, but was reversed on appeal. So at the appeals level your
authority was upheld. So in a sense, on that issue at the
moment you have a clear street and we urge you to press forward
with that. We would be happy to talk with counsel at HUD about
trying to move in other areas and sort of not backing off
simply because some of the private parties say, well, we are
not going to be cooperative.
Now, in the one instance, of course, you were upheld by the
appeals court in the end, and it might happen in other areas as
well. We need to look at that. In any event, we also need to
discuss with you what statutory changes you think are
necessary. But we have to dry up this pool that enables people
to function this way.
Mr. Graziano, I want to ask you, what is the city's
strategy to deal with the problem in the non-FHA arena? We are
focusing on the FHA and we have got Ms. Maggiano now as the
point person and we are very pleased that the Secretary has
come through so quickly on that assurance that he gave to us
about designating someone at the central office. We think that
is very important, that we now have a coordinator to pull all
this together.
A lot of the focus, of course, has been on the FHA and HUD
because that is a public agency and we deal in a public
dimension in it. But this problem obviously, as we hear from
our local people, extends out beyond HUD. So you are dealing in
other areas where there is no HUD presence, as I understand it.
What about that?
Mr. Graziano. Well, that is obviously a tougher one. We do
not have quite the hook there that you do with the FHA program,
even with some of the current limitations. But I think it
starts with a basic education program that we have talked
about, the mass education program, the specific individual
counseling for home buyers which we are trying to make
mandatory, we are making mandatory in all of our programs.
I made reference to a section 8 homeownership program that
we will be creating. An important element of that will be
ensuring that people are fully educated. Of course, because the
dollars will go through our agency through section 8, we will
be able to ask some of the questions, as you suggested earlier,
where HUD could make that half-hour phone call, FHA could,
before a loan was closed. We can certainly go through those
kinds of initiatives, those kinds of questions, rather, under
the section 8 homeownership initiative.
I think there are also some other very basic things that we
need to do that touch on this program, but that have a broader
impact. That is to say, our code enforcement program is one
that we are beefing up more and more each day and week.
Fundamental code enforcement I think holds owners accountable.
Those would-be speculators and so forth would be, we hope,
discouraged from participating if they know that there is a
greater watch over the condition of properties.
The same thing would be said on the section 8 side for
renters, the rental section 8 program also, much stricter
inspections and holding landlords accountable.
So there is a lot of up-front education on the one hand,
helping wannabe home buyers, making sure that they have the
wherewithal, that they can sustain the homeownership, but also
holding--discouraging the involvement in our market of
speculators who have no interest in stable neighborhoods,
whether they be for rental property or for homeownership.
Senator Sarbanes. Well now, Fannie Mae and Freddie Mac have
both enunciated policies to try to dry up the availability of
the secondary market for these sales. Is the city in touch with
them?
Mr. Graziano. We have been in discussions with them. I am
not fully--I cannot give you a complete rundown at this point.
But that is something we would continue to do.
Senator Sarbanes. Now, is there an adequate database? I
mean, obviously a Vinnie Quayle and Ken Strong and Ed Rukowski,
who is here for the Patterson Park people--I am sure that when
they see a certain name or a certain company they know enough
that red lights go off. Now, is the city plugged into that?
I mean, it seems to me we have experienced enough of this.
Of course, Mr. Schenning is removing a lot of them from the
playing field, thank heavens.
Mr. Graziano. Right.
Senator Sarbanes. And we encourage him in what he is doing.
I think it is very important that one message that comes out of
this hearing is that, you know, this is not a risk-free
endeavor these people are in and some big bonanza and that we
have got--you say ten Assistant U.S. Attorneys in this office?
Mr. Schenning. Just in Baltimore.
Senator Sarbanes. In the Baltimore office, working on this
problem. That is a major task force. How many U.S. assistants
are there in the Baltimore office?
Mr. Schenning. Forty-seven.
