[Senate Hearing 106-623]
[From the U.S. Government Publishing Office]
S. Hrg. 106-623
HUD'S GOVERNMENT-INSURED MORTGAGES: THE PROBLEM OF PROPERTY
``FLIPPING''
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HEARINGS
before the
PERMANENT
SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
JUNE 29 AND 30, 2000
__________
Printed for the use of the Committee on Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
66-088 cc WASHINGTON : 2000
_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
U.S. Government Printing Office, Washington, DC 20402
COMMITTEE ON GOVERNMENTAL AFFAIRS
FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware JOSEPH I. LIEBERMAN, Connecticut
TED STEVENS, Alaska CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania JOHN EDWARDS, North Carolina
JUDD GREGG, New Hampshire
Hannah S. Sistare, Staff Director and Counsel
Joyce A. Rechtschaffen, Minority Staff Director and Counsel
Darla D. Cassell, Administrative Clerk
------
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
SUSAN M. COLLINS, Maine, Chairman
WILLIAM V. ROTH, Jr., Delaware CARL LEVIN, Michigan
TED STEVENS, Alaska DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico MAX CLELAND, Georgia
THAD COCHRAN, Mississippi JOHN EDWARDS, North Carolina
ARLEN SPECTER, Pennsylvania
K. Lee Blalack II, Chief Counsel and Staff Director
Linda J. Gustitus, Minority Chief Counsel and Staff Director
Mary D. Robertson, Chief Clerk
C O N T E N T S
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Opening statements:
Page
Senator Collins.............................................. 1, 41
Senator Durbin...............................................18, 52
WITNESSES
Thursday, June 29, 2000
Hon. Barbara A. Mikulski, a U.S. Senator from the State of
Maryland....................................................... 4
Lisa Smith, Fresh Meadows, New York.............................. 9
Sonia Pratts, Hollywood, Florida................................. 12
Stekeena Rollins, Chicago, Illinois.............................. 15
Stanley J. Czerwinski, Associate Director, Housing and Community
Development Issues, Resources, Community, and Economic
Development Division, U.S. General Accounting Office,
accompanied by Robert Procaccini, Assistant Director for FHA
Insurance Programs, and Paul Schmidt, Assistant Director for
Single-Family Housing Programs................................. 29
Friday, June 30, 2000
William C. Apgar, Assistant Secretary for Housing and Federal
Housing Commissioner, U.S. Department of Housing and Urban
Development.................................................... 43
Susan Gaffney, Inspector General, U.S. Department of Housing and
Urban Development, accompanied by Kathryn M. Kuhl-Inclan,
Assistant Inspector General for Audit, Office of Inspector
General, U.S. Department of Housing and Urban Development; and
Philip Kesaris, Assistant Inspector General for Investigations,
U.S. Department of Housing and Urban Development............... 62
Alphabetical List of Witnesses
Apgar, William C.:
Testimony.................................................... 43
Prepared statement........................................... 97
Czerwinski, Stanley J.:
Testimony.................................................... 29
Prepared statement........................................... 87
Gaffney, Susan:
Testimony.................................................... 52
Prepared statement........................................... 107
Mikulski, Hon. Barbara A.:
Testimony.................................................... 4
Prepared statement........................................... 71
Pratts, Sonia:
Testimony.................................................... 12
Prepared statement........................................... 80
Rollins, Stekeena:
Testimony.................................................... 15
Prepared statement........................................... 83
Smith, Lisa:
Testimony.................................................... 9
Prepared statement........................................... 77
Exhibit List
* May Be Found In The Files of the Subcommittee
1. GAffidavits of Richard Nelson and Louis Prus informing the
Permanent Subcommittee on Investigations of their decision to
assert their Fifth Amendment right not to answer questions if
called before the Subcommittee................................. 115
2. GThe Report of the Baltimore Task Force on Predatory Lending,
June 2000...................................................... 117
3. GMaterials regarding Stekeena Rollins:
a. GPictures of Stekeena Rollins' residence.................. 169
b. GResidential Real Property Disclosure Report reflecting
sellers lack of knowledge of material defects.............. 174
c. GLoan Application (p. 2 of 4) reflecting false income..... 175
d. GGift Affidavit........................................... *
e. GReal Estate Sale Contract................................ *
f. GHUD-1 Settlement Statement and Addendum................. *
g. GUniform Residential Appraisal Report..................... *
h. GIndictment of Appraiser on Rollins' Property............. *
i. GUniform Residential Loan Application and Mortgage Credit
Analysis Worksheet......................................... *
j. GTermite Inspection...................................... *
k. GEarnest Money Deposit and Cashiers Check to Rollins for
$6,000..................................................... *
l. GAdjustable Rate Rider................................... *
m. GInformation on prior sale of Rollins' House for $14,000.. *
n. GBorrower's Notification and Interest Rate Disclosure
Statement.................................................. *
o. GDependable Mortgage, Inc. Acknowledgment................. *
4. GMaterials regarding Lisa Smith:
a. GPictures of Lisa Smith's residence....................... 176
b. GContract of Sale and accompanying Rider.................. *
c. GImportance of Home Inspections report.................... *
d. GHUD-1 Settlement Statement and Addendum.................. *
e. GUniform Residential Loan Application..................... *
f. GGift At Closing Certification and certified check....... *
g. GAppraisal and Valuation Condition Sheet.................. *
h. GInformation on prior sale of Smith's House for $50,000... *
5. GMaterials regarding Sonia Pratts:
a. GPictures of Sonia Pratts' residence...................... 178
b. GContract For Sale and Purchase of Real Property.......... *
c. GSeller's Disclosure Form................................. *
d. GHUD-1 Settlement Statement and Addendum.................. *
e. GUniform Residential Appraisal Report..................... *
f. GBuydown Worksheet....................................... *
g. GCode Violations.......................................... *
h. GTermite Inspection....................................... *
6. GChart: Foreclosures Started by Subprime Lenders in
Chicagoland--1993, 1998........................................ 181
7. GU.S. General Accounting Office Report, Single-Family
Housing: Stronger Oversight of FHA Lenders Could Reduce HUD's
Insurance Risk, April 2000, GAO/RCED-00-112.................... 182
8. GGAO chart reflecting frequency of poor ratings for mortgage
credit analysis given to 36 approved lenders................... 227
9. GChart: HUD's Failure to Monitor Appraisers.................. 228
10. GHUD Form: For Your Protection: Get a Home Inspection........ 229
11. GChart: Percent of Loans In Foreclosure...................... 230
12. GChart: Percent of Loans Delinquent.......................... 231
13. a. GTranscript of June 2000 HUD-FHA Appraisal Commercial..... 232
b. GVideo of June 2000 HUD-FHA Appraisal Commercial.......... *
14. GMemorandum prepared by K. Lee Blalack II, Chief Counsel and
Staff Director, Rena M. Johnson, Deputy Chief Counsel, Karina
Lynch, Counsel, et al., dated June 27, 2000, to Permanent
Subcommittee on Investigations' Membership Liaisons, regarding
Background Memorandum for ``Flipping'' Investigation........... 233
15. GNew York City, Chicago, and Florida Lending Activities/
Actions Taken, provided for the record by General Deputy
Assistant Secretary Matthew O. Franklin, U.S. Department of
Housing and Urban Development.................................. 296
16. GFHA Premium Policy, provided for the record by General
Deputy Assistant Secretary Matthew O. Franklin, U.S. Department
of Housing and Urban Development............................... 313
17. G2-minute video of testimony of Lisa Smith, Sonia Pratts and
Stekeena Rollins before the Permanent Subcommittee on
Investigations on June 29, 2000, shown to Assistant Secretary
Apgar, U.S. Department of Housing and Urban Development on June
30, 2000....................................................... *
18. GTable: HUD: Ignoring the Warnings........................... 314
HUD'S GOVERNMENT-INSURED MORTGAGES: THE PROBLEM OF PROPERTY
``FLIPPING''
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THURSDAY, JUNE 29, 2000
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:30 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Susan M.
Collins, Chairman of the Subcommittee, presiding.
Present: Senators Collins and Durbin.
Staff Present: K. Lee Blalack II, Chief Counsel and Staff
Director; Mary D. Robertson, Chief Clerk; Rena Johnson, Deputy
Chief Counsel; Karina Lynch, Counsel; Brian C. Jones,
Investigator; Claire Barnard, Detailee/HHS; Jim Pittrizzi,
Detailee/GAO; Raymond Kessenich, Detailee/NCIS; Elizabeth Hays,
Staff Assistant; Bob Slama, Detailee/Secret Service; Bob
Groves, Detailee/HUD OIG; Courtney Hays, Intern; Joe Kosnow,
Intern; Adam Thomas, Intern; Felicia Knight (Senator Collins);
Steve Abbott (Senator Collins); Tracy Shollenberger (Senator
Specter); James Twaddell (Senator Specter); Marianne Upton
(Senator Durbin); Glen Sauer (Senator Akaka); Jessica Porras
(Senator Durbin); and Jonathan Mervis (Senator Durbin).
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. The Subcommittee will come to order.
Good morning. During the next 2 days, the Permanent
Subcommittee on Investigations will examine a type of mortgage
fraud commonly known as ``flipping.'' Flipping is a complex
fraud that involves the purchase and then resale of property at
greatly inflated prices. This fraudulent scheme increasingly
plagues our Nation's cities and victimizes first-time
homebuyers. Indeed, the evidence gathered by the Subcommittee
during its 9-month investigation suggests, as Senator Mikulski
has previously noted, that flipping is spreading like a virus
that, if left unchecked, could reach epidemic proportions.
Property flipping generally involves con artists who
purchase dilapidated homes at bargain prices, usually in
economically distressed parts of the city. These properties are
then quickly resold at a tremendous markup--often 100 percent
or more. It is not uncommon for ``flippers'' to buy and sell
the same property within a few months, or even days.
In flipping schemes, the sellers frequently make cosmetic
repairs to the property such as carpeting over damaged wood
floors or painting over termite damage so that it is not
visible. They then sell the home to an unsuspecting purchaser,
usually targeting low-income, first-time homebuyers. The
targeted buyers are normally unsophisticated financially and
have little experience with financial transactions, much less
the real estate market. Through high-pressure tactics, the
sellers persuade these buyers to rely on them completely. They
arrange for the buyers to obtain a mortgage loan, often by
doctoring the buyers' financial and credit information. To
support the grossly inflated sales price, the sellers often
obtain dubious appraisals from unscrupulous appraisers who are
part of the scam.
After the buyers move into their new homes, they soon
discover that the ``total rehab'' they were promised is little
more than a crumbling relic. Their dream of homeownership
quickly turns into a nightmare. Our investigation found that
many buyers are left with homes that are virtually
uninhabitable. Others are forced to make costly repairs that
they can scarcely afford. In addition, because the homes are
sold at exorbitant markups, the buyers are often saddled with
mortgage payments that exceed their ability to pay. The end
result for these unfortunate homeowners is often default and
eventually the loss of their homes through foreclosure. While
the property flippers walk away from the sale with huge
profits, the homebuyers are often left with no home, broken
promises, and a tarnished credit rating.
During our extensive investigation, the Subcommittee staff
interviewed scores of low-income homebuyers who had been duped
by property flippers. Let me tell you the story of one of them.
The tragic story of Gladys Hall, a 54-year-old Chicago
resident, illustrates how these flipping scams work and
testifies to the emotional and financial toll that results from
this fraud.
In early 1996, Ms. Hall contacted a local real estate
agency in response to a flyer that had been circulated in her
neighborhood, urging her to ``rent to buy.'' After speaking
with a sales agent, she was persuaded to purchase a home owned
by the real estate agency that was located in the South Austin
area of Chicago.
At that time, Ms. Hall was unemployed, and her only source
of income was Supplemental Security Income, SSI. Even though
Ms. Hall obviously had very little means, the seller arranged
for her to obtain an FHA-backed mortgage to purchase the house
for $122,000. Property records indicate that the real estate
agency selling her the house had purchased the property 22
months earlier for only $11,000. That is a markup of over 1,000
percent.
At the time of the sale, the real estate agent assured Ms.
Hall that his agency would thoroughly rehabilitate the house.
Soon after she moved into her new home, however, Ms. Hall
discovered that the structure was leaning noticeably, the roof
leaked, and the plumbing didn't work. In addition, even though
the sales agent assured Ms. Hall that her monthly mortgage
payment would be about $500, it soon skyrocketed to $1,000 a
month. It turned out to be an adjustable rate mortgage,
something that Ms. Hall told the Subcommittee staff she did not
understand at the time of the sale. She did not realize that if
interest rates increased, her mortgage payment could also
increase dramatically.
Not surprisingly, Ms. Hall soon fell behind in her mortgage
payments. In 1998, the lender foreclosed, obtained payment on
the insurance from FHA, and returned the property to the
Department of Housing and Urban Development. Ms. Hall is now
living in a public housing project in Chicago.
When HUD sold Ms. Hall's home in April of this year, it
received only $24,990. The insurance fund run by HUD picked up
the difference, incurring a loss of over $90,000. The
Subcommittee staff sought to question the principals of the
real estate agency that sold this property to Ms. Hall;
however, those individuals asserted their Fifth Amendment
rights and refused to answer any questions.\1\
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\1\ See Exhibit No. 1 which appears in the Appendix on page 115.
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Unfortunately, Ms. Hall's experience is far from unique. We
will hear testimony today from three witnesses who were also
victimized by flipping schemes very similar to the one
perpetrated on Ms. Hall. Moreover, HUD's Office of Inspector
General reported in its report to Congress dated March 31 of
this year that it had uncovered ``massive fraud schemes
surrounding the origination of single-family homes insured by
HUD.'' Six months ago, a Federal grand jury in Los Angeles
charged 39 persons with fraudulently obtaining more than $110
million worth of FHA-insured loans through the execution of
multiple flipping schemes that typically inflated the value of
the properties as much as $150,000.
And, just 2 weeks ago, Federal prosecutors in Florida
charged 10 people with fraudulently securing more than 200 FHA-
insured loans valued in excess of $17 million. One of the
defendants has apparently told authorities that they targeted
first-time homebuyers in predominantly working-class, minority
neighborhoods. This fraud ring followed a familiar formula: Buy
properties in distressed conditions at very low prices, perform
minor cosmetic improvements, and then resell the homes at
drastically inflated prices to unsophisticated buyers.
I find it very troubling that so many citizens in our
Nation's cities have been victimized by the predatory practices
of unscrupulous real estate agencies, appraisers, and lenders.
But what I find most appalling is that the Federal Government
has essentially subsidized much of this fraud. HUD, through
FHA, insures many of the mortgages that finance these
fraudulent transactions. A series of audits and reports over
several years warned HUD repeatedly of the vulnerability of its
mortgage programs to fraud. But the Department has been slow to
act to curtail this fraud.
When a lender forecloses on Gladys Hall or any other
flipping victim, it is fully compensated for underwriting the
bad loan because FHA pays the insurance claim. Therefore, these
flipping schemes often result not only in financial ruin and
emotional distress for the buyers and their families, but they
also undermine the integrity of the FHA insurance fund by
passing on the tab for this fraud to the Federal Government.
The unfortunate irony, of course, is that the victims of
property flipping are often the very people whom HUD is
intended to help attain the American dream of homeownership.
They depend on HUD to protect them from the predatory sales and
lending practices that the Subcommittee's investigation
revealed. After all, without HUD's help, they would be unable
to obtain the conventional mortgages to buy their homes. Their
whole access to the housing market depends on obtaining the FHA
loan guarantees. Surely, HUD has a duty to protect these
unsophisticated homebuyers who are the targets of these
fraudulent sales and lending practices as well as to safeguard
the integrity of the insurance fund.
The purpose of these hearings is to get to the bottom of
this disturbing trend in mortgage fraud. In addition to
examining the flipping schemes and the havoc that they wreak on
families and neighborhoods, we will consider whether HUD could
do more or could have done more to prevent the recent growth in
mortgage fraud that has beset the single-family loan program.
We will also seek to determine what we can do now working with
HUD to put a stop to these predatory practices which threaten
the stability of many urban neighborhoods and rob the insurance
fund.
I look forward to hearing all of our testimony today, and I
think we are especially fortunate to have as our lead-off
witness for these hearings my distinguished colleague from
Maryland, Senator Barbara Mikulski. Over the past several
months, I have followed her efforts very closely, as she has
been a leader in remedying the exploding problem of mortgage
fraud in the city of Baltimore. She has worked very diligently
to expose flipping, and she has been a leader in Congress on
this troubling issue. She has been responsible for prompting
the Department of Housing and Urban Development to take some
action in this area, and I am delighted to have her here today.
