CUOMO ANNOUNCES MAJOR CONSUMER PROTECTIONS FOR FHA HOMEBUYERS

Housing and Urban Development Secretary Andrew Cuomo today announced a major consumer protection initiative to prevent millions of families who get new FHA-insured mortgages from being victimized by predatory lending practices that can cost individual homeowners thousands of dollars each in unnecessary costs.

The Fraud Protection Plan is also designed to compensate homeowners who already have mortgages insured by the Federal Housing Administration for past predatory lending abuses. FHA, which is part of HUD, insured 1.3 million home mortgages last year.

Based on the work of HUD's Baltimore Task Force on Predatory Lending formed at the request of U.S. Senator Barbara A. Mikulski, the new protections include: restructuring inflated mortgages, default counseling for FHA borrowers, denying FHA insurance to FHA homes that have been "flipped" at inflated prices, placing caps on the points and fees charged FHA borrowers, deploying special teams to pursue unscrupulous appraisers and lenders, removing appraisers involved with large numbers of foreclosures, and imposing tighter FHA downpayment rules.

"As the largest insurer of homes in the nation, FHA has moved aggressively and quickly to insure that FHA borrowers are fully-protected against the abusive practices of those who would try to turn the dream of homeownership into a nightmare," Cuomo said. "However, our work in Baltimore clearly demonstrates that the explosive growth in predatory lending has led to new scams and new schemes by which FHA homeowners are being defrauded and, in too many instances, forced into poverty. Our new Fraud Protection Plan will help those already victimized and help rid the housing marketplace of these abusive and predatory practices."

Senator Mikulski said: "After my field hearing in March - where the true horrors of predatory lending and real estate flipping in Baltimore were uncovered - I charged HUD and the Baltimore Task Force with finding solutions to the problem. I asked them to help stop the destruction of neighborhoods and the gouging of our residents. HUD's Fraud Protection Program is the first step toward protecting unsuspecting home buyers and repairing the damage that has been done to our community."

Senator Paul Sarbanes said: "Predatory lending practices represent a frontal assault on homeowners, not only in Baltimore, but all across America. I am pleased to see that HUD and FHA have responded to the problems in Baltimore with such new and innovative approaches, which are designed not only to assist those who have been victims of these practices, but also to seek ways to avoid these deceptive practices from occurring in the first place."

HUD's stepped-up protections for FHA borrowers were announced at a joint forum with the Treasury Department on Predatory Lending in Baltimore. Forums previously have been held in Atlanta, Los Angeles and New York with the fifth and final one to be held in Chicago next week. This summer, Cuomo and Treasury Secretary Lawrence Summers will issue a joint report with recommendations on how to further protect borrowers from predatory lenders.

Many of the protections announced today build on existing FHA efforts to streamline operations and eliminate abusive practices. The existing efforts include Credit Watch, the Homebuyer Protection Plan, and a variety of reforms of the FHA property disposition program, such as the new Marketing and Management Contractors, the Good Neighbor Sales Program, and the Teacher and Officer Next Door Programs.

In some instances, HUD's new Fraud Protection Plan will be immediately available on a national basis. In other instances, FHA will launch pilots in Baltimore and other selected "hot spot" cities - defined as those with excessively high default and claim rates - to further test and refine the concept before moving to national implementation.

HUD'S Fraud Protection Plan will:

Restructure Inflated Mortgages. Once FHA identifies a mortgage based on a fraudulent appraisal, FHA will move to force the lender to write the mortgage down to a level consistent with true market value. If a lender refuses, FHA will intervene directly, cancel the insurance, take possession of the deed, and resell the property with FHA insurance to the family for the fair market price.

Counsel Borrowers in Default. HUD has a network of more than 1,200 approved counseling agencies nationwide. However, the availability of counseling services is geographically uneven and not all agencies are able to provide specialized foreclosure avoidance counseling to borrowers in default. With funding from its insurance fund, FHA will provide borrowers at risk of default with a certificate that will pay for the cost of counseling at a HUD-approved agency.

Restrict Loan Fees. HUD's Baltimore Task Force identified some cases in which FHA borrowers were charged unreasonably high points, closing costs and fees. FHA will cap on the total amount of points and fees charged FHA borrowers.

Repair Credit of Abused Borrowers. In cases of default or foreclosure linked to fraudulent appraisals or underwriting, FHA will instruct the lender to issue a "credit repair letter" to the borrower and notify the credit reporting agencies of this action.

Deny FHA Insurance to "Flipped" Properties. "Flipping" occurs when an investor purchases a property at a relatively low price, then re-sells or "flips" it for a much higher, inflated price, even though few improvements have been made to the property. Where "flipping" is suspected, FHA insurance will be denied, pending further investigation. FHA also will monitor future applications for FHA insurance to prevent former FHA foreclosed properties from being "flipped" and returned to the portfolio at an inflated price.

Pursue Unscrupulous Appraisers and Predatory Lenders. In Baltimore, FHA sent a SWAT team to review all foreclosures taking place from January through March of 2000. Based on this review, FHA identified a number of apparently fraudulent practices on the part of FHA appraisers and lenders who will be referred for further investigation and possible action. Similar teams will be deployed to assess potential fraudulent activities in other cities now experiencing high numbers of FHA defaults and foreclosure.

Suspend Bad Appraisers and Lenders. HUD's Baltimore Task Force identified fraudulent appraisals as a key contributor to subsequent default and foreclosure. Just five appraisers, for example, were associated with 38 percent of all FHA foreclosures in Baltimore in the first three months of 2000. Building on the FHA's Lenders Credit Watch, FHA will create an automated Appraisers Watch to rate appraisers on the performance of the loans linked to their appraisals. Those associated with high numbers of foreclosures will be targeted for further review and, if appropriate, removed from the FHA rosters.

Track Mortgage Brokers. With a growing number of FHA-insured loans originated with the significant involvement of mortgage brokers, FHA will require that Tax Identification of any mortgage broker participating in the transaction be reported so that brokers associated with a high loan default and claim rate can be identified and, where appropriate, disciplined.

Suspend Abusive Brokers. Through listing of properties on Multiple Listing Services (MLS) and the Internet, FHA's new management and marketing procedures have streamlined the sale of FHA foreclosed properties and expanded the number of participating real estate agents. Working with the Baltimore Task force, FHA will review the list of participating real estate brokers and terminate unscrupulous brokers from future participation in FHA programs.

Tighten Use of Gifts for Downpayment. HUD's Baltimore Task Force identified the fraudulent use of gift letters as another practice used by unscrupulous lenders to qualify borrowers for inflated mortgages. FHA will release new and clearer guidance on FHA gift letters and enhance monitoring of these provisions.

Expand Loss Mitigation Efforts. In "Hot Zone" areas with high default and foreclosure rates, FHA will establish teams of loss mitigation specialists to work with lenders and borrowers to ensure that every effort is made to help families remain in their homes.

Approve New Software to Empower Default Counselors. FHA already has approved the first software package - "BackInTheBlack" - to assist default counselors in examining FHA foreclosure avoidance options and advise clients as to the best course of action. It is available at no charge to housing counseling agencies. FHA is reviewing additional software programs to assist its counselors.