Senator Sarbanes. Forty-seven. So that is a major task
force addressing this problem, and the sort of prosecutions
that you are bringing is an indication of, I think, of the
growing effectiveness of that task force. So the word needs, if
it is not out there yet, it ought to be out there that the
people engaging in these deplorable practices and exploiting
people in the most gross fashion are going to pay a price for
it.
Now, you say these sentences are running about 30 to 36
months?
Mr. Schenning. Correct.
Senator Sarbanes. And there is no time off of those
sentences?
Mr. Schenning. That is without parole. There is no parole
in the Federal system. You can earn some good time credits, but
it is about 5, 6. If you get 30 months, you are going to do 25
months before you get released.
Senator Sarbanes. So they are going to serve a substantial
sentence off of this. There is also an effort to recoup in
monetary terms, I gather, as well; is that correct?
Mr. Schenning. We always look a restitution if it is there.
We do financial backgrounds before a defendant is sentenced and
we try to, if we can, individualize the restitution. Of course,
in the cases a lot of times the victim, in say the Beeman
investigation, the victim in terms of the prosecution was the
out of State lender who had loaned the money and who had been
stuck with it. That is one of the reasons that we ask.
We knew that there is another victim here. Like the lady
who was sitting in this chair, she is a victim, too. But in
terms of a prosecution and restitution, the judge does not have
any authority to order money to her, but what we did in the
Beeman case was ask the court, at least in two cases where the
defendants had money, ask them in one case for $30,000 and
$40,000, for a total of $70,000, to go to the agency, the
Patterson Park community agency--Mr. Rukowski I think is the
head of that--money that the court ordered to that agency so
they could continue their good work.
Senator Sarbanes. Do you have a database that enables you
to sort of send up the warnings as soon as you see certain
entities moving around our city?
Mr. Graziano. I am going to ask Joann Copes, my Director of
Development, if you would indulge me, to respond to that.
Ms. Copes. We are keeping data through the task force. The
State Department of Assessments and Taxation has all the data
on property transactions and they are an active member of the
task force. The task force meets every 3 weeks. We have also
relied heavily on the advocacy group, St. Ambrose. But we do
have a formal relationship with Ken Strong, who is now with
Community Law Center, on a consulting basis to provide that
kind of information and data to us in the city.
So I would say through the task force we are keeping data
and are well aware of who the actors are. Of course, that is a
changing landscape.
Mr. Graziano. If I could just elaborate on the earlier
questions, too. In some of my points I spoke of orally and in
the written testimony as well, I focused on the appraisers and
the licensing of appraisers. Mr. Schenning certainly pointed
that out as well, that appraisal is the critical element of
all, whether it be an FHA or a non-FHA loan. So to get at those
non-FHA loans I think we have to focus on the recommendations
here about appraisers.
One is that in the FIRREA legislation I believe it allowed
for discretionary or States having optional licensing, and
Maryland is a State that does make licensing optional. Perhaps
we should look at the being a Federal mandate for licensing of
appraisers be mandatory.
Then we talked about the de minimis provision that said if
your mortgages are below $250,000 that there need not be a
licensed appraiser. Well, 95 percent of the loans out there are
less than that and in Baltimore probably more. So that we need
to get licensed appraisers and they need to be held
accountable.
Senator Sarbanes. There are two approaches to that. One is
to try to get a Federal standard that all appraisers must be
licensed.
Mr. Graziano. Right.
Senator Sarbanes. Which would be nationwide.
Mr. Graziano. Right.
Senator Sarbanes. The other would be to close this gap as
far as Maryland is concerned by getting Maryland legislation
that says, at least in Maryland, as is the case in some other
States, the appraisers must be licensed. In how many States
must appraisers be licensed under State law, do you know?
Mr. Graziano. I think there are something like half a dozen
States that have it optional, I am told.
Senator Sarbanes. We are one of only six where it is
optional?
Mr. Graziano. Something like that.