Senator Mikulski, you may proceed.
TESTIMONY OF HON. BARBARA A. MIKULSKI,\1\ A U.S. SENATOR FROM
THE STATE OF MARYLAND
Senator Mikulski. Well, thank you very much, Senator
Collins. First of all, I want to thank you for holding this
series of hearings to really get in very deeply on the issues
of predatory lending. Your own reputation for standing sentry
on the issues of fraud is well known. I think senior citizens
and their families all over America are grateful for the
leadership that you undertook in the telemarketing and other
fraud scams against seniors. Remember the ``Buy a magazine
today, lose your house tomorrow'' kind of thing? And all over
the State of Maryland I talk about Senator Sue from Maine, who
really stopped these scams directed against seniors.
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\1\ The prepared statement of Senator Mikulski appears in the
Appendix on page 71.
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I so welcome the fact that you have now turned your very
able and your staff's attention to the issue of flipping.
Flipping is a word that has no meaning to it until we really
name it, and it is called predatory, predatory lending, and
that is what this is all about, where through predatory
practices, preying on the poor, that they bought homes at very
low cost in very distressed neighborhoods, turned them around
at exorbitant profits, had FHA to subsidize their unscrupulous
and often illegal behavior, gouging the poor, ripping off the
taxpayer, and when the poor can't make their obligations,
through no fault of their own, the houses are then foreclosed,
and then we have got to dispose of them. And in many of our
neighborhoods, the term ``a HUD house'' is really a despicable
term because it is even bringing the neighborhood further down.
So we want to congratulate you on this because there are
really two types of flipping: The flipping of real estate,
which you have discussed here today; then there is also the
flipping of the mortgage, where they take the mortgage and keep
flipping it over and over again, adding fees where the
transactors sit back and enjoy the largesse, but the working
poor, the ones out there who work in day-care centers, often in
hospitals as aides and orderlies, or in geriatric services, who
end up now at the end of the day with a bad back, varicose
veins, and often facing bankruptcy because of these
unscrupulous practices. So we thank you for your leadership.
I got into this because of hearing about the stories in our
own neighborhood, stories about unsuspecting people trying to
buy a home, first-time homeowners often moving from welfare to
work, learning that the houses they bought were worth less than
half of what they paid, stories of the gouging of the poor by
unscrupulous real estate investors, appraisers, title
searchers, and even predatory lenders.
In February, I went to a meeting at St. Michael's Church in
East Baltimore, where I heard about the problem firsthand. Your
own staff was there, and we welcomed their attendance and
participation that day.
We learned about crooked appraisers conspiring with crooked
lenders to target these unsuspecting first-time homebuyers. By
providing misleading and often false information, predatory
lenders, brokers, and home improvement contractors were
manipulating borrowers into loans that could only result in
defaults. The loans were rife with high fees, high points,
hidden balloon payments, and the flippers were buying up
houses, making quick cosmetic fixes to them so they could be
sold at inflated prices.
People were being robbed of their savings, and what should
have been the American dream turned into the American
nightmare.
I was shocked and outraged, as I know you have been,
because of what was happening to the poor, to the taxpayer, and
to the neighborhoods.
As the ranking member of the VA/HUD Subcommittee, I turned
to another colleague, our mutual friend, Senator Bond, the
chairman of that subcommittee, to see if I could hold a field
hearing in Baltimore. I cannot thank Senator Bond enough for
his bipartisan cooperation through the VA/HUD Subcommittee to
at least begin some of this activity. Senator Bond agreed to
have this hearing in Baltimore, and we moved on it.
We heard from victims. You are going to hear from them
today. I will just say this: There was one lady who worked so
hard. She bought a home. She thought for $500 a month she was
going to pay this house off in 15 years. Well, guess what? She
had a balloon payment of $57,000 in the final year. We heard
stories and stories like that. You will hear from them.
Our witnesses had a lot of courage, and I want to thank
them for coming forward to tell their stories. But as you said,
it is just not going on in Baltimore. It is a cancer destroying
our neighborhoods.
The National Consumer Law Center estimates that there are
over 600,000 Americans who may lose their homes because they
were duped into bad loans. And, Senator Collins, I was afraid
that this was going to be another S&L thing. What do I mean by
that? Every time they go into default, FHA has to foreclose.
The taxpayer loses while the homeowner loses. And as they go
into default, we could be losing as much as $20,000, $30,000,
or $40,000 on a house, and the taxpayer is holding the
liability. We were being ripped off in two ways: The poor and
the taxpayer.
Well, what we found in Baltimore was horrifying. Two
thousand properties in Baltimore were bought and resold within
120 days. Two thousand properties, moving stressed
neighborhoods to siege, at 100 percent profit.
I don't know if that is a vote or I get so excited my
beeper goes off, like an EKG here. [Laughter.]
Senator Mikulski. Let me just put this here.
Unfortunately, FHA has been an accomplice to the flippers
and the predatory lenders due to the large inventory of FHA-
owned homes that were ripe for flippers. The stock of FHA
housing had deteriorated, and houses were available for
depressed prices. See, some of the places were doubly flipped.
An FHA house goes into foreclosure, but another sham or dummy
corporation buys the foreclosed house and starts the same scam.
The scum start the same scam all over again.
Well, you and I want to stop the poor from being gouged,
the taxpayer from being ripped off, and our neighborhoods from
being destroyed.
After the Baltimore hearing, I had what was called, I think
in diplomacy terms, a frank and candid conversation with
Secretary Cuomo and said you are either going to have to get
into this yourself or you are going to face Senators Bond,
Mikulski, Collins, and so on--and, of course, Senator Sarbanes.
And I asked him to establish two task forces that I hope
provide guidance to the Subcommittee. One was a national one on
mortgage lending and so on, and it was involved with the
Department of Treasury. I bring that to your attention. The
other was the Baltimore task force because we were the worst in
the Nation. And thanks to the openness of Mayor O'Malley, our
new mayor, we said we are ready for Baltimore to be the
laboratory, examine us. And I tell you, Senator Collins, we
found under every rock was another rock, and under that rock
was worms.
Those predatory lenders were actually meeting in cafes in
Baltimore, swapping notes and tips and techniques on how to
really gouge the poor and the taxpayer. They actually met to do
this.
Well, our able U.S. Attorney got in on this, postal
inspectors, and the FBI. These will be part of the kind of
things that the Subcommittee can draw upon.
But I will say this: Once Cuomo got into it, things have
really begun to develop. Out of the two task forces, they have
the recommendations on a prevention plan:
One, early detection of problem loans and early detection
of problem lenders. This means a lot of consumer information so
that people like the unsuspecting buyers don't get into it;
Second, using technology for credit watches, and provides
assistance to the people who have now been victimized;
And then, third, identifying and prosecuting predatory
lenders and those in that chain.
And I think if they know that we are coming, they are going
to go. We already have anecdotal evidence that the aggressive
activity in Baltimore has reduced flipping by about 80 percent,
and it is because they know we are coming after them, and they
could lose their license, they could go to jail, and maybe they
have to lose their home.
So this is the kind of Federal commitment that we want.
Senator Sarbanes and I introduced legislation yesterday called
``Credit Watch.'' We invite it to your attention because,
again, the predatory crowd was going to use the law to evade
the law, saying we had no authority to come after them. So we
are ready to get involved with that. Again, as a result of your
hearings, we hope that you have the kind of recommendations we
could work on on a bipartisan basis.
I bring to your attention the national task force. They
have 50 recommendations to stop predatory lending. Let them
tell you what they are. I just want you to be aware of them.
But we do have a whole series of things that could deal with
it: Real estate settlement procedures, also zeroing in on
harmful sales practices, and also a way to restrict abusive
conditions of high-cost loans.
We are also inviting Fannie Mae, Freddie Mac, and Federal
Home to really get in for a major consumer education program
for the poor.
We are also recommending the Community Reinvestment Act
encourage lenders to move people from sub-prime markets to the
conventional. It is the sub-prime area where it is also going
on.
I really applaud--Cuomo really got into this, and I want to
bring that to your attention. And through this National
Predatory Lending Task Force, they do have a blueprint.
Now, this is the Baltimore Task Force Report.\1\ I am going
to give this to you and to the Subcommittee. It is replete with
pictures and so on about how this was actually done.
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\1\ See Exhibit No. 2 which appears in the Appendix on page 117.
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I believe you have many other witnesses and we have a vote.
I would like you to hear from the people who have come from all
over the country. You and I can talk again to really move on
this issue. But I believe that we have got a momentum going.
Both at HUD and through your hearings, we really are able to
work on it.
Madam Senator, I invite you to come to Baltimore sometime
because we are work in progress. We have not solved our
problems, but we have got everybody on the edge of their chair
now working to solve the problems, to protect the poor, to
protect the taxpayer, and to protect the neighborhoods. And,
after all, that is what the U.S. Government, as big as it is,
should be able to do.
So we thank you for your leadership and look forward to
working with you.
Senator Collins. Thank you very much, Senator. I am, as
always, very impressed with the dedication and the amount of
work you have done on this very important issue. Without your
leadership, we never would have had this report. We will put it
in our hearing record so that all may have the advantage of it,
and I really commend you your leadership.
We have a series of two votes on now. I am going to recess
the hearing for about 15 minutes, and then I will come back and
we will swear in our next panel.
Senator Mikulski. Good, and I really look forward to
working with you because, I tell you, I think if we had a
bipartisan effort here, we can really get to the bottom of it.
And hats off, I might say, to the U.S. Attorney, the FBI, and
the postal inspectors. They were the first to do the
indictments that then were the early warnings here. So I look
forward to working with you.
Senator Collins. Thank you very much.
The hearing will stand in recess for 15 minutes.
[Recess.]
Senator Collins. The Subcommittee will come to order. I
apologize for the delay that has occurred because of the vote.
Our second panel of witnesses consists of homebuyers who
were the victims of property flipping schemes. Each of these
witnesses is a first-time homebuyer who purchased supposedly
rehabilitated properties after obtaining mortgages insured by
the Federal Housing Administration. Each of them, however, was
victimized by sellers who grossly inflated the value of the
properties and failed to rehabilitate the homes as promised.
First, the Subcommittee will hear from Lisa Smith, who
lives in Fresh Meadows, New York. Ms. Smith is a New York City
policewoman.
She will be followed by Sonia Pratts, who lives in
Hollywood, Florida. Ms. Pratts works as a health care
assistant.
Finally, we will hear from Stekeena Rollins, who resides in
Chicago, Illinois, and provides day-care services at a
preschool in Chicago.
I want to thank all of you for being willing to come
forward and tell your stories. I know it is not easy to talk
about what has been an absolutely horrible experience for each
of you. But by doing so, you will help prevent other people
from being victims of the kinds of schemes that unfortunately
were perpetrated on you. And you will also be helping us
formulate public policy to try to prevent this from happening
to others.
So I know it is hard for you to tell your personal stories
in a lot of ways, but you are doing a wonderful service by
doing so. And I just want to personally express my thanks and
the thanks of the U.S. Senate for your willingness to come
forward.
Under the Subcommittee's rules, all witnesses are required
to be sworn in, so I am going to ask that you all rise and
raise your right hand, and I will swear you in.
Do you swear that the testimony you are about to give to
the Subcommittee will be the truth, the whole truth, and
nothing but the truth, so help you, God?
Ms. Smith. I do.
Ms. Pratts. I do.
Ms. Rollins. I do.
Senator Collins. Thank you.
You will see that we are going to be using a timing system.
That is just to help you gauge the length of your remarks. When
you see an orange light come on, it is time for you to start
summing up, and when you see a red light start flashing at you,
you could please conclude your comments. But we are not going
to be real strict about it, so if you have something that you
think you need to say to us, feel free to continue. And we will
put your written testimony in the record in its entirety.
Ms. Smith, we are going to start with you.
TESTIMONY OF LISA SMITH,\1\ FRESH MEADOWS, NEW YORK
Ms. Smith. Good morning. My name is Lisa Smith. I am a
single mother of three children and a police officer with the
New York City Police Department.
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\1\ The prepared statement of Ms. Smith appears in the Appendix on
page 77.
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Senator Collins. Ms. Smith, excuse me for interrupting you.
These mikes are a little bit tricky, so if you could make
sure--I think it is a little high for you, right.
Ms. Smith. In February 1997, I decided that I wanted to buy
a house for my family. At the time, we were living in a two-
bedroom apartment that was very small and all the children had
to share one bedroom. I knew they needed their own personal
space, and it would be a dream come true if they could have
their own bedroom. I had recently ended a personal relationship
that had been hard on the whole family, and I thought it would
give me a sense of independence to be a single mother buying my
own home. I knew it would not be easy, but I had no idea about
the terrible experience I was about to go through.
One day in April 1997, while looking through a newspaper
ad, I saw a real estate ad that caught my eye. The name of the
company that had placed the ad was Lenders Realty in Brooklyn,
New York. The ad caught my eye because it said that the houses
were completely renovated and all the closing costs were paid
and only a low down payment was required. I thought that was
great and called Lenders. Two women from the company came to my
apartment. They were very nice and made me feel comfortable.
They told me that all the houses they sold were foreclosures. I
didn't understand what that meant, and they explained to me
that the banks own the houses. I told them what I was looking
for and the price range I could afford. They told me not to
worry and said that they would make sure I got a good house
that was in my price range.
They took me to a house in South Ozone Park and explained
that the house was completely renovated. In early May, we went
to see the house. They said that if I liked it, all I had to do
was move in. I stood outside and looked at the yellow and brown
house. It appeared to be well-kept and looked nice. My heart
was beating fast, and I had a big smile on my face. I had to
get myself together before I went into what would probably be
my house. When I went inside, I was so excited. It seemed like
it had been renovated, and it looked new. I was the happiest
person in the world that day. They saw the excitement on my
face and said the house was mine if I wanted it.
I asked about the roof because it looked like it had fresh
black tar on it. They told that the roof was new, and so were
the kitchen, bathrooms, bedrooms, and windows. They also
explained that if there were any problems with the house, they
would be repaired before I moved in. I told them I wanted the
house but wasn't sure if I would be approved for a mortgage.
They explained that I shouldn't worry and said that they would
help me get a loan. They then told me if I wanted the house, I
had to enter into a contract. I didn't know what that meant
either, so they explained to me that the process of buying a
house and getting a mortgage began with my signing a contract
to agree to buy the house. They said I had to go right back to
Brooklyn with them so the paperwork would start. They explained
that the house would sell fast if I didn't buy it quickly. I
couldn't understand why there was a big rush, but I trusted
them.
We went back to Lenders Realty office, and a supervisor, a
woman, told me I should be so proud to have a house for my
family. I explained that I needed to call a lawyer since my job
would provide me with free legal services. She told me that it
wasn't necessary because Lenders would provide a lawyer for me.
I called the PBA lawyer anyway, and he told me that after the
contract was written, I should fax it over to him and he would
review it. I told the Lenders supervisor that, and she seemed
not to be very happy. She later told me that she had talked to
the PBA lawyer and that I shouldn't use him because he had made
me sound stupid and incapable of making any decisions. She also
told me that I didn't deserve a lawyer that was going to bad-
mouth me. She told me that I should use their lawyer and that
he was a very good lawyer and would be acting on my best
interest. If I had to do this again, I would have conferred
with this lawyer, and he would have never allowed me to sign
this contract. She also told me that the Lenders would arrange
for my mortgage and they would take care of everything. I never
knew things moved so fast when buying a house, and I started to
feel pressured. But I trusted her.
In July 1997, we closed on the house. There was so much
paperwork to fill out. I was really nervous because there was
so much I didn't understand. I had called the lawyer before the
closing, and he told me not to worry and said that everything
would be OK. Then at the closing, the lawyer hardly talked to
me. When I tried to read the papers, he told me just to sign
the papers. If I asked a question, he barely answered. Then
after 2 hours it was over. The house was mine. I paid $129,000.
The day I moved in was the best day in the world. My
children were so excited, and they ran into the house to look
at their bedrooms. But shortly after that, my problems with the
house started. In August, water started to leak from the light
fixture in my ceiling into my bedroom. I called a friend who
was a licensed electrician to come look at the ceiling. He went
to the roof and noticed that there was tar on the roof and
explained that there was a weak spot on the roof that needed
more tar. He told me that he didn't know what was under the tar
or how bad the situation was. He put more tar on the roof, and
it seemed to work for a while.
