Realty Times: HUD Announces A Fraud Protection Plan for Borrowers

May 23, 2000

HUD Announces A Fraud Protection Plan for Borrowers
by Lew Sichelman

Major consumer protections are being put in place to prevent families who obtain federally-insured mortgages from being victimized by predatory lenders.

The fraud protection plan announced late last week by Sec. Andrew Cuomo of the Department of Housing and Urban Development also is designed to compensate hundreds of borrowers who have fallen prey to unscrupulous loan brokers that charged them thousands in unnecessary loan charges and stripped them of the equity they had in their homes.

Among other things, the Federal Housing Administration has been ordered to restructure inflated mortgages and offer default counseling for deceived borrowers. The agency also will deny insurance coverage on homes that have been "flipped" at inflated prices.

In addition, the government will deploy special investigative teams to track down corrupt appraisers and lenders and remove from the program appraisers who are involved with large numbers of foreclosures.

The program "will help those already victimized and help rid the housing marketplace of these abusive practices," said Cuomo.

At the same time, though, the HUD secretary, noting the explosive growth of predatory practices, indicated the mercenaries might still be a step ahead of the authorities. Hearings held around the country uncovered several new scams and schemes designed to defraud FHA borrowers and force them into poverty, he said.

But Sen. Barbara Mikulski, D-Md., who charged HUD with finding solutions to the problem after hearings in Baltimore found "the true horrors" of predatory lending, said the fraud protection plan is just a "first step."

Here is a more detailed rundown of the new program. In some cases, provisions will be available immediately on a national basis. In other instances, the FHA will launch test initiatives in Baltimore and other "hot spot" cities where defaults are abnormally high before rolling them out nationally:

Once FHA identifies a loan that was based on an inflated appraisal, it will force the lender to write down the balance to a level consistent with the home's fair market value. If the lender balks, the agency will step in, cancel the insurance, take over the deed, and resell the property with insurance to the owner at its fair value. FHA insurance protects lenders against the possibility the borrower will default on his loan payments. But unlike private mortgage insurance, which covers only a portion of the loan amount, the FHA covers the entire mortgage.

The government will provide borrowers with specialized foreclosure counseling with a HUD-approved agency at no cost to the owner. HUD has a network of more than 1,200 such agencies nationwide.

For future transactions, HUD will cap the total loan fees, including points, charged to FHA borrowers. One of the hallmarks of predatory lending is that borrowers are hit with unreasonable closing costs and fees and a large number of points. A point is 1 percent of the loan amount.

In cases where the borrower has defaulted or already lost his house to foreclosure because of fraudulent appraisals or underwriting, lenders will be instructed to issue a "credit repair letter" to the borrower and notify the credit reporting agencies of this action.

To stop flipping, which occurs when an investor acquires a property at a relatively low price and then re-sells it for a much higher price even though he has done little or nothing to improve the place, FHA insurance will be denied pending further investigation. The government also will monitor future applications for insurance to prevent FHA foreclosed properties from being re-flipped and returned again to its portfolio at an inflated price.

SWAT teams will be deployed in markets experiencing problems, and appraisers will be rated on the performance of their loans. In Baltimore, investigators fingered five appraisers who were associated with 38 percent of the FHA foreclosures in the first three months of this year.

Loan brokers and real estate professionals also will be tracked so those associated with a high number of defaults can be identified and disciplined.

The FHA will release new and clearer guidance on gift letters, which has been pinpointed as another practice used by swindlers to qualify borrowers for inflated mortgages.

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