Senator Sarbanes. In all the other States they require
licensed appraisers, is that correct?
Mr. Graziano. That is correct. The reason why that is
important, of course, is because right now it is optional----
Senator Sarbanes. You see, it would be different--that is a
problem on a Federal standard because you have got 44 States
who have no interest in the Federal standard because they in a
sense are already doing it at the State level.
Mr. Graziano. We can certainly work on it at the State
level as well. The importance is that if you do not have--if it
is optional and you lose your license, if that is the penalty
imposed, that is not a terrible penalty because you can go off
and continue to do your business without a license. So clearly
it is important that the taking away of that license has some
real teeth in it.
Senator Mikulski. Picking up on what Senator Sarbanes said
about this appraisal licensing, we would really encourage Mayor
O'Malley to make this one of his legislative priorities in the
next session of the Maryland General Assembly. We would like to
know the other five States as well. But we think this would be
an important Maryland self-help initiative.
I want to compliment Delegates Rosenberg and Kreziak and
MacIntosh on their efforts in this area. I also note that
Councilman Kane was here and I see Council Keefer Mitchell, who
himself has a very keen interest in this. Perhaps, Councilman,
you could work with the delegation as they go to Annapolis on
this, because I know you are hot on this topic, too. We are
glad to see you this morning.
Picking up on our U.S. Attorney, Mr. Schenning, I was
really struck by the ten different Assistant U.S. Attorneys on
this. This approximates about 20 percent of our caseload. Then
when you think about what it takes--here is my question. Number
one, how much is the U.S. Attorney spending on it? Do you have
enough resources? This really has to show what kind of urgency
we need to do the prevention and intervention.
Mr. Schenning. The ten that are assigned to these cases,
that is not their only assignment. They have other commitments,
too.
This might give you some insight, Senator. Two cases have
gone to trial so far. Samson U. Gorgy, who is an appraiser; in
that case--he was in the Beeman investment.
Senator Mikulski. Oh, I am familiar with him.
Mr. Schenning. He went to trial and it took 4 weeks to try
that case in front of Chief Judge Motts. He was the sole
defendant who actually went to trial.
The other case that went to trial, there were three
defendants, two appraisers and one of the flippers, before
Judge Smalkin, I believe. That case took 3 weeks. So 2 trials
that we have taken, taken to trial; 1 was 4 weeks, the other 3
weeks plus. It was actually into the fourth week. That is just
trial time. So it is a tremendous--these cases are complicated.
Anybody that has ever gone to a settlement on their own house--
--
Senator Mikulski. We understand they are complicated. How
much is it costing you?
Mr. Schenning. I guess I cannot give you statistics, but it
is a tremendous undertaking.
Senator Mikulski. Well, we would like to know it. I will
tell you why, because, you see, we have got to talk about the
cost to everybody. The FHA, the taxpayers are being ripped off.
I know this is one of the reasons Mr. Martinez feels so
outraged. There are two kinds of locusts and predators that are
hitting our Baltimore City. One sells the white powder of
cocaine and heroin, and we know you are working on that with
local and State. Then there are the white collar predators,
equally the locusts, destroying the stressed neighborhoods,
turning them into siege.
Now, we are on your side. The reason is--this is in no way
a criticism. It is to show the cost of failing to have the
right prevention, statutory and other interventions in place.
Do you have enough resources to be able to do this?
Mr. Schenning. Well, I think we move--you also know that we
are doing tons of gun cases that are coming out of Baltimore
City. We have a whole floor of people dedicated to that. The
drug cases, we have that. Then in the white collar section--we
could always use more people because the assistants, they are
not just doing these cases. They are doing other cases, too.
Senator Mikulski. Well, I just want to say thank you to
you, your team, to all that help put the cases together, that
was community-based law enforcement, the techno-databases,
everything, because I believe that your indictments and then
subsequent convictions have really had a chilling effect, that
we are really serious. This is not some toothless wonkie public
policy seminar being run by Brookings or Heritage. We are in
this.