In September 1997, I couldn't understand why the basement
floor and stairs were so weak that it felt like you would fall
right through the floor. Again, I had my friend come to the
house and pull up the tile from the floor. I couldn't believe
what I saw. There was a huge hole that had never been repaired.
It had just been covered over with tile. I couldn't understand
how someone could put other people at risk of serious injury by
simply putting tile over such a big hole. Lenders had told me
that they had paid an inspector to look at the house, and the
inspector found that the house was in good and safe condition.
I started to get kind of scared, but I kept remembering that
Lenders had promised to take care of everything.
Shortly after I moved in, I began experiencing plumbing
problems. I called the New York City Department of
Environmental Protection to complain about flooding. I also
found out from a neighbor that the house had a long history of
water problems and had received numerous citations from the
city. Whenever we turned on the water, the pipes sounded like
they would explode. On top of that, the house began to shake,
and I found out that the water from the upstairs bathroom was
leaking down into the dining room. I couldn't afford to make
all the repairs on the house, so I had to take out a second
mortgage for approximately $12,000. I was now paying $1,028 per
month on my original mortgage and $368 per month on the second.
I struggled to make the payments and was never late.
Then in June 1999, the upstairs bathroom started to have
plumbing problems, and water leaked all over my kitchen and
dining room. I had a flood in the basement, and all my
children's summer clothes were ruined. The smell in the
basement was terrible because the sewage was backed up. As you
can see from the photographs of the house, sewage backed up
everywhere. I found more holes in the floor and I was really
upset. I knew one of the children could be hurt and that it had
to be repaired. I couldn't afford to make more repairs, so I
had to take out a third mortgage for the house for $45,000. The
third mortgage cost me close to $600 per month, but I continued
to make all the payments.
When the weather began to get cold, the house was freezing.
I would turn the thermostat up to 80 degrees, but it would
still read 45 to 50. There were nights when it was so cold in
the house that I took my children to a motel. Even though I had
two comforters on the beds, the children started to get sick.
When the flooding began in the winter, I couldn't take it
anymore.
For a long time, I thought about the house and about my
family's safety and health. I realized the house was falling
apart, and I couldn't afford to make all the mortgage payments.
It was costing me nearly $2,000 a month, and the condition of
the house wasn't improving. So in January 2000, I decided that
as much as I didn't want to give up the house, I had to let it
go. It saddened me much because even with the problems, I loved
the house. Over the past few years, I had worked so hard to pay
my bills on time and get good credit. But I had to declare
bankruptcy and eventually lost my house. What makes it worse is
that I have since learned that the owner of the house only paid
$50,000 in December 1996 and then resold it to me 7 months
later for $129,000.
I hope this never happens to anyone else. Although my
credit has been totally destroyed, I feel so much better that I
left the house. I would never have forgiven myself if someone
had been seriously hurt in the house. I have learned that in
the future, regardless of what anyone tells me, I will read
everything and ask questions. I hope that the people who took
advantage of me will learn a lesson, too. I pray that I can
overcome my bitterness that this experience has created, but I
also know this has made me a stronger person.
I would be happy to answer any questions the Subcommittee
may have.
Senator Collins. Ms. Smith, my heart just aches for you,
and I am so sorry that you have endured this, and it is so
unfair that you have had to go through this. We are going to
help you in every way that we can.
I do have some questions I want to ask you, but we are
going to hear from the other two witnesses first. But I just
want you to know that I am just so sorry that you have had to
go through this. It really has been a nightmare for you, I
know.
Ms. Pratts, would you proceed, please?
TESTIMONY OF SONIA PRATTS,\1\ HOLLYWOOD, FLORIDA
Ms. Pratts. Good morning. My name is Sonia Pratts. I live
in Hollywood, Florida. I am currently employed as an assistant
manager at Memorial Senior Resource Center in Pembroke Pines,
Florida. I would like to thank you for inviting me here today
to tell my story.
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\1\ The prepared statement of Ms. Pratts appears in the Appendix on
page 80.
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Two years ago, my husband Carlos and I began driving
through various neighborhoods in South Florida looking to
purchase our first home. Neither he nor I had ever owned a
home. It was our dream to have a home of our own, a place large
enough for my kids. We were not looking for luxury, but we
wanted a comfortable home with no problems. We had been saving
for over 2 years to buy our dream home.
In October 1997, we were driving through several
neighborhoods looking at houses for sale when we stopped at an
open house sponsored by ERA Homeland Realty. After we looked
through the house, we spoke with the real estate agent. We told
him that we really liked the house, but he told us that it was
out of our price range and showed us a second house located at
6121 Jackson Street, Hollywood, Florida. He then introduced us
to his boss, Joe Kuruvila, a real estate broker, who told us he
would like to take care of us.
The first time we looked at the house on Jackson Street it
was late at night. The second time was during the day, and we
could tell it was being worked on. The back room was torn
apart, and the front room was a mess and lots of garbage
around. There was a big dumpster full of trash in the front
yard. We were concerned about the house because of all the work
it needed. We told Joe that we did not want a house that we
would have to spend money making repairs on because we were
using our entire savings for the down payment. Joe told us that
the house had a new roof and was insulated. Additionally, he
told us that the entire house would have new windows, new
doors, and the walls would be as good as new. He also told us
that we would be able to afford the mortgage payment for the
house on our income. We foolishly trusted Joe and signed a
contract to buy the house.
One day after we signed the contract, my husband Carlos
drove by to check on the progress of the rehabilitation work
being done on the house. As he approached the house, he saw a
code violation notice taped to the house. He went straight to
Joe's office and asked him about the violation notice. He
assured him not to worry and said that everything would be
taken care of before we moved into the house. We did not get a
home inspection because of the promise from Joe that the house
would be as good as new when we took it over.
Joe recommended that we get our mortgage at Hollywood
Mortgage. We followed his advice, and through Hollywood
Mortgage we got a loan with something called a ``buydown,''
which I still don't understand exactly what this means, but I
do know that we had told Joe about our tight financial
situation, and he assured us that under the buydown we would be
able to afford our mortgage payment.
On February 20, 1998, we went to Joe's office for the
closing. Present in addition to Carlos and I was Joe and a
representative from the title company, Gerald Chapman. We did
not have a lawyer of our own because Joe told us that he would
take care of everything. When we finished with the closing, we
were very excited. We were homeowners. Little did we know what
was in store for us.
We moved into the house in February 1998. Approximately 2
months later, to my shock, I received a notice of code
violations from the city of Hollywood. The violations included
lack of permits for windows and the addition to the house. The
notice required all items to be replaced or fixed. If we failed
to do so, we would face a fine of up to $200 per day from the
city.
The electrical system in the living room is wired wrong. We
have sockets that did not work and are not hooked up. I am
concerned that this faulty electrical system will cause a fire.
The rotted wood in the front room is all that holds the windows
in place, and continues to fall apart. We have had so many
problems with the house. It seems to be falling down around us.
The living room walls are in terrible shape, and the ceilings
are crumbling. As you can see from these photographs,\1\ there
is termite damage throughout the house. Mice and rats enter the
house through holes and, because of a lack of foundation, under
the addition in the back.
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\1\ See Exhibit No. 5.a. which appears in the Appendix on page 178.
---------------------------------------------------------------------------
The roof is another story. As you can see from this
photograph, the roof is falling down and leaking. Recently we
had a storm last week, and that part back there that you see--
the roof fell. It needs to be repaired and insulated. Joe had
told us that the house would have a new roof, and, in fact, I
later found out that the roof was listed on the appraisal as
new. Believe me, the roof is not new. The roof leaks every time
it rains. We also have birds getting into the house and rats
crawling around. We can hear them running around at night.
The appraisal also refers to other repairs that were never
done. For example, the appraisal stated that the rotted fascia
and soffits were repaired. That was not done. It also said that
all the debris was removed from the yard, and that was not
done. Carlos and I worked to clean up all the garbage left
behind. From my understanding, the appraisal was used to
determine the value of my house. I am not an expert, but I
don't understand how this can be when so many things listed in
the appraisals were not true. I also don't understand why I was
never given a copy of the appraisal before closing.
After closing, we contacted an engineer to look at the
house in the hope that we could fix the problems we were
having. The engineer told us that the total cost of repairs
would be approximately $40,000 and that the majority of the
house would have to be demolished. So, in other words, if you
demolish three-fourths of the house that has to be torn down to
put it on code, then the rest of the house won't be on code; so
he told us that the whole entire house would have to be
demolished to be on code.
When I heard this, I was devastated. We simply don't have
the money to spend repairing the house, remedying the code
violations we were stuck with, and making our mortgage
payments. Because of this buydown mortgage that we were given,
our payment has ballooned up by more than $200. I am worried
that we will lose our house because we are really struggling to
make ends meet.
We later learned that Joe Kuruvila owned not only the real
estate agency that sold us the house, but also our mortgage
lender and even the house itself. We have also learned that Joe
bought the house from HUD in September 1997 for $44,600 before
he sold it to us in February 1998 for $80,000. In just 6
months, he nearly doubled his money. From what I can tell, Joe
bought the house, made minimal cosmetic repairs, and then sold
it to us without disclosing the hidden defects. I trusted him
because he told us that he would make our dream of owning a
home come true, and he said that he would take care of us.
Little did I know that he was holding all the cards.
We spent about a year asking Joe to correct the code
violations and complaining about the condition of our house,
and all we heard in response were promises to make things
right, but we never saw any action. Although we did not want to
involve the courts, we felt we had little choice but to file a
lawsuit against him seeking compensation. Our church is paying
our legal fees, and the suit is presently pending in Broward
County Circuit court. We have also discussed our problems with
the State of Florida.
My life and my husband's life have been devastated. At
present, we are just getting by on our paychecks and could
never hope to make the needed repairs or pay a fine. My husband
and I have been severely damaged by all of this. Our lives are
in turmoil, and my marriage is deeply hurt. What was once my
dream home is now a nightmare.
I will be pleased to answer any questions of the
Subcommittee. Thank you for giving me the opportunity to tell
my story.
Senator Collins. Ms. Pratts, again, I want to thank you for
telling your story. I know this has been such a painful
experience for you, as it has been for Ms. Smith. And it is
just so wrong that this has happened to you, to all three of
you. It makes me so angry. And that is why we are holding this
hearing today, and I know it is so hard to tell your stories,
but you are really helping others avoid what happened to you.
Ms. Pratts. Yes. This situation is very critical because my
husband is a schizophrenic, and he has tried to take his life
already three times. My husband is the kind of person that he
can't deal with problems. It affects him very, very much, and I
tried to call him yesterday. I was really worried. I had to
call him this morning, and he didn't sound too well on the
phone. So I just hope that something will come of this.
Senator Collins. Thank you.
Ms. Rollins, before I turn to you, I want to acknowledge
that Senator Durbin, who is your Senator, has joined us. He has
been working very hard on this problem as well, and I know he
is extremely concerned about the flipping problems that we have
identified in Chicago. He has worked very hard on this, and I
know he wanted to be here today specifically to hear your
testimony as well as the others. So if you would please
proceed?
TESTIMONY OF STEKEENA ROLLINS,\1\ CHICAGO, ILLINOIS
Ms. Rollins. Good morning. My name is Stekeena Rollins. I
live in the Austin neighborhood of Chicago, Illinois, and I
teach preschool children.
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\1\ The prepared statement of Ms. Rollins appears in the Appendix
on page 83.
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In mid-1995, my mother, Shirley Rollins, and I read an
advertisement in the Chicago Sun Times that said ``Kiss Your
Landlord Good-bye.'' The ad offered rehabilitated homes for
sale with low down payments from a company called Easy Life
Real Estate System. At the time, I was 20 years old and living
on the northern side of Chicago in an apartment. Neither my
mother nor I had ever owned a home. I was operating a day-care
business from my apartment, which I was interested in moving to
a home setting.
We felt we could afford the down payment mentioned in the
ad. So in June 1995, my mother and I visited the Easy Life
office and met with the sales agent, Peter Sandow. Mr. Sandow
told us that Easy Life was offering 100 percent ``rehabbed''
homes to first-time homebuyers through a special government
program called FHA. He told us that through this program our
down payment would only be $500. He asked us some other
questions about our jobs and how much rent we paid. He told us
he would get back in touch with us.
About a week later, we had another meeting with Mr. Sandow.
He showed us a contract that had no address and told us to sign
it so that we could get the ball rolling. We signed the
contract. The price on the contract was $119,000, but Mr.
Sandow told us that was just a rough draft. This is the price
we paid for the house. I have recently learned that Easy Life
purchased the home for $14,000 in May 1995.
He showed us some pictures of homes and then took us to see
some of them. They were in terrible neighborhoods, surrounded
by abandoned houses. We told him we didn't like the areas and
that we wanted to buy a home on the north side so that my day-
care clients could be close. Mr. Sandow told us that Easy Life
does not have any homes for sale on the north side, but asked
if we were interested in buying a home in Oak Park. I thought
that my clients would come to Oak Park, a suburb just west of
Chicago, so we said yes.
Mr. Sandow drove us to the house he said was in Oak Park.
It was visibly fire-damaged and had been abandoned for some
time. It was completely gutted and was under construction. Mr.
Sandow told us many parts of the house were too unsafe for us
to see, but it looked fairly large. We thought it would work
well for my day-care business. When I pointed out to him the
crumbling walkway, the holes in the foundation, and the
unstable foundation supporting the back porch, he again told us
that the house would be totally rehabbed and that everything
would be new by the time we moved in. I explained to Mr. Sandow
that the first floor would need to be modified to meet State
licensing requirements for a day-care business. He said that
would be no problem. In fact, he even met with a State day-care
licensing representative to discuss the requirements for
modifying the house. We were very excited and thought our
dreams were coming true.
We saw the house again with Mr. Sandow in mid-July. On this
visit we saw the basement for the first time. My mom told Mr.
Sandow that we would need another bedroom in the basement. He
said that it would be taken care of. On the second floor, we
saw the stairs were cut too steep going up into the third floor
and that the ceiling on the third floor was very low. I asked
Mr. Sandow if he could change the ceiling so that we could use
the third floor for bedrooms. I also asked him to fix the
stairs so that they wouldn't be such a hazard. He said it would
be no problem.
After that, I tried to go back to the house several times,
but the house sitter who was staying there would not let me in.
Other times the workmen wouldn't let us in. When we asked Mr.
Sandow about it, he told us that everything was going fine and
not to worry.
About a month before the closing, we found out from a
family friend familiar with the west side that the house was
not in Oak Park as Mr. Sandow had told us. Instead, the house
was located in the Austin neighborhood of Chicago. My mother
and I were very upset and confronted Mr. Sandow. He admitted
that the house was not in Oak Park, but he told us that it was
too late to back out now.
Before the closing, Mr. Sandow told us that he had found a
company that was willing to give us a loan. We met the
gentleman from Dependable Mortgage at Easy Life's office. He
told us that all we had to do is fill out some paperwork and
everything would be fine. Neither he nor anybody else explained
to us we would have an adjustable rate mortgage. In fact, at
the time we did not know what an adjustable rate mortgage was
and had no idea that our mortgage could increase.
Also, before the closing, my mother asked Mr. Sandow if we
needed to do anything else. Mr. Sandow told us that, as part of
the special government program, Easy Life would supply a lawyer
to represent us, conduct a home inspection for us, and have
termite control specialists examine the house. At the closing
in September 1995, the Easy Life lawyer gave us a lot of papers
to sign, but he didn't explain anything about them. He seemed
to be in a hurry and said he had a boat to catch. We didn't
understand everything we were signing, but we trusted the
lawyer and signed the papers anyway.
We moved into the house about 1 week later. I noticed right
away that Easy Life had not done the work required for my day-
care license. When I called Mr. Sandow to complain, he said,
``Don't worry, go ahead and move in and we'll work around
you.'' I kept calling Mr. Sandow, but the modifications were
never made, and I was never able to get my day-care license.
We soon began noticing other problems with the house. As
you can see from these photographs, the house has a dangerous
furnace which has resulted in numerous instances of overheating
and burnouts of the gas regulator, a narrow and dangerous
stairway to the basement, an overloaded and leaky roof with
three or more layers, a garage that is leaning severely and is
unstable--unusable, a damaged ceiling in the first-floor
bedroom from a constantly leaking toilet, a second-floor deck
that is improperly nailed through the roof, and the poor
ceramic tile that has come loose. Underneath the cheap carpets
Easy Life installed were the same burnt wooden floors that I
had seen the first time when I looked at the house. In
addition, the walkways that Mr. Sandow had promised to repair
were crumbling, and the foundation under the back porch was
still unstable. The floors in some areas of the house didn't
meet the walls, which allowed rain and snow to enter the house.
The light sockets sparked and the toilets overflowed.
I complained about ten different times to Easy Life about
the problems in the house. In response, Easy Life sent some
workmen to the house on several occasions. They did some
caulking, nailed down the front steps, and put a patch on the
second floor toilet, and installed a ventilation system in the
attic. But the work that they did only lasted 1 or 2 days, and
then the problems would come right back.
We have had many other problems with the house since we
moved in. The representatives from the gas company have come
out to the home several times because of leaks in the furnace.
They had to disconnect the gas and the piping, and they told us
that the piping was old and improperly attached. They also told
us that the furnace is unsafe. We have seen termites swarming,
the plumbing leaks, and the garage is leaning heavily to one
side. The windows were improperly installed and there is no
insulation. Instead, as you can see from the photograph,\1\
cheap new siding was installed over the burned wooden exterior,
so cold air comes right through into the house in the winter.
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\1\ See Exhibit No. 3.a. which appears in the Appendix on page 169.
---------------------------------------------------------------------------
My mother and I have tried our best to make the repairs,
but cannot afford to put the kind of money into the house that
it needs to make everything right. I estimate that we have
spent several thousand dollars of our own money to keep the
house from falling apart. We have not been able to keep up our
mortgage payments because they kept going up. Right now there
is a foreclosure case pending against us, and we are afraid of
losing our house.
I appreciate the opportunity to tell my story here today. I
will be glad to answer any questions the Subcommittee has.
I would also like to state that Ms. Gladys Hall is also a
member of the same neighborhood that I live in. We also
purchased the same home from Easy Life Real Estate. I would
also again like to thank Counsel Nina Vinik for allowing me to
have this opportunity to come here today and to state the
problems not only that Chicago is having but that faces many
different cities in the United States. I would like to say to
Senator Durbin, I know that you have been working with us, and
I know that this is going to take time. But, please keep us in
mind. We will do everything that we can to support you in
helping other cities, not only just Chicago, to get this
problem resolved. Easy Life has devastated Chicago, not just
South Austin, but devastated Chicago and its entities.
Thank you.
Senator Collins. Thank you, Ms. Rollins. You were very
eloquent in describing what happened to you and how your dream
of opening the day-care center turned out to be a nightmare as
well.
I just want to clarify on the one last photo. This is your
mother. Is that correct?
Ms. Rollins. Yes.
Senator Collins. And she was involved in buying the house
with you.
Ms. Rollins. Yes.
Senator Collins. Before I go to questions, I want to call
upon Senator Durbin for any opening comments that he might want
to have.
OPENING STATEMENT OF SENATOR DURBIN
Senator Durbin. Thank you, Madam Chairman, and I am going
to be brief because I want to ask a few questions, as I am sure
you do, too. But first let me compliment the Chairman of the
Subcommittee, Senator Collins. This Subcommittee is such a
breath of fresh air. We bring stories before us here that are
troubling, upsetting, but it is the real world. And,
unfortunately, too many times in Congress we entertain people
in nice suits, high rollers who come and tell us stories based
on statistics and theories and don't bring real families and
real concerns before this Congress. This Subcommittee is a
notable exception, and I want to congratulate Chairman Collins
for this hearing and for gathering these witnesses, who really
tell us a story that everyone in Congress should hear.
Ms. Smith, thank you for being here, and as a New York
police officer, you are doing your duty to your city, and you
never should have gone through this experience.
Ms. Pratts, as you talked about the family circumstances
that you are facing, with the health problems, it is amazing
that you can make it through this ordeal, but to have that on
top of it is a tribute to your strength. Thank you for being
here.
And, Ms. Rollins, thank you for coming and telling the
story from the Chicago perspective. I am glad to hear that you
are working with the South Austin Coalition Community Council.
This is a good group. They really fight for people. And I have
worked with them in the past on a lot of different issues like
LIHEAP and energy assistance.
I want to say in my opening statement that this hearing is
about government letting people down. That is what this is
about. It is about the Department of Housing and Urban
Development, as the GAO report spells out, failing to keep an
eye on these lenders who are taking advantage of innocent
people, like Ms. Rollins, who, with her mother, had a dream of
owning a home for the first time in their lives and saw this
dream disintegrate.
FHA needs to do a better job of keeping businesses like
Easy Life off the street. We have got to get rid of these loan
leeches and real estate reptiles that are out there taking
advantage of ordinary people. And that means that HUD has to do
a better job, and we have to hold them to a higher standard.
And though they may be improving their situation, they can
still do a better job.
I will join Senator Collins in a bipartisan plea and
demand, if you will, that HUD do a better job of policing the
ranks of people who sell these homes and finance these homes.
Now, there is another failure of government involved here,
too. What we are seeing before this Subcommittee today in this
panel are people who are right on the edge of bankruptcy. Ms.
Smith, if I am not mistaken, you indicated that you filed for
bankruptcy already.
Ms. Smith. Yes.
Senator Durbin. I don't know the situation of Ms. Pratts
and Ms. Rollins, but you can understand with foreclosure
proceedings being filed what they could face.
We debate the bankruptcy law in theory, about people who
are abusing the bankruptcy court. Listen to these stores, real-
life stories of people on the edge headed to the bankruptcy
court. I hope the other two of our witnesses can avoid it. But
that ought to be a reminder to all of us that this bankruptcy
debate we have been in for years is about people just like
those who have joined us today.
Last November, I introduced an amendment on the floor of
the U.S. Senate, and this is what it said: Predatory lenders
who deceive people like the three who have gathered before us
today into signing documents that they could never honor nor
deal with balloon payments and worthless pieces of real estate,
should not have the protection of the bankruptcy court. These
lenders should not be able to walk into bankruptcy court and
demand from these three families full payment for their
deceptive loans. I think the courts ought to close the doors to
those folks. They have violated the law. They shouldn't have
the protection of the bankruptcy court to collect.
You know what? I lost that amendment. The vote was 51-47. I
couldn't get a majority in the U.S. Senate to agree with me
that those predatory lenders have no place there. And the group
that opposed me was the other lenders and the other banks who
said, well, we don't want to get the government involved in
credit practices.
Listen to these stories and tell me that government
shouldn't be involved in keeping an eye on these predatory
lenders. I just wish my colleagues in the Senate could be here
with Senator Collins and myself today to hear these stories. We
might have had a different result on that bankruptcy amendment
on predatory lending.
Thank you, Madam Chair.
Senator Collins. Thank you, Senator Durbin.
Ms. Smith, I would like to ask you a few more questions,
and I would like to ask the staff to put up the picture of the
toilet from Ms. Smith's house.\1\
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\1\ See Exhibit No. 4.a. which appears in the Appendix on page 176.
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From the photographs we have seen of your house--and we
have seen many of them--you have obviously experienced very
severe problems. And I just want to make sure I understand what
I am seeing in this photograph. It looks to me like raw sewage
is coming up out of the toilet and spilling out all over the
floor. Is that what I am seeing here?
Ms. Smith. Yes. What it was, when you flushed the toilet
from upstairs, it would come out of the toilet from the
basement.
Senator Collins. My staff visited your house, as you are
well aware, and they said the stench from this was just
overwhelming. There was no way anyone could live in your house.
And in addition to being unpleasant, it is obviously a safety
hazard.
Ms. Smith. Yes.
Senator Collins. Was that part of your concern about having
your children living there?
Ms. Smith. Yes, because at the time my son--I had made him
a nice room in the basement--so I had to move him out of the
basement because we started getting a lot of mold and the
flooding, the feces all over the place. So I had to move the
kids, everyone upstairs.
Senator Collins. Did you ever talk to anyone about making
repairs on this problem?
Ms. Smith. I had spoken to Lenders, and basically they
weren't any help to me. They were OK in the beginning when they
knew I was excited about the house. But once the problems
started, I was on my own.
Senator Collins. And this was despite the fact that the
sales contract that you signed said that the seller would make
all necessary repairs. Is that right?
Ms. Smith. Yes.
Senator Collins. So you essentially were lied to, weren't
you?
Ms. Smith. Yes.
Senator Collins. You were deceived about the condition of
the house, and then when it became obvious that very major
repairs were needed to make it fit for you and your family to
live there, they refused to make the repairs. Is that right?
Ms. Smith. Yes.
Senator Collins. Now, it is my understanding you did talk
to a contractor about this particular plumbing problem, and
what were you told? Were you told that it was something that
could easily be fixed? Or was it a major problem?
Ms. Smith. He said it was a major problem. Basically they
would have to gut it, gut the whole basement, the walls,
everything. Everything was behind the walls. And it would cost
me a lot of money to have it fixed.
Senator Collins. We also have some pictures of your house--
and I don't know whether we have them with us or not--of the
windows and the doors with plastic over them. Obviously you
were trying to keep out the cold. You said it was cold, even
though you turned up the thermostat to 85. Did you ever find
out whether the home was insulated?
Ms. Smith. Well, what happened was, with one of the home
improvements, they had took down some of the siding, and there
was no insulation at all. It was just wood there.
Senator Collins. Were you also concerned about the safety
of your children because of the problems you told me about with
the holes being discovered when you peeled back the floor?
Ms. Smith. Yes.
Senator Collins. What was your concern?
Ms. Smith. Well, with the holes that was in the floor, you
could either break a leg, the hole that was leading to the
basement, we could have fell through the floor, that is how big
it was.
Senator Collins. That is extraordinary, and that was
concealed, deliberately concealed by the placement of the tile
over the hole.
Ms. Smith. Yes, just tile.
Senator Collins. Now, you testified that you felt as though
you were being rushed through the whole process, and that you
were discouraged from asking any questions. Is that correct?
Ms. Smith. Yes.
Senator Collins. What was your concern? Were you concerned
that you would lose the house. Did they give you the impression
that if you didn't act now, someone else was going to snap up
what appeared to be a good house?
Ms. Smith. Well, basically they said that the houses go
fast, this is a great buy, I am getting a good price on the
house, and this is my house and they wanted to make sure that I
get this house.
Senator Collins. And I understand that you decided to not
have a home inspection of the house, which would have revealed
a lot of these problems. Why did you decide not to get the home
inspected before you bought it?
Ms. Smith. Well, basically they had told me, Don't worry,
everything is OK, and that they had the house inspected, and
that they would never let me move into a house that was unsafe.
Senator Collins. So you thought it was pointless to pay for
a home inspection because you had been told by Lenders Realty
that it already had been inspected and it was fine. Is that a
fair statement?
Ms. Smith. Yes.
Senator Collins. So you thought, well, why bother to pay
for a second inspection?
Ms. Smith. Right.
Senator Collins. How did you select the bank for your
mortgage?
Ms. Smith. I didn't select a bank. Lenders selected the
bank.
Senator Collins. And they told you they would take care of
everything, and just as they made the false assurances that if
there were any repairs necessary, they would take care of those
as well?
Ms. Smith. Yes.
Senator Collins. When you bought the house for $129,000,
did you have any idea that just 7 months earlier the seller had
purchased it for $50,000?
Ms. Smith. No, not at all.
Senator Collins. Was it our staff who told you that for the
first time?
Ms. Smith. Yes, and I was devastated.
Senator Collins. So had you known that just 7 months
earlier this house had been purchased for less than half of
what you paid for it, would that have been a red flag to you?
Ms. Smith. Yes. I wouldn't have bought it.
Senator Collins. Ms. Smith, just one final question for
you. You have testified that you had no choice but to default
on the mortgage. You obviously couldn't afford all those
repairs. It has been an awful experience for you. Are you
living in an apartment now? Have you moved back into rental
housing, or what are you doing now?
Ms. Smith. Rental housing.
Senator Collins. And you have had to file bankruptcy. How
has this horrible experience affected you and your family?
Ms. Smith. A lot of stress. I mean, I am back to square
one. I had a house that I wanted for my children, and now I am
back in an apartment again, and they are back sharing one
bedroom. And it is hard, but at least I could say that they are
safe and they are happy.
Senator Collins. I thank you again very much for coming
forward. It is so awful that you were deceived in this way, and
I can imagine your joy at owning a home and having what
appeared to be a wonderful new home for your children, only to
have it end this way. And, again, we will help you in every way
that we can.
One of the actions I am going to take is to ask HUD what
they are doing not only to assist you personally but also to
take action against the people involved in the flipping scheme
that has affected you so detrimentally.
Ms. Pratts, I understand that you also decided not to get a
home inspection before you bought your home. Can you explain to
us why you didn't get the inspection?
Ms. Pratts. When we went to see Joe Kuruvila, my husband
and I, we asked him if we had to do anything for the house, and
he said no, that he would take care of it: ``Because you are a
first-time buyer, we are going to take care of everything for
you.'' So that is the reason why we didn't get a home inspector
or anything like that.
Senator Collins. So you thought everything had been taken
care of, you received all these assurances, and you testified
that you specifically told the seller that this was a stretch
for you financially, that you had saved and saved in order to
come up with the down payment that you needed, and that you
didn't want a house that needed a lot of repairs. Is that
correct?
Ms. Pratts. Exactly. Even my husband told him, we came
here, I am glad you showed us the house, we came here not only
for that but I want to make sure that we don't have to spend
any money on the house or anything because we can't afford it.
And, actually, we did spend money on the house. We still have
the receipt from Home Depot, $2,500 that we already spent so
far. The rest we couldn't pay for or fix or anything because we
can't afford it.
Senator Collins. So you made it really clear that you
weren't looking for a fixer-upper where you would have to spend
a lot of money to renovate the house.
Ms. Pratts. Exactly.
Senator Collins. Because you were using all of your savings
in order to afford the down payment and get into the house. Is
that right?
Ms. Pratts. Exactly.
Senator Collins. And, once again, I want to emphasize that
you were told by the seller that the house would be completely
renovated, and indeed, it appeared renovations were going on.
Is that accurate?
Ms. Pratts. Yes. He was fixing the house, all right, but he
was fixing it with people that didn't have a license or
building permit or anything at all whatsoever. That is how the
violation came up, and then more of the violations came up.
This house had violations since 1982.
Senator Collins. You are talking about code violations,
correct?
Ms. Pratts. Yes.
Senator Collins. So when you moved into the house, you find
out there are all these problems, you actually get a notice of
code violations, for which you personally were going to be
fined, is that right?
Ms. Pratts. Yes.
Senator Collins. So what happened? Did you confront the
seller? Did you go back--could you talk a little bit about
that?
Ms. Pratts. We went over to him, and we asked him about all
these violations, and he said that he would take care of it.
And we went a couple of times to take care of it. It so happens
that I myself went into an investigation to see how in the heck
did we get this loan. And when I went to investigate, that
house did not have termite inspection, roof inspection, or
anything at all whatsoever.
Senator Collins. So none of what you had been promised was
done.
Ms. Pratts. No.
Senator Collins. And you obviously trusted the seller that
not only was the house completely rehabilitated but that he
would take care of the code violations and any other problems?
Ms. Pratts. Yes.
Senator Collins. Let me ask you one more question before
turning to Senator Durbin for his questions, and then I will
come back to Ms. Rollins for some questions that I have for
her. It is similar to the question that I asked Ms. Smith. At
the time that you bought the house--and you paid, I think,
$80,000 for it? Is that correct, was it $80,000?
Ms. Pratts. Yes.
Senator Collins. Did you have any idea that Joe Kuruvila
had paid only $44,600 for the house just 5 months before?
Ms. Pratts. I didn't know any of that at all whatsoever,
but my son, when he came from New York--he was transferred
here--he said, Mom, we could find out how much that house cost.
So my daughter-in-law's cousin, he is a realtor, he looked
it up on the Internet, and when I saw the price, I nearly had a
heart attack. In fact, my husband was so upset, he went over to
the office and told him a thing or two. And he promised us so
many things, and then I said, you know what? We are going to
take care of it. So that is how we got our lawyer, through our
church, and so up to this date, they are taking care of it.
Senator Collins. So had you known that it was being sold to
you for almost double the price just 5 months later, you never
would have bought the house?