Again, the model--and we want to thank you, and we know it
is happening, too, in Greenbelt. We know that flipping is in
Baltimore County, Prince Georges County, even some tell-tale
signs in Montgomery. Where there is stress, the predators come
in. So we want to thank you and as we move forward on State,
Justice, Commerce Approps we would like to know what we can do
to be helpful to you.
I am sorry, Senator Sarbanes. Did you want to ask a
question?
Senator Sarbanes. I just want to say, presumably as you
bring these trials and gain these convictions you build up a
momentum that leads other people that are indicted often to go
ahead and enter a guilty plea. I urge you to really press hard
with them and make it very clear that you are going to take
this thing right down to the end if necessary. The more I think
you reflect that attitude and gain some successes in expressing
it----
That is a siren warning these people of what is coming.
Senator Mikulski. That is exactly right.
Senator Sarbanes [continuing]. The more you can, I think,
get more accommodation from the others you bring these
indictments against. Of course, the whole impact of that is to
send a very strong and clear warning signal to these people
that we are just not going to have it. We will find you--if you
need the resources, let us know. We will find the resources.
But these people have been engaged in absolutely despicable
practices.
They are not performing some sort of honest function where
they are really trying to provide a service for which they get
a reasonable remuneration, which is sort of how the system
operates. They have set in there to just abuse the system and
to exploit people that are unaware, and then they say, well,
they ought to know better, you know, caveat emptor and all the
rest of it. But they use all these techniques to lure them into
this situation, and once they get them in, then they have other
techniques to deepen people's involvement and the extent to
which they are being exploited.
So you are performing a very significant function. I join
Senator Mikulski in commending the U.S. Attorney's office.
I want to thank Ms. Maggiano. We are glad you are there. I
am sure we will be at you from time to time, but I must say I
think you have come in today and in very short order indicated
a clear working plan on the part of the Department. I have
confidence in your ability to sort of hold it together and to
work with--we think our nonprofit sector here is first rate,
and working with the city and the nonprofit sector we think we
can crack this thing. So thank you very much.
Ms. Maggiano. Thank you.
Senator Mikulski. Senator Sarbanes, I just have a little
bit more before we close out.
Ms. Maggiano, you of course have heard from our U.S.
Attorney and we are not involved in any of the pending cases,
but really the cost. I am sure when you convey this to
Secretary Martinez and even to Attorney General Ashcroft you
will see this.
You listened to the testimony of Mr. Graziano in which he
has about 11 or 12 recommendations. Do you have any initial
comment on those or do you want to study these more and advise
the appropriate committees on how you think we should proceed
or how we could recommend to Mayor O'Malley, particularly where
there might be State changes, for him to take up the cudgel,
both with himself and, I might add, the other big seven
executives if this is happening in the Prince Georges and
Montgomery and Baltimore Counties, etcetera?
Ms. Maggiano. Well, first I thank you for the courtesy of
letting me give you a more formal response rather than trying
to solve very, very difficult problems sort of off the cuff
after a month's worth of involvement in this process. But a
couple things I certainly can address. One of those that has
been sort of floating around during the testimony today is the
disposition of HUD REO property, HUD-owned real estate.
Senator Mikulski. We want to hear about that.
Ms. Maggiano. I do want to commit to everyone in this room
that HUD is going to be working very aggressively, both
internally and with nonprofits, to put together a property
repair pilot, because we feel that in many ways that is the
biggest stumbling block to homeownership. The properties are
just not in a condition that most homeowners can readily take
on the challenge of buying them and getting them insured. So we
are going to be working on that.
We are going to be using our 203(k) loan program more
extensively in Baltimore. We think that that will help get some
of these properties repaired and get them into private hands as
well.
We would like to use a prepurchase housing counseling pilot
for the REO properties as well, because we think that the
recommendations for prepurchase counseling that have been made
here have merit and we would like to test them on the REO
portfolio because it is a portfolio that we can control and can
maintain.