Ms. Pratts. I wouldn't have bought it.
Senator Collins. Senator Durbin.
Senator Durbin. Thank you, Madam Chair.
I think some of your questions and answers really make it
clear what a cruel experience you have been through. If I am
not mistaken, this was your first homeownership experience,
something you had never been through this before, and you
didn't quite know what you were getting into. You were pushed
to the limit on payments by people who were trying to get you
to sign these contracts and clearly were deceived in terms of
the product that you were trying to purchase.
I would like to ask a few questions, if I could, of Ms.
Rollins. Is Easy Life Real Estate still in business?
Ms. Rollins. No. They have since moved on, and they have
started other companies. That is why I stated earlier it is
entities because they have moved on to other companies and use
different names. Same tactics, different name.
Senator Durbin. But are they still around? I mean, could
you pick out the people that are still involved in this?
Ms. Rollins. As far as the real estate agents, to my
knowledge, some of them have moved on and started their own
development projects. The real estate agent that sold me my
home, he has started some housing, like fast-track housing near
the United Center. So, they have moved on. It seems to be after
they make so much money and then when this situation came up,
everybody kind of scattered and went about their own ways, and
some folks have totally disappeared.
Senator Durbin. Cockroaches will scatter when you turn on
the lights.
Let me ask you, this fellow who did the appraisal on your
house, James----
Ms. Rollins. Koechle.
Senator Durbin. Is that how you pronounce it? He was
indicted by a Federal grand jury, as I understand.
Ms. Rollins. Yes.
Senator Durbin. Do you know of anyone else who has been
indicted as a result of what happened to you?
Ms. Rollins. No.
Senator Durbin. Have you reported the people who were
involved in your transaction to State and local agencies so
that they know the experience you have been through?
Ms. Rollins. Yes. The State's Attorney's office, I have
talked to two agents that worked for the Federal Bureau of
Investigations. I have touched bases with a lot of people about
this case, so it is well known in Chicago.
Senator Durbin. Is Dependable Mortgage still in business?
Ms. Rollins. I have no idea. I can't say yes or no.
Senator Durbin. Madam Chair, I would like to put into the
record here a chart which is interesting. It shows the
foreclosures in the Chicagoland area.\1\ And these do not
include FHA and VA foreclosures. In 1993, there were 94
foreclosures. In 1998, the figure is up to 3,502, not including
FHA and VA. So there is a dramatic effort by these sub-prime
lenders to drag people into these real estate deals that they
know they can't pay off. And it isn't just young families such
as those represented here today. There are a lot of senior
citizens who are being victimized--your mother, of course, is
in your home purchase deal, but there are senior citizens who
are being victimized as well.
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\1\ See Exhibit No. 6 which appears in the Appendix on page 181.
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I would like to spend a minute, if I could, talking about
what has happened as a result of this. Ms. Smith, you say you
have gone to bankruptcy court. Is that correct?
Ms. Smith. Yes.
Senator Durbin. And the people who gave you the mortgage on
your home, are they filing a claim against you in bankruptcy
court?
Ms. Smith. Yes. Now the house is in foreclosure.
Senator Durbin. It is in foreclosure. So the company that
loaned you the money for the purchase of the home is basically
suing you to pay off the balance on the loan.
Ms. Smith. Yes.
Senator Durbin. Ms. Pratts, have they started foreclosure
proceedings against you yet?
Ms. Pratts. Not yet, but I know for a fact my house doesn't
have insurance now. I just sent out an application for
insurance through the Principal Residential Mortgage, and I am
thinking about having a bankruptcy because I am the only one
working now. My husband doesn't have a job right now.
Senator Durbin. And you said you have been unable to keep
up with the mortgage payments because of the expenses?
Ms. Pratts. I pay my mortgage, but late. But I have to pay
the interest, which is $34.
Senator Durbin. I see.
Ms. Rollins, what is your situation? Have they filed a
foreclosure action against you?
Ms. Rollins. Yes. I am currently in foreclosure, just
waiting for basically the notices to come in the mail to tell
me exactly what I need to do. I am involved with the Legal Aid
Foundation. They are in litigation right now, and they are
trying to get some loss mitigation going. But other than that,
I am just basically waiting, but by no means will I file
bankruptcy.
Senator Durbin. You don't want to do that?
Ms. Rollins. No.
Senator Durbin. Are you still living in the house?
Ms. Rollins. Yes.
Senator Durbin. Well, I think it is clear, Madam Chair,
from the record here what happens. It isn't just a bad deal and
a tragic story. It ends up in a legal proceeding where the
people who have deceived you are now going into our courts and
saying the law is on their side. Isn't that amazing that the
law would be on their side with all of this happening to you,
all of the deception and all of the exploitation that has been
involved in it? And to think in bankruptcy court that they are
going to be standing in line and sifting through whatever
assets you have left and saying we are going to take as much of
this as we can. That to me is an outrage. And it is a shame
that we in Congress didn't summon the will to deal with that
directly.
We are going to have testimony a little later about FHA and
whether they have done a good job in keeping people out of this
business like the dregs of the credit and real estate industry
with whom you have been involved. But thank you for your
testimony today. It really has had an impact on us.
Thank you, Madam Chair.
Senator Collins. Thank you, Senator Durbin.
Ms. Rollins, let me follow up on what Senator Durbin was
saying. Did the fact that you knew your mortgage was insured by
the Federal Government give you a sense of security, of
thinking, surely, if the Federal Government is standing behind
the mortgage on my house, the house is going to be in good
condition?
Ms. Rollins. Yes. That was the whole reason for me
continuing with this process because the first visit with Mr.
Sandow was kind of sketchy. I got kind of--some red flags went
up, but after he had said it to me that HUD and FHA would work
together and this was a program, a pilot program that they were
starting in Chicago, I felt a little more confident about
making the choice and going ahead with the process.
Senator Collins. See, I think that is a very logical
conclusion for you to have drawn. Clearly, when you see that
your loan is backed by the Federal Government, you should be
able to assume that the house that you are buying is in good
condition. And I agree with Senator Durbin, and as I said in my
opening statement, I think HUD in some ways has been an
accomplice to the problem. I think that it bears a great deal
of responsibility for allowing the flipping problem to go
unchecked for so long. They have taken some recent steps, but
this problem has been going on for a long time.
I want to ask you about--I want to show you a form that was
signed by the seller of the house that you bought.\1\ Now, you
have testified that you were told that the house was going to
be completely rehabilitated before you moved into it, and this
form--is there a copy? Could we provide a copy for Ms. Rollins?
Because it is a little hard to see from here.
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\1\ See Exhibit No. 3.b. which appears in the Appendix on page 174.
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This is a disclosure form that the seller signed indicating
that the house is basically free of major defects. For example,
the form indicates that the seller was aware of no major
problems in the walls or floors, no material defects in the
electrical system, no material defects in the plumbing system.
And you and your mother signed the form to show that you
received it.
Was this form one of the reasons why you felt that the
house was fine? Because here you have a signed statement from
the seller certifying that it was free of these defects. Was
this something you relied upon?
Ms. Rollins. Yes.
Senator Collins. And based on your experience, it is
obvious that the seller misled you, that he wasn't telling the
truth on this form. Is that correct?
Ms. Rollins. Yes.
Senator Collins. Now, let's go through a few of the
specifics. The seller stated that he wasn't aware of any
problems with the walls, the floors, or the foundation. Now, I
understand that you found spaces that had developed between the
floors and the walls and that the foundation is crumbling. Is
that accurate?
Ms. Rollins. Yes.
Senator Collins. Could you tell us more about the problems
with the walls and the floors and the foundation?
Ms. Rollins. Basically the foundation was crumbling from
the very first time that I went to look at the home. Mr. Sandow
told me that it would be repaired. It has not been repaired.
The walls and the floors have never met. When I visited the
home on the first occasion, like I said, it was fire-damaged.
It was always like that. What they did was when they put the
new dry wall in and the border around the floor, that kind of
would give you the indication that it had been repaired. But
over time if you take away the carpet or when you are cleaning
the home, you can notice little defects.
Senator Collins. And, similarly, this form also says that
the house's electrical system is sound, that it is free of any
material defect. Did you find that to be true? Tell us about
the sockets and the electrical outlets in your home.
Ms. Rollins. Well, the whole house, they have two separate
electrical boxes for the first floor and the second floor.
Those wires, even though they are housed in two separate
electrical boxes, they are crossed. So if I am using a large
appliance on the first floor, like, say, the washer, if you
turn the microwave on on the second floor--and mind you that it
has its own electrical box--it will blow the whole house.
Senator Collins. And it is my understanding that one of the
light sockets actually shoots sparks.
Ms. Rollins. Yes. In the basement, we have four light
fixtures. Out of the four, only two are operable because they
can't--the one system will overload if all the lights are on in
the basement.
Senator Collins. Now, the seller also claimed that the
plumbing system in your house was free of material defects, and
yet I understand you had a lot of plumbing problems as well.
Could you tell us about those?
Ms. Rollins. Yes. The toilet on the first floor overflows.
The toilet on the second floor overflows just by itself. It
flushes by itself. The toilet on the second floor has fallen
into the first-floor master bedroom on three occasions.
I had called out a company to have them go into the crawl
space to look at the stack. I thought that that may be causing
the water to rise, like debris was in there. The gentleman did
come out to the home, and what he told me was that he could not
repair the stack because there was cement in the stack and it
had solidified, and he could not break it up to get into the
system. So it is permanently like that.
Senator Collins. I want to state for the record that the
Subcommittee staff attempted to interview the individual who
signed this document and who sold you the home, and he asserted
his Fifth Amendment rights and refused to answer any
questions.\1\
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\1\ See Exhibit No. 1 which appears in the Appendix on page 115.
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Let me ask you just a couple more questions, and then we
will move on to our next panel.
I would like to ask you a question about part of your
mortgage application, the section depicting the monthly income
and combined housing expense information.\2\ Now, this shows
that you receive $618 a month in rental income, and that was
used to qualify you and your mother for the mortgage so that
you would meet the income levels. And the reason why there are
income levels is to make sure you can afford to pay for the
mortgage.
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\2\ See Exhibit No. 3.c. which appears in the Appendix on page 175.
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Do you, in fact, receive $618 in rental income every month?
Ms. Rollins. No.
Senator Collins. Did you put that number on that form?
Ms. Rollins. No.
Senator Collins. Did you tell anyone to put that number on
that form?
Ms. Rollins. No.
Senator Collins. And you weren't even aware that that
number had been put on the form to make it appear that you
qualified for the mortgage?
Ms. Rollins. No.
Senator Collins. Thank you. So this is an example where
there was falsification or doctoring of some of your financial
data to make it look like you could qualify for this mortgage.
Is that an accurate statement?
Ms. Rollins. Yes.
Senator Collins. OK. I do want to thank you all for coming
forward with your stories today. As I said, it is absolutely
wrong what has happened to you, and I know I speak for Senator
Durbin and myself, that we are absolutely committed to putting
in place protections that will ensure that this does not happen
to others. There clearly needs to be a crackdown on the
unscrupulous real estate agents, appraisers, and lenders who
are involved in this. HUD needs to do a much better job to
ensure that other homeowners don't go through this.
Each of you is a first-time homebuyer, and in virtually
every case of the victims we interviewed, that was the case. So
the people who are being exploited are the very people that
these Federal housing programs are designed to help. We are
determined to put a stop to this, and I can't thank you enough
for being willing to come forward and tell your stories. Thank
you so much.
Ms. Smith. You are welcome.
Ms. Rollins. Thank you.
Ms. Pratts. Thank you.
Senator Collins. You are excused now.
Our final witness today is Stanley Czerwinski, who is the
Associate Director of the General Accounting Office's Division
of Resources, Community, and Economic Development. In response
to a joint request from Congressman Rick Lazio and myself, GAO
conducted an investigation of the Department of Housing and
Urban Development's supervision of FHA lenders. Today GAO will
release its report entitled ``Single-Family Housing: Stronger
Oversight of FHA Lenders Could Reduce HUD's Insurance Risk.''
\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 7 which appears in the Appendix on page 182.
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I am going to ask Mr. Czerwinski to introduce the two
gentlemen who are accompanying him today, but before you get
comfortable, if you will please stand so that I can swear in
pursuant to Rule 6. Would you raise your right hand? Do you
swear that the testimony you are about to give to the
Subcommittee will be the truth, the whole truth, and nothing
but the truth, so help you, God?
Mr. Czerwinski. I do.
Senator Collins. I know you are familiar with the lighting
system, and so, Mr. Czerwinski, I will ask you to introduce the
two gentlemen with you and proceed with your statement.
TESTIMONY OF STANLEY J. CZERWINSKI,\2\ ASSOCIATE DIRECTOR,
HOUSING AND COMMUNITY DEVELOPMENT ISSUES, RESOURCES, COMMUNITY,
AND ECONOMIC DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING
OFFICE, ACCOMPANIED BY ROBERT PROCACCINI, ASSISTANT DIRECTOR
FOR FHA INSURANCE PROGRAMS, AND PAUL SCHMIDT, ASSISTANT
DIRECTOR FOR SINGLE-FAMILY HOUSING PROGRAMS
Mr. Czerwinski. Thank you, Madam Chairman. To my left is
Paul Schmidt. Paul is our Assistant Director for Single-Family
Housing Programs. And to my right is Bob Procaccini. Bob is our
Assistant Director for FHA Insurance Programs.
---------------------------------------------------------------------------
\2\ The prepared statement of Mr. Czerwinski appears in the
Appendix on page 87.
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Senator Collins. Thank you.
Mr. Czerwinski. Madam Chairman, I would like to thank you
for holding this hearing. As you know, GAO tries very hard to
put a human face on the issues that we cover, and we couldn't
have done it anywhere near as well as you have just done with
this past panel. The stories that you have seen illustrate the
kinds of issues that we uncovered during our review. And as you
know, this review was undertaken at your request, and the
report was released earlier this week.\1\
Our report evaluates HUD's oversight of FHA mortgages, and
is aimed at avoiding the kind of things that we saw today. HUD
has three oversight components, and I would like to give a
brief description of these after I talk a little bit about FHA.
The three components are:
Approval of FHA lenders. Approval is designed to only let
good lenders in the program.
Second is monitoring, and monitoring is designed to make
sure those lenders that you let in the program do a good job.
The final step is enforcement, and that is designed to take
action against those lenders that don't do a good job.
Before I go into these three steps in more detail, I would
like to take a step back and talk a little bit about FHA.
FHA is the principal provider of Federal mortgage
insurance. More importantly, it is the major lending source for
first-time, low-income, and minority homebuyers.
For example, one-quarter to one-third of all low-income and
minority homebuyers got their homes through FHA insurance, and
three-quarters of FHA's portfolio is devoted to first-time
homebuyers.
FHA relies on about 10,000 lenders to carry out its
mission. About 2,900 of these lenders are granted what is
called direct endorsement authority. That means these lenders
can gather and process the information, underwrite loans, make
eligibility determinations, and they do this with no prior
review from HUD. The remainder of the lenders are called loan
originators. Loan originators can gather such information as
mortgage applications, employment verification, credit
histories, but then they must go to one of the 2,900 approved
lenders for underwriting and eligibility determinations.
Given HUD's reliance on private lenders, oversight is
essential. Such oversight is the primary responsibility of four
homeownership centers that HUD has in Atlanta, Denver,
Philadelphia, and Santa Ana. Our team visited all four
homeownership centers, and we found problems in the three areas
I just mentioned: Approval, monitoring, and enforcement.
The major problem with approval is consistency. When
lenders apply for FHA approval, they go through a probationary
period. During that period, FHA evaluates their performance.
HUD guidance requires that lenders must have ``acceptable''
performance to be approved, but the guidance does not specify
what acceptable is. Given such general criteria, it is not
surprising that the four centers we visited apply the standards
differently.
For example, during our review, 36 lenders applied for FHA
approval. Some of these lenders had no significant problems at
all during their probationary period; however, others had as
much as 40 percent of the loans they made while on probation
with serious problems. All 36 lenders, those with no
significant problems and those with up to 40 percent, were
approved because their performance was deemed acceptable.
Once lenders are in the program, the key then becomes to
monitor their performance. HUD monitors their performance in
two ways: It conducts on-site reviews of lenders' operations;
it also has desk reviews of the paperwork associated with each
loan. HUD guidance requires that both of these types of reviews
be targeted to high-risk lenders and loans. However, we found
that HUD did not target reviews to these high-risk lenders and
loans.
For example, of the four homeownership centers, only
Philadelphia developed a list of high-risk lenders to
prioritize the reviews, and even in Philadelphia, they only
covered about 20 percent of the number of high-risk loans that
they were supposed to cover.
As I mentioned, enforcement is the third step of the
oversight process, and enforcement has essentially three
components: The first is the homeownership centers may suspend
lenders for poor performance; the second is lenders may be
referred to HUD's Mortgagee Review Board for such actions as
indemnification, termination, or fines and penalties; the final
step of the enforcement process is Credit Watch, and I would
like to spend a moment or two on Credit Watch because it really
is the crown jewel of HUD's attempts to enforce its actions.
Credit Watch works according to automatic sanctions that
are applied to lenders based on their default rates and claim
rates. However, we found two problems with Credit Watch.
First of all, Credit Watch only holds accountable those
lenders who originate loans. When the same lender originates
and underwrites a loan, this isn't a problem. However, when one
lender originates a loan and then must go to an underwriter, in
that case the underwriter gets a free ride under Credit Watch.
The second problem is that lenders have successfully
challenged in court HUD's authority to impose Credit Watch.
Yesterday Senator Sarbanes and Senator Mikulski said they were
introducing legislation that would remedy this problem.
We support clarifying HUD's authority regarding Credit
Watch. We also recommend that Credit Watch be extended to all
lenders within FHA. Our report also contains a number of
recommendations aimed at improving the approval, the
monitoring, and the enforcement functions that HUD has. I am
happy to say that HUD agrees with the recommendations we are
making, and they have told us that they promise to take action.
I know HUD will be up here tomorrow, so you can follow up on
that, I am sure.
That concludes my statement. I am glad to answer any
questions that you or Senator Durbin may have.
Senator Collins. Thank you, Mr. Czerwinski. I thought your
report was very well done, and I appreciated the efforts that
GAO has made in this regard.
Your testimony, as well as the report that was dated April
and released earlier this week, outlines a number of weaknesses
in HUD's system for lender approval, monitoring, and
enforcement that pose risks for the first-time homebuyers that
we have heard from today and also for the insurance fund. But
this wasn't the first government report to cite problems. It is
my understanding GAO has done previous reports, and the Office
of Inspector General at HUD has repeatedly issued audits and
reports indicating that these programs were at significant risk
for fraud.
For example, way back in 1993, 7 years ago, HUD's Office of
Inspector General completed an audit of FHA's single-family
program and found that HUD's post-endorsement reviews did not
consistently ensure quality underwriting. Based on your more
recent work, is this still a problem?
Mr. Czerwinski. That is absolutely correct.
Senator Collins. In addition, back in 1993, the Office of
Inspector General found that HUD was not effectively using
sanctions to protect the integrity of the program. Sounds like
you found the same thing.
Mr. Czerwinski. Yes, Madam Chair.
Senator Collins. The same report back in 1993 found that
the direct endorsement underwriter approval process was not
effective. That is again what we heard today, is it not?
Mr. Czerwinski. That is exactly right.
Senator Collins. So it appears that the IG identified
essentially the same kind of problems that you found in your
review 7 years ago.
Mr. Czerwinski. That is correct.
Senator Collins. And it wasn't just back in 1993. It isn't
as if there was a report in 1993 and nothing happened for 7
years. It is my understanding that GAO did some work in 1997
that looked at the appraisal process, and we have heard a lot
about faulty appraisals today. Could you tell us a little bit
about the report done in 1997?
Mr. Czerwinski. Yes, Madam Chair. When you look at the
lending process, the two key players are lenders and
appraisers. And the one thing that they have in common is that
in both cases HUD has to rely on these agents to carry out the
program. In both cases, the agent sometimes may have different
incentives than HUD, or the American taxpayer, or the borrower,
and that is why oversight is very important. In both cases,
because you want to put in incentives to make those agents
behave along the same lines that you would like them to.
So, just like our report on lender oversight, which talks
about approving, monitoring, and enforcing, the same issues of
approving appraisers, making sure the appraisers do a good job,
and then taking action is valid also.
Senator Collins. And then in 1999, it is my understanding,
2 years later, GAO issued yet another report entitled ``Single-
Family Housing: Weaknesses in HUD's Oversight of the FHA
Appraisal Process.'' And I want to read some of the findings.
GAO found that HUD is not doing a good job monitoring the
performance of appraisers; HUD is not holding appraisers
accountable for the quality of their appraisals; HUD has
limited assurances that the appraisers on its roster are
knowledgeable.
Is that an accurate summary?
Mr. Czerwinski. Absolutely, Senator.
Senator Collins. So, once again, we see a pattern of
reports and audits over a 7-year period, time and time again,
making the exact same criticisms of HUD's programs. Is that
accurate?
Mr. Czerwinski. Yes, Senator, and it points out the
importance of approving, monitoring, and enforcing what you
want your agents to be doing.
Senator Collins. I would now like to go to your most recent
report and ask you a few questions to highlight some of the
findings. Now, it is my understanding that FHA relies almost
exclusively on direct endorsement lenders to underwrite the
mortgages that it ensures. Is that accurate?
Mr. Czerwinski. That is correct.
Senator Collins. And you talked about that HUD has
inconsistent standards for approval of lenders who apply for
direct endorsement authority. And as a result, some lenders
with very questionable proficiency were approved. In fact, you
said that even lenders who were found to have 40 percent of
their mortgages they submitted had problems with them, some of
them rated poor, received approval nonetheless. Is that right?
Mr. Czerwinski. That is correct.
Senator Collins. So nobody was turned down?
Mr. Czerwinski. Not during the period of our review.
Senator Collins. That you looked at.
Mr. Czerwinski. We looked at 36. All 36 were approved.
Senator Collins. All 36 were approved despite the fact that
there were significant deficiencies in the mortgages that were
submitted for review by some of the lenders.
Mr. Czerwinski. That is correct.
Senator Collins. It sounds like a pretty automatic system
to me, if you can still get approved when you have significant
deficiencies.
Could you provide us with an example of a direct
endorsement lender that HUD approved with questionable
proficiency?
Mr. Czerwinski. Well, I think the key issue, first of all,
is that the standards are very general, and, therefore, the
application of the standards can lead to inconsistency. As the
chart to your left shows, for the four offices that we went to,
the number of problems that were encountered by the lenders
applying for approval. As you can see, it is all over the
board; that is inconsistent.\1\
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\1\ See Exhibit No. 8 which appears in the Appendix on page 227.
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Senator Collins. Now, I want to make sure again that I
understand that process. It is my understanding that when HUD
looks at the mortgages that are submitted as part of an
application for direct endorsement authority, they rate the
quality and that there is a classification of, what, good,
fair, and poor. Is that correct?
Mr. Czerwinski. That is absolutely right.
Senator Collins. And you looked at 36 of those. Did you
find that HUD actually granted direct endorsement authority to
12 lenders who had earned, if that is the right word, a rating
of poor?
Mr. Czerwinski. On some of their loans, yes.
Senator Collins. On some of the loans that were submitted.
And were these errors significant errors? In order to get a
poor rating, can you give us an idea of the kinds of errors
that would be made?
Mr. Czerwinski. Yes, they were significant errors.
Mr. Schmidt. I can probably do the best job giving you
examples of that.
Senator Collins. That would be helpful, Mr. Schmidt.
Mr. Schmidt. What we found--and this kind of probably goes
across the three that had the 40 percent of their loans in poor
condition--was a failure to verify income and employment----
Senator Collins. A pretty basic requirement.
Mr. Schmidt. Pretty basic requirement. Failure to ensure
that the borrower had enough income to make the payments.
Senator Collins. Critical, and we have heard what happens
when the homeowner can't afford it.
Mr. Schmidt. Failure to explain delinquencies on credit
card debt or a collection on credit card debt, and also failure
to properly calculate the debts and liabilities the borrower
had, which are all fairly basic types of issues.
Senator Collins. So these lenders which showed that they
did not have the capacity to underwrite these mortgages
correctly were approved nevertheless. That is accurate?
Mr. Schmidt. Correct.
Senator Collins. And your review of these cases was just
last year. Is that correct?
Mr. Schmidt. Correct.
Senator Collins. So this isn't ancient history. Mr.
Czerwinski, you mentioned that of the four HUD centers that you
looked at, only the Philadelphia center suspended the direct
endorsement authority of any lenders during the period that you
looked at, during 1999. Yet I believe it is accurate to say
that you identified more than 200 lenders nationwide that had
poor ratings as a result of the monitoring that HUD is doing.
Could you talk about that issue?
Mr. Czerwinski. That is exactly correct, Senator. When a
lender is suspended, the homeownership center then has to go
through the process of reviewing every single loan that that
lender makes as a lender tries to get its position reinstated.
That is a large workload effort for the staff at each of the
homeownership centers.
Senator Collins. So it is part of the dynamic here that if
a homeownership center suspends the lender, takes away the
direct lending authority, they are going to have to do the
work?
Mr. Czerwinski. That is correct.
Senator Collins. And that discourages them from pulling
back the authority?
Mr. Czerwinski. We talked to the staff at the centers, and
they said that the workload was certainly a factor that they
considered.
Senator Collins. Of those 200 lenders that you identified,
how many of them were actively writing FHA mortgages? I am
talking about the lenders that received the poor ratings as a
result of the reviews.
Mr. Czerwinski. All of them were.
Senator Collins. Senator Durbin.
Senator Durbin. Thank you very much. We are going to have
testimony, are we not, Madam Chair, from Secretary Cuomo
tomorrow?
Senator Collins. He has declined our invitation to come and
instead is sending a deputy, Mr. Apgar.
Senator Durbin. To speak on behalf of FHA?
Senator Collins. On behalf of the Department.
Senator Durbin. In the course of the investigation here,
did you hear from HUD that there was any budgetary reason
driving this lack of scrutiny and surveillance?
Mr. Czerwinski. The way we do our work: We go out and find
what the agency is doing; then we go back to the agency and
verify what we found; we ask them why they think some of these
things are happening. One of the reasons that we were given by
homeownership center staff was resources, in terms of travel to
go out and visit lenders--to do the inspections.
Senator Durbin. Did you follow through on that? Was that
something that made sense?
Mr. Czerwinski. It makes sense.
Senator Durbin. But did they not change the configuration
of the groups that were reviewing lenders to these regional
centers from, I guess, 10 or 12 offices to four regional
centers?
Mr. Czerwinski. That is exactly right.
Senator Durbin. And what year did that happen?
Mr. Czerwinski. That happened in 1997 or 1998.
Senator Durbin. Did you take a look at the HUD efforts
before and after this regional service center approach to
compare their activities?
Mr. Czerwinski. Some of our earlier work looked at HUD
prior to the reorganization, so we did have that type of
comparison.
In terms of the reorganization that created the four
homeownership centers, I think it is a good news/bad news
answer. The good news is that HUD is putting more resources in
terms of staff for overseeing lenders--their allocations are
higher. The bad news is that many of these staff haven't been
doing this work before, so that one of the reasons HUD told us
why they hadn't targeted as many of the high-risk lenders is
that they felt their staff hadn't gotten up to speed enough to
deal with these more difficult cases.
Senator Durbin. I also read somewhere that the number of
employees involved in this review and surveillance, when HUD
went to the regional centers, was cut substantially. Is that
true?
Mr. Czerwinski. The overall number of employees that HUD
has put into the homeownership centers has been reduced.
However, HUD has put in more resources to look at lenders. The
number of lender reviews is up.
HUD does their reviews in two ways: One, they have HUD
staff do them; and the second is that they rely on contractors.
Senator Durbin. I want to make sure the record is clear.
Before the reorganization, before the creation of the regional
service centers, if you compared the number of FTEs or
employees involved in surveillance of these lenders before and
after, can you tell me the comparable numbers that were
involved?
Mr. Czerwinski. We don't have the precise overall numbers.
I can provide those for the record if you would like.
Senator Durbin. I read somewhere, and I can't find it as I
sit here, but I read somewhere that the number of employees
involved in surveillance or review was cut in half when they
went into this reorganization. Does that sound right to you?
Mr. Czerwinski. Yes. There are a number of aspects of
surveillance, not just monitoring of FHA 203(b) lenders, and I
think that you are picking up that overall number. Mr. Apgar,
who is the FHA Commissioner, is going to be here tomorrow, and
he should be able to give you the precise overall numbers. I
can also get them for the record.
Senator Durbin. I wonder--and we will find out tomorrow--
how much of this was driven by congressional appropriations and
how much was driven by a HUD decision. If HUD decided to step
back from its responsibility, then, of course, they have some
hard questions to answer. Do you know whether or not there was
congressional input into this reorganization?
Mr. Czerwinski. We have looked at HUD's reorganization. It
is called their ``20/20 Reform Plan.'' In many respects, the
reorganization is the Secretary's response to his analysis of
what the Department needed to do. Obviously one factor in the
input would be what reviews were conducted by us and what kind
of oversight was conducted by the Congress and others.
I don't recall anybody saying that we should give less
scrutiny to oversight of lenders such as FHA, and as a matter
of fact, GAO is on the record of talking about more needs in
that area.
Senator Durbin. I see in your report here that you noted
that HUD's single-family housing staff was cut by more than 50
percent under the 20/20 plan.
Mr. Czerwinski. Yes. That is the overall staffing.
Senator Durbin. Well, I think that will be an interesting
thing. Of course, if this is HUD's decision that they don't
need review and surveillance, that is one thing. If Congress
said we won't give you the money for review and surveillance,
then it kind of creates another challenge for us to look and
see where responsibility might lie.
And then do I take it from your testimony that since there
have been abuses, HUD has now responded with more people
involved in this?
Mr. Czerwinski. HUD has said that they agree with our
findings and recommendations and has talked about planned
initiatives. We haven't seen any resource allocations according
to how that would be done.
Senator Durbin. One of the groups or companies, rather,
that was involved in the earlier testimony, this Easy Life, if
I remember correctly had been found guilty of prior wrongdoing,
and they still continued on the FHA approved list.
Address that for a moment, if you will. Do you think HUD
met its responsibility when a lender that has been involved or
a realtor that has been involved in wrongdoing, paid a fine,
for example, for this wrongdoing, and continues its wrongful
practices? Were you able to address that in your investigation?
Mr. Czerwinski. We did not specifically look at Easy Life.
But, obviously we found some gaps in the system in which
lenders are approved, monitored, and then enforcement action is
taken.
Senator Durbin. Now, one of the things that we have found
in this Subcommittee when Chairman Collins has called previous
hearings is that once you nail down a wrongdoer, they have a
tendency to disappear and reappear in a different form with a
different name--the same people, the same problems, coming at
it with a new application.
Have you found evidence of that in this particular problem?
Mr. Czerwinski. We did not look at that particular aspect,
but I would go back to the point that I was making about
approval, because that really becomes an approval issue. If the
lender comes back in a different incarnation, the question is:
What criteria are used to reapprove or approve that lender? And
then how are those criteria applied?
The point that I was making is that the approval process
has very general criteria which allows for inconsistencies.
Senator Durbin. One of the questions that I asked during
the brief break before your panel was started was of an
attorney from Chicago who is representing some 200 homebuyers
who were victimized by this Easy Life operation. And I asked
her: Well, what response have you received from the Illinois
Association of Realtors in terms of these folks that have been
involved in this? And I don't want to put words in her mouth,
but she wasn't very encouraging. They haven't really received
any kind of response.
Did you monitor any efforts beyond HUD and FHA by
professional organizations, whether it is a realtors'
organization or the banking industry in a given State or
locality, to take action against those who have been found
guilty of wrongdoing through this program?
Mr. Czerwinski. That was not a course that we followed.
What we did do, however, was to look at others who are in
similar roles to HUD, specifically the GSEs. We asked how they
did their oversight, and then had that as a comparison.
Senator Durbin. And tell me what you found to be best
practices in this area. What did you find that we could use as
an example to clean up this situation?
Mr. Czerwinski. We saw a difference in terms of monitoring,
and HUD in that case has the right idea about targeting high-
risk lenders. However, in terms of implementation, we found the
other parties to be further along than HUD in terms of how they
went about targeting. That was probably the major point; that
if we could get HUD to improve its risk-based analysis, that
would help.
Senator Durbin. And that improvement, would it involve more
technology, more personnel, both? Tell me what you mean by
that.
Mr. Czerwinski. I think probably the major place that HUD
could make an improvement in this area is in the information
that it has and the way that it uses it. HUD's data systems
currently are not quite so facile at identifying the risk
factors. If the information systems could readily pop out the
risk factors such as defaults, volume, when the last reviews
were undertaken, this would help target the monitoring better.
Senator Durbin. I am going to close at this point. I think
that Senator Collins made a good point with one of our earlier
witnesses. When they hear ``government-insured,'' it gives them
great peace of mind that this great government of theirs is
going to stand behind them, and then they find out by bitter
experience that it isn't worth much. In fact, they have been
misled not only by the people on the street, the realtors and
the lenders, but they have been misled by this label that
suggests some approval of a process that, frankly, never should
have been approved. That falls back on our shoulders. Those of
us in government have a responsibility to make sure we do our
part of the job. It isn't just a ``buyer beware'' culture. And
these new homebuyers, with the dream of doing something that
most of us look forward to and appreciate as a great moment in
our lives, deserve better. They deserve better from HUD, from
Congress, and I hope that this hearing will lead us to follow
some of your recommendations. Thank you for your investigation.
Thanks, Madam Chair.
Senator Collins. Thank you, Senator Durbin. Mr. Czerwinski,
just a couple more questions. Isn't a major part of the problem
that HUD's approval system is so flawed that mortgage companies
with poor records are getting certified in the first place?
Isn't that a likely predictor of problems down the road, if
they are making the kinds of basic mistakes that Mr. Schmidt
described, aren't they likely to end up as high-risk lenders
that are going to create the kinds of problems we have explored
this morning?
Mr. Czerwinski. I think you are absolutely right. When we
talk about oversight, probably the most important part of
oversight is stopping the problems before they come in the
door.
Senator Collins. Exactly. We have got to stop these lenders
from being certified in the first place, and it is
inconceivable to me that HUD is certifying lenders that don't
pass their own test, that submit applications that are so
flawed that HUD itself rates them as poor and then turns around
and gives them direct endorsement authority. I just am at a
loss to understand why that is happening.
Mr. Czerwinski. The answer is that the criteria for what is
an acceptable application are so vague that it leaves it open
to interpretation. So the key in our minds would be to specify
exactly what HUD means by ``acceptable'' in terms of the number
of loans that have significant or serious problems.
Senator Collins. But HUD is deeming acceptable and, thus,
giving direct endorsement authority to lenders that HUD itself
rated as poor. Is that correct?
Mr. Czerwinski. That is correct.
Senator Collins. That just is inconceivable to me.
The final question I want to ask you, Mr. Czerwinski, is to
respond to a point that Mr. Apgar, who will be testifying
before us tomorrow, made about the economic value of the
insurance fund. In your report, you gave HUD, appropriately, a
chance to respond to your criticism, and Mr. Apgar pointed out
that the economic value of the fund stands at an all-time
record high.
Could you tell us why that may be, whether it is really due
to HUD's actions or is it due to other factors? And could you
also comment on the impact of the dramatic increase in the
number of HUD properties that have been foreclosed upon on the
value of the fund?
Mr. Czerwinski. Sure. There are probably three factors that
drive the value of the fund, and I would probably put them in
this order: The first is the overall economy. The economy is
very strong. This has driven housing prices up, interest rates
down. That has helped FHA immensely.
The second are changes structurally that the Congress has
made to FHA in terms of the premiums. Back about 10 years ago,
FHA's picture was not anywhere near as rosy as it is today, and
the Congress, working with HUD, decided that it had to raise
insurance premiums. Those premiums have been raised. More money
has been coming into the fund.
The third part is HUD's management of the fund.
Those are the three factors. I would put them in that
order.
Mr. Procaccini. If I could add to Mr. Czerwinski's answer,
Madam Chair?
Senator Collins. Yes.
Mr. Procaccini. To give an example of the impact of the
economy on this fund, one needs to just look at the latest
actuarial study report, and in that report it talks about what
would happen if the fund--if economic conditions that prevailed
over the next 30 years were less optimistic, less positive than
what was deemed to be the baseline case this year, and by using
lower economic predictors, the fund, it was estimated by
Deloitte Touche to be worth about $12.3 billion. So that is
about 26 percent less than their baseline case. So that is
about $4.3 billion less the fund would be worth if these
economic conditions were not as optimistic. So that gives you a
demonstration of the economic impact of the economy on the
reserves of this fund.
Senator Collins. That is a very important point. So I think
what you are telling me is that it has been the combination of
economic prosperity plus the increase in premiums assessed to
the homebuyers that has been responsible, that have combined to
increase the value of the fund and helped to offset the
increase in foreclosures. Is that an accurate statement?
Mr. Czerwinski. Those are major factors.
Senator Collins. And it is important for us to keep in mind
that if the premiums have to be increased in order to offset--
keep the fund healthy and in order to offset the cost of
foreclosures, that that cost is being passed right back to the
homebuyers. Is that accurate?
Mr. Czerwinski. That is correct, and the homebuyers are
typically low-income, minority, first-time homebuyers who are
bearing this cost.
Senator Collins. Thank you very much for your testimony. It
has been very helpful. I again want to commend you for the
thoroughness and the high quality of your report. It is always
a pleasure to work with GAO, and we very much appreciate your
contributions in this area.
Thank you very much.
Mr. Czerwinski. Thank you, Madam Chair.
Senator Collins. Before we recess today, I want to just
once again thank all of our witnesses, but particularly the
three women who testified so eloquently about their
experiences. We very much appreciate your coming forward. I
know it was a very difficult thing to do, but you added
immensely by putting the human face on this problem. We do talk
about statistics all day long here, but when we hear the
personal stories of people affected by fraudulent schemes like
this, that is when it really hits home. So I want to thank all
of our witnesses today.
We will resume the hearing tomorrow. Based on the testimony
we have heard today, I am convinced that flipping is an
extremely serious and growing national problem and that we need
to take much tougher action. I am also convinced that HUD has
not done an effective job in overseeing the lenders and the
other players involved as it stands behind these mortgages with
the insurance fund.
I look forward to hearing HUD's explanation tomorrow and to
questioning HUD's Assistant Secretary for Housing, as well as
the inspector general for HUD.
With that, this Subcommittee will stand in recess until
tomorrow morning at 9:30. Thank you very much.
[Whereupon, at 12:08 p.m., the Subcommittee was adjourned.]
HUD'S GOVERNMENT INSURED MORTGAGES: THE PROBLEM OF PROPERTY
``FLIPPING''
----------
FRIDAY, JUNE 30, 2000
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 11:05 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Susan M.
Collins presiding.
Present: Senators Collins and Durbin.
Staff Present: K. Lee Blalack, II, Chief Counsel and Staff
Director; Mary D. Robertson, Chief Clerk; Rena M. Johnson,
Deputy Chief Counsel; Karina Lynch, Counsel; Brian Jones,
Investigator; Claire Barnard, Detailee/HHS-IG; Jim Pittrizzi,
Detailee/GAO; Raymond Kessenich, Detailee/NCIS; Bob Groves,
Detailee/HUD-OIG; Elizabeth Hays, Executive Assistant; Adam
Thomas, Intern; Christopher Kramer, Intern; Steve Abbott
(Senator Collins); Marianne Upton and Jessica Porras (Senator
Durbin); and Glen Sauer (Senator Akaka).
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. The Subcommittee will come to order. I
first want to apologize to our witnesses this morning and to
others, who are here today for the hearing, for the delay in
convening. We had an additional two votes that I was not
counting on when we changed the time of the hearing last night.
So I apologize for any inconvenience that the late start may
have caused.
This morning the Permanent Subcommittee on Investigations
continues its examination of property flipping. As we learned
at our hearing yesterday, flipping is a growing type of
mortgage fraud that has devastated families and neighborhoods
across this Nation. In a typical flipping transaction, a con
artist purchases a rundown house in a low-income neighborhood.
The seller then makes minor cosmetic repairs to the property
and then attempts to unload the house on an unsuspecting buyer
at a grossly inflated price. These properties are usually
resold at tremendous markups, often 100 percent or more within
a few months or even days.
Flippers usually target first time, low-income home buyers
who are eager to own their own home and are willing to trust
sellers who promise them the American dream of homeownership.
Our investigation found that these unsophisticated buyers are
generally unfamiliar with real estate transactions. They are
essentially at the mercy of unscrupulous sellers who are often
aided and abetted by unethical appraisers and lenders.
Once they have hooked the unsuspecting buyers, the sellers
make arrangements to secure an FHA-backed mortgage loan to
finance the transaction. In some cases, if a buyer's credit
history or financial condition would scuttle the deal,
fraudulent mortgage applications and phony gift letters are
crafted to grease the transaction. The combination of inflated
property prices, expensive repairs, and adjustable rate
mortgages often leave the buyers with mortgage payments and
other costs that they simply cannot afford.
Contrary to the explicit assurances of the sellers, the
properties are frequently in such poor condition that the
buyers must sink even more money into their homes just to
render them habitable. The result is sadly predictable. The
sellers escape with obscene profits and the buyers default on
their mortgages. The ultimate result is often foreclosures that
leave the owners with no home, tarnished credit ratings, and
broken promises.
Yesterday we heard truly heart wrenching testimony from
three first-time home buyers who are victims of flipping
schemes. They told tragic stories of high hopes that were
dashed by unscrupulous sellers, appraisers, and real estate
agents, all of whom were part of intricate scams to sell them
dilapidated, overvalued houses.
Our witnesses showed the Subcommittee pictures of what they
had hoped would be their dream homes, but which instead proved
to be houses that were crumbling and unsafe. We saw raw sewage
backed up through a toilet onto the bathroom floor, severe
termite infestation, rotting wood exteriors through which rats
entered a roof that almost completely detached from the rest of
the house, dangerous structural damage and faulty electrical
systems that repeatedly burned out, placing the occupants at
risk of a fire.
The ultimate tragedy is that our witnesses paid these
exorbitant prices for these atrocious homes and are now saddled
with mortgages and repairs that they cannot afford. In several
cases, we found that flipping victims have had no choice but to
default and file for bankruptcy. I am outraged that these
hardworking Americans, such as those whom we heard from
yesterday, have become targets of con men disguised as
legitimate business people.
I am particularly disturbed, however, to learn that all of
the fraudulent loans examined during Subcommittee's 9-month
investigation were insured by the Federal Government.
Consequently, after the crooks walked away with handsome
profits, the Federal Government was left to pick up the tab for
the fraudulent loans. I look forward to exploring these issues
further with our witnesses this morning.
Our first witness this morning is William Apgar, who is the
Assistant Secretary for Housing at the Department of Housing
and Urban Development. Mr. Apgar also serves as the Federal
Housing Commissioner and directs the Federal Housing
Administration, reporting directly to HUD Secretary Andrew
Cuomo. I look forward to hearing Mr. Apgar's testimony this
morning in light of the disturbing testimony that we heard
yesterday.
Pursuant to Rule 6, all witnesses who testify before the
Subcommittee are required to be sworn. So I would ask Mr. Apgar
to stand and raise his right hand.
Do you swear that the testimony you are about to give will
be the truth, the whole truth, and nothing but the truth, so
help you, God?
Mr. Apgar. I do.
Senator Collins. Mr. Apgar, you can proceed with your
testimony. We do have a lighting system, which I know you are
familiar with. We would ask you to take about 10 minutes for
your oral remarks, and we will put your prepared testimony
fully in the record.
TESTIMONY OF WILLIAM C. APGAR,\1\ ASSISTANT SECRETARY FOR
HOUSING AND FEDERAL HOUSING COMMISSIONER, U.S. DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
Mr. Apgar. Thank you. Good morning, Chairman Collins.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Apgar appears in the Appendix on
page 97.
---------------------------------------------------------------------------
Today's hearing focuses on abusive practices aimed at FHA
borrowers. I understand yesterday that you heard testimony from
several fraud victims.I share the Subcommittee's concern about
mortgage fraud of any type, be it in the FHA or in the larger
mortgage industry.
This is my top priority at the FHA. That is why I invited
one of yesterday's witnesses, Mrs. Rollins, to come to my
office so I could personally thank her for the courage she
displayed in coming forth and sharing her story with the
Subcommittee. She was accompanied by her lawyer, Nina Vinik, a
woman who has worked to seek justice for those families
victimized in Chicago by the Easy Life Real Estate scam.
HUD has been involved in Easy Life case for more than 5
years. In 1996, we referred Easy Life to our inspector general
for criminal violations. Again, in 1996, we debarred two Easy
Life Real Estate agents. We also declared a moratorium on Easy
Life foreclosures in 1998 to give victims a chance to get back
on their feet.
But as Ms. Rollins story suggests, there is much more we
can and must do. Let me tell you what I told Ms. Rollins that
day in my office. HUD is committed to ridding FHA of the
problem and to help victims of mortgage scams recover. Over the
last 3 years, the FHA has initiated a comprehensive approach to
protect FHA borrowers from predatory lending practice and hold
its private sector partners accountable for their actions.
After more than a year of development, last year in May
1999, we launched Credit Watch, a new performance-based lender
monitoring and enforcement system. In the first year of
operation, the FHA has terminated 48 lenders, proposed
termination of another 10, and placed approximately 135 lenders
on probationary lending status.
We have enhanced lender monitoring activities. Over the
past 3 years, FHA has increased its lender monitoring staff
more than 7-fold and increased the number of lender monitoring
reviews from 256 in 1997 to more than 900 in 1999.
We have stepped up lender enforcement activities. I would
like to submit for the record the enforcement actions taken in
just three States, the home States of yesterday's victims.\2\
These report hundred of actions we have taken in the last 15
months alone against real estate agents, against lenders,
against appraisers who are preying on victims in these
communities.
---------------------------------------------------------------------------
\2\ See Exhibit No. 15 which appears in the Appendix on page 296.
---------------------------------------------------------------------------
Senator Collins. It will be presented in the record.
Mr. Apgar. Thank you. We have also, over the past 3 years,
substantially enhanced our appraisal monitoring activities.
Under the Home Buyer Protection Plan announced in 1998, FHA has
put in place the most comprehensive and thorough appraisal
process in the market today. This initiative is now providing
consumers with an unprecedented amount of information about the
physical conditions of the homes they are purchasing.
In addition, we have created a more effective framework to
hold appraisers accountable for the work. This new approach
includes mandatory appraiser testing. This was launched in July
1999. We also now require a more thorough valuation condition
report. FHA is the only mortgage finance organization in the
country that requires every appraisal to include completion of
a four-page form that encompasses comprehensive information
regarding the physical condition of the property. Again, this
has been in place now since September.
Along with the Home Buyer Protection Plan--we provide home
buyers easy-to-understand information about the important
issues in their appraisal so that folks will not be so readily
duped in believing the home is in good repair when it is not.
FHA is also requiring lenders to provide every borrower the
summary condition form, and, again, it highlights many of the
physical conditions that do not meet FHA minimum property
standards.
We also developed and are using statistical indicators to
target poor performing appraisers for extra monitoring
activity. As part of this initiative, FHA also issued new
regulations to clarify existing authority to pursue enforcement
sanctioning against fraudulent and poor performing appraisers.
This system is working. Just last month, we sent out letters to
over 40 appraisers notifying them that they were about to be
terminated or otherwise sanctioned in the FHA programs.
And, finally, in 1996, Congress authorized and HUD quickly
moved to implement a comprehensive new program of foreclosure
avoidance and loss mitigation. After assisting just 5,000
families in the first year, FHA helped 10,000 borrowers in 1998
avoid foreclosure, and in 1999, the number flew to 27,000. This
year, we project 32,000 families will avoid foreclosure because
of the new loss mitigation tools that are now in effect.
So we have taken serious measures to combat fraud in our
programs and to help families arm themselves with the
information they need to help protect them from abusive
practices, but clearly the job is not done. One victim is one
victim too many. That is why we are so pleased to join forces
with Senator Mikulski and Senator Sarbanes and others to form
the Baltimore and the national task force on predatory lenders.
You heard Senator Mikulski yesterday describe these efforts.
Let me just highlight a few initiatives. The core of the
Baltimore plan is a series of initiatives to provide relief to
those FHA borrowers already in distress, especially those who
have been victimized by predatory lending. Specific initiatives
include expanded efforts to counsel borrows in default. Again,
FHA relies heavily on its own network of HUD-funded counseling
agencies, but there is often not enough. We have expanded the
counseling effort to put of special focus on pre-foreclosure
counseling.
In addition, HUD will move aggressively to force lenders to
restructure inflated mortgages, that result from fraudulent
appraisals or the so-called property flips. We will push the
loan back to the lender and make him responsible for producing
a loan that the borrower can afford. If not, the FHA will
intervene directly and make the loan right for the borrower.
In addition, we are working with local governments and
community groups to intensity our enforcement efforts in hot
zones, areas of high default and foreclosure rates. This focus
on hot zones makes sense. The highest share of FHA foreclosures
occur in these hot zones. Overall each year, FHA takes back
through foreclosures only about 1 percent of all loans. We have
6.7 million loans of the books. This year, we project our
foreclosures will amount to approximately 67,000 or 1 percent.
The number has not changed much over the past 10 years, this 1
percent figure, and today, indeed, the overall foreclosure rate
is dropping.
But there will always be someone who will try to scam the
system. The private mortgage industry today spends millions of
dollars to rout out fraud, as do we, and we are committed to
ending abusive practices wherever they occur, and we need your
help, Senator Collins. As Senator Mikulski noted, we urge you
and your colleagues to support legislative propositions
presented in the HUD Treasury Task Force report and in the
Baltimore task force report.
As you know, the HUD Treasury report calls for
comprehensive assault on predatory practice with particular
focus on growing abuses in the sub-prime market. These
recommendations closely parallel the legislative proposals
already introduced by Senators Sarbanes and Schumer here in the
Senate and Representatives La Falce and Schakowski in the
House. Congress should work to resolve the remaining
differences amongst these various proposals and enact
comprehensive legislation to reform lending practices this
year.
We would also urge you to support legislation to protect
the Credit Watch program from legal challenge. As Senator
Sarbanes noted when he introduced this legislation, he
believes, as HUD does, that we already have the authority to
run Credit Watch, but rather than wait for the courts to rule,
Congress has the opportunity to clarify and enhance the
authority so that this important initiative will continued to
be used to protect FHA borrowers from abusive lenders.
In conclusion, under the leadership of Secretary Andrew
Cuomo, HUD has a demonstrated track record of routing out
waste, fraud, and abuse. Predatory lending is a serious
problem, and HUD has taken serious actions to hold our business
partners to high standards of performance. There will always be
some who attempt to defraud FHA and the millions of families
who rely on FHA to purchase their first homes.
For more than 3 years, FHA has aggressively expanded its
fraud protection tool kit. The results are evident. FHA is in
the strongest financial shape it has ever been and well
positioned to meet the future home buying needs of the Nation's
low and moderate income families. I look forward to answering
any questions you may have about my testimony. Thank you.
Senator Collins. Thank you, Mr. Apgar. I have listened very
closely to your testimony, and I read your full statement when
we received it late last night, and I believe that Credit Watch
and the fraud protection plan that you have described are
potentially very positive innovations.
I am also pleased to hear that you reached out to Stekeena
Rollins, who testified before us yesterday. I would encourage
you to do so with our other witnesses, and we would be happy to
provide you with the names and addresses of the many other
victims that we interviewed nationwide as part of this
investigation.
But I have to tell you that when I read your press comments
earlier this week, I have to question whether HUD really
understands how serious and widespread a problem this is and
whether HUD is truly committed to solving it. For example, it
sounds to me like you are continuing to deny the extent of the
problem when I read in an Associated Press story that:
``William Apgar, HUD Assistant Secretary for Housing, said
instances of flipping involving government-insured mortgages
are isolated; we have isolated examples of fraud.''
Well, the evidence is overwhelming that flipping is not an
isolated problem. It is a problem in cities all over the
country. The Department's Inspector General, who will be
testifying later this morning, says in her testimony that
massive property schemes involving FHA-insured mortgages
continue to be uncovered in New York, Baltimore, Chicago, and
Los Angeles. In just one case, the IG is investigating, more
than 1,200 FHA-insured loans totaling over $160 million are
under investigation.
Similarly, you quoted Maryland Senator Barbara Mikulski,
and I share your very high opinion of Senator Mikulski and have
worked closely with her on this and many other issues. She
testified yesterday that there were countless properties in
Baltimore alone that were flipped within 120 days, and she
described FHA as an accomplice to flippers and predatory
lenders.
The Subcommittee's own investigation, likewise, found
significant evidence of flipping in every single city where we
looked and did an investigation. We had no trouble finding
scores of victims in every single city that we went to. Even
Secretary Cuomo has said that this is a growing problem, and
that is why the nationwide task force was convened.
So in the face of this overwhelming evidence, why are you
continuing to maintain that this is just an isolated problem
that pops up here and there?
Mr. Apgar. OK. Let me start with the Secretary Cuomo
comment. His comments referred to the growing and obviously
substantial abusive practices in the Nation's sub-prime market,
the non-government portion. That is the largest share of the
abusive practices that our task force has uncovered; and in
Baltimore, for example, over half of the foreclosures and an
equally large share of any flipping activity were outside of
FHA or government-backed entirely or where our detail data
suggests that we are a smaller part of that problem. Important?
Yes. Significant? Yes. But his comments relate to the national
task force work almost exclusively on sub-prime activity.
In terms of the statement about isolated, I understand what
you are saying in what we call hot zones, and we named several
of the hot zones in areas of New York, Baltimore, Los Angeles,
and other places. There is a significant ring of fraud that we
have identified and are working to rout out.
The papers that I handed you to show you talk about the
hundreds of actions we have taken in Chicago, we have taken in
Florida, we have taken in New York. So I appreciate that.
But let me just go back in terms of how the FHA program is
doing overall. We look at our bottom line. We look at our
overall loss experience, and, again, we anticipate that 1
percent of our loans this year, of the 6.7 million loans, will
move into foreclosure. Now that varies by State to State. We
have a few States which have high, intense loss experience, but
in your own State, for example, we have only 17,000 loans.
About 100 of them will go into foreclosure, a foreclosure rate
of less than .6 percent. Michigan, if Senator Levin was here,
is about the same as Maine. So many of the large States, many
of the small States across the board, we see very little
evidence of any substantial run-up in the kind of foreclosure
problems that your Subcommittee is focused on.
Senator Collins. But wait a minute. Flipping does not
always lead to foreclosure. There are many, many homeowners out
there who are continuing to struggle and make those mortgage
payments who are still victims of property flipping scams. We
heard from one yesterday.
Mr. Apgar. Right.
Senator Collins. Mrs. Pratts is still making her payments.
Mr. Apgar. Yes. When people have faced the combination of a
poor home condition and a high price, that puts a lot of
pressure on them. Some owners hang on as best they can. Many of
them move into foreclosure, but, again, we are not aware of any
information that provides any extent of this. We look through
our own files, and we can identify--where we identify examples
of a fraudulent appraiser, and that is why we are bringing
action against some of the appraisers across the country.
Senator Collins. So are you standing behind your press
statement that this is just an isolated problem and it is no
big deal, essentially?
Mr. Apgar. No. I never said it was not a big deal.
Senator Collins. You said it was isolated, that it was just
isolated examples.
Mr. Apgar. Right, the flipping problem is isolated to these
hot zone areas.
Senator Collins. How can something that is occurring in
cities all over the country be called an isolated problem?
Mr. Apgar. Well, like I said, it is an intense problem in
the cities that you mentioned. It is not a particularly
substantial problem in other places, but I do expect with 6.7
million homes on the market that you could go back and find
examples of abusive practices across the board, one here, one
there, but the concentration and the ring of this kind of
fraudulent behavior is what we are working hard to crack.
Senator Collins. Well, I have to say that your answer just
heightens my concerns. If you do not concede that this is a
widespread problem that is causing a lot of trouble for
thousands of home buyers across the Nation, then I really
question whether HUD is committed to solving the problem. If
you do not admit the extent of the problem----
Mr. Apgar. I am saying look at our actions, please. We have
worked hard for 3 years to put aggressive programs in place. We
have taken aggressive enforcement actions. We have developed
new systems and new procedures and that evidences the fact that
we take it very seriously. As I said in my statement, one
victim is one too many, and we will work hard to make sure that
nobody is victimized in the FHA programs, and so I just reject
the idea that we do not take it seriously.
My staff and I work on this on a regular basis, and it is
our No. 1 priority, and, again, our actions demonstrate that we
are making substantial progress.
Senator Collins. Well, let me ask you about another comment
that you made to the press with regard to these hearings. This
was part of a news story written by the Dow Jones News Service.
It says: ``FHA Commissioner William Apgar defended HUD's
oversight and belittled Senator Collins' hearings,'' and quote,
``This is just show-boating in order to make cheap political
points.''
You did not attend yesterday's hearing. So I want to show
you some of the excerpts of the very disturbing testimony from
the three victims that appeared before the Subcommittee and
see, perhaps, if it alters your view of the importance of these
hearings. We will roll the tape.\1\
---------------------------------------------------------------------------
\1\ Exhibit No. 17 is retained in the files of the Subcommittee.
---------------------------------------------------------------------------
[Video presentation.]
Senator Collins. Mr. Apgar, when I heard those statements,
they broke my heart, and there were scores, there were
hundreds, there are thousands of home buyers who are exactly in
the same position as those three women, and if you think these
hearings are show-boating and an attempt, as you clearly were
quoted in the paper, to make political points, you are sadly
mistaken. We have a serious problem, and I would expect that
HUD would want to join me, Senator Mikulski, Senator Sarbanes,
Senator Durbin, Senator Bond, and others who have expressed
concern in trying to solve this problem rather than attacking
us for exposing it.
Mr. Apgar. I share the importance of the problem. I,
myself, have talked to many victims in my own travels to
Chicago, to Baltimore, to New York, and around the country.
These are heart-wrenching stories, and there is no doubt about
it. The bottom line here, though, is what we plan to do about
this. We have an action agenda at HUD, and we are moving. Many
of the people who have been victimized, we have a plan to help
make them whole, the most aggressive victim relief program in
the industry today.
Many of the people who perpetrated the fraud are now out of
business because of HUD actions, and so I appreciate the fact
that we are working with Senator Sarbanes, we are working with
Senator Mikulski, and we would be very happy to work with you
to take these hearings and turn them into something productive,
concrete actions that this Congress can take to help eliminate
the predatory lending from our mortgage industry.
Taking up the Senator Sarbanes bill would be a good first
step. Taking up the efforts to protect Credit Watch would be
another step. Making sure that the HUD budget is fully funded
so that we can do the kind of counseling that we need to do is
a good step, and so I think that we have a lot of work to do,
and I am glad to see that you are willing and able to work with
us at HUD as a partnership, because we have a plan, and we just
need your support to make it happen.
Senator Collins. Well, let us take a look at one of your
plans. We have heard from Ms. Rollins in her testimony, the
last question that she posed or that I posed to her, that she
and many of the other flipping victims whom we interviewed told
us that the fact that the Federal Government was insuring their
mortgage made them think that everything, surely, would be all
right. After all, if the Federal Government is standing behind
my mortgage, surely the Federal Government is not going to
allow me to buy a house that is crumbling; it is not going to
allow me to be a victim of a fraud and is going to stand behind
me as the home buyer.
You heard her say that, that one reason she went forward,
despite her reservations, is that she could not imagine that
there would be a problem when HUD was insuring her mortgage.
They assumed, these home buyers assumed, and it is a very
logical assumption for them to make, that the Federal
Government would not agree to insure the mortgage if the
property was not worth what they paid for it and if it was not
livable. That is a logical assumption for them to make.
In addition, as you pointed out in your testimony, I think
you said in your written testimony it is something like 80
percent of your portfolio who are first-time home buyers, and
that is the whole point. We are trying to help these people who
do not have the experience, who are the first-time home buyers.
So I think it is very logical for them to draw the conclusion
that if the government is standing behind the loan, they are
standing behind them as the home buyer.
Now I want to show you an ad that HUD has recently produced
that we happened to see on CNN.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 13. Exhibit No. 13.a., a transcript of video,
appears in the Appendix on page 232. Exhibit No. 13.b. is retained in
the files of the Subcommittee.
---------------------------------------------------------------------------
[Video presentation.]
Senator Collins. This promises home buyers, ``If any
problems are found, you will know about them before you
close,'' and I am really concerned that through this ad, HUD is
perpetuating the false assumption that home buyers can believe
that the process HUD is using is going to protect them. Another
problem I have with this ad is the implication that the
appraiser is going to do this kind of in-depth inspection that
a home inspector would conduct. Your own form, you have a good
form that you have recently changed.\2\ I have the updated
version that says: ``For your protection, get a home
inspection.'' It is much stronger than your earlier forms, and
I commend you for coming up with that.
---------------------------------------------------------------------------
\2\ See Exhibit No. 10 which appears in the Appendix on page 229.
---------------------------------------------------------------------------
This form makes very clear that an appraisal is different
from a home inspection. It encourages the home buyer to get an
inspection, and appropriately so. It makes clear that an
appraiser is not an inspector, that an appraisal will not
evaluate the physical condition of the house. It will not look
at the mechanical systems. It will not identify the items that
need to be repaired or replaced.
It explains the difference, and yet your ad seems to foster
exactly the opposite impression. It says that you can count on
the appraiser to find out if there are problems with the house.
I do not understand why you would be running an ad that gives
home buyers this sense of false security that confuses them
about the role of the appraiser and the role of the home
inspector.
Mr. Apgar. Well, let me just first comment on the role of
the FHA appraiser. It has always been different. Our appraisers
are required and have been for some time to note down any
readily observable conditions that differ from FHA minimum
property standards. That is not the same as an inspection, and
we are clear, as we note there, but the conditions that were in
the homes of the three victims certainly would have been
readily observable by an appraiser doing his job, and under our
new system that we have in effect, the home buyer would be
notified of what the appraiser observed.
They would observe the fact that the roof was a patched-
over tar job, and the useful life of the roof would not have
been more than a couple years, as opposed to the buyer who
believed the roof was good forever. The appraiser can note
that. The appraiser could turn the lights on and off and note
that the electrical systems were not adequate. The appraiser
would have observed conditions of the raw sewage that you
mentioned. These are readily observable appraisal concerns.
The appraiser is a responsible agent, if you will, of FHA
that goes in the property and notes that. We clarify that for
the home buyer. We give them the information from the appraisal
report that says here is what the appraiser observed. That
report then says you should go and get an inspection, just as
the form did. In addition, we worked collectively with the
appraisal institutes and others to launch a national campaign
called For Your Protection, Get a Home Inspection, where
brochures about the role of the appraiser, the inspector, and
how to use an inspector properly, as does our home buying
counseling.
So we are aggressively encouraging households to get
inspections, but we are also taking advantage of the fact that,
as a professional, an appraiser in the home can make
observations about readily observable defects and that the
homeowner ought to have that benefit too.
Senator Collins. Mr. Apgar, in guidance that you put out to
all of the FHA-approved appraisers in a letter dated November
12, 1999 that came from you, you tell the appraisers that you
are not acting--``the appraiser, in performing the appraisal of
the property, does not act as a home inspector.''
Mr. Apgar. That is true.
Senator Collins. And I quote, ``It is not the
responsibility of the appraiser to guarantee the condition of
the house, its equipment, appliances, or to certify that the
property is free from defects.''
Mr. Apgar. That is also true.
Senator Collins. Rather, the appraiser is required to make
reasonable observations that are immediately discernable, not
required to move any furniture or any equipment. It would not
have detected the problems in the heating systems in every one
of the houses we looked at.
Mr. Apgar. That is for sure.
Senator Collins. It would not have uncovered the plumbing
problems, because those did not occur instantly.
You further go on to say that this really is not much
different from what we have provided in the past or what we
have asked from appraisers in the past. You said appraiser
costs should not rise significantly because this really is not
adding any additional requirements.
Mr. Apgar. Right.
Senator Collins. So how is this different?
Mr. Apgar. It is different in a couple of ways. First of
all, it is different in the way it is communicated to the home
buyer. Prior to the initiation of this new appraisal monitoring
system, an appraisal form was only seen by the lender and was
not seen by the consumer. By converting this information
through the home buyer's summary sheet, these readily
observable conditions, which would have been reported in the
examples in the cases--I do not know, but certainly should have
been reported, are readily observable conditions to warn the
buyer that there are issues with this property, not a
substitute for a complete appraisal--inspection, but a detailed
assessment of things that were observable.
An additional piece