Senator Mikulski. This was one of the set of
recommendations that came from Quayle-Strong.
Ms. Maggiano. Yes.
Senator Mikulski. Are you announcing today or are you
considering today Baltimore being a pre-pilot program?
Ms. Maggiano. Well, I had actually already discussed with
Vinnie using the REO portfolio as a pilot for prepurchase
counseling. So we will be pursuing that. That is not the same
as the entire FHA new origination portfolio.
Senator Mikulski. We understand that this is a test to see
how this would work; am I correct?
Ms. Maggiano. That is correct.
Senator Mikulski. That sounds excellent.
On behalf of Senator Sarbanes and I and our other
respective committee chairs, we would like your analysis or
comments on this. This takes me then to some closeout things.
What we need from you, Ms. Maggiano, is number one to stay
engaged. First of all, we are happy to have you. We think that
this is really the kind of problem-solving, pinpointing that we
had hoped for in the Baltimore laboratory.
Second, for you to provide recommendations to Senator
Sarbanes and myself and our respective chairs on both the
issues related to Baltimore, and nationally, how this would tie
into both authorizing and appropriations. If you could do that,
it would be terrific.
The Baltimore City task force gave us this checklist that
we have operated off of. We would like very much for it to be
updated and if we could have monthly reports to see how we are
doing, so nothing falls through the cracks again. I believe
that in this room there is real goodwill, and if there is
goodwill we are going to find a way to actually do problem-
solving.
So we would like these monthly reports. We would like to
have a status report on where we are now--I think some have
been accomplished--and where we need to go.
Now, I tell you, when I listened to our nonprofits and our
citizens I really had a hard time following this. The reason I
say this--I mean, I know it, but if we go to explain changes to
our colleagues--we have been at this for more than 18 months in
really various cities. Of course, each step is another misstep.
I wonder if we could have one of those charts that say, first
of all, prevention, point one, what goes wrong, what needs to
be done; what goes wrong, what needs to be done. Then once they
enter into actually being a homeowner, like Ms. Adams and Mr.
Smith.
But you see what I am saying? Not a Rube Goldberg chart
awash with bureaucracy and so on, but what is broken and what
needs to be fixed. Then also this whole cleanup process,
because we would like to be able to explain this to our
colleagues. I will tell you, that again, as everyone says it is
so complex that people lose interest, and we do not want them
to lose interest. We want them to have a great sense of
urgency.
So if we could have that as a tutorial, as kind of a
teaching tool, for example in preparation for the June 20
hearing, I think it would be a big help. Not with numbers and
statistics, but really the story of like through one person and
what goes askew.
There are many more questions that we can ask. But you see,
again, we said that this was a work in progress.
We want to thank everybody who has participated. We have a
lot more work to do both in the streets and neighborhoods
through our Baltimore City task force and working with HUD,
with our U.S. Attorney. Mr. Graziano, we hope you are going to
keep Ms. Copes as your point person as well.
Mr. Graziano. Yes.
Senator Mikulski. So we think now we have the right people
and we have the momentum. So we want to thank you for your
testimony, but also for your active engagement. I cannot say
enough, as Senator Sarbanes said, about our nonprofit advocacy.
We thank you for your continued vigorous championing of both
the needs of our community and on what is the gouging of the
taxpayer.
To you, Mr. Schenning, thanks for all the work, and please
thank the U.S. Attorney staff for what they are doing.
Ms. Maggiano, we are glad to see you.
CONCLUSION OF HEARING
With this, the committee is going to recess, the VA-HUD
Subcommittee is recessed, until tomorrow at 10:00--no,
Wednesday at 10 o'clock, when we will be taking the testimony
of FEMA and how they are going to respond to natural disasters
and to terrorist attacks.
[Whereupon, at 12:04 p.m., Monday, May 14, the hearing was
concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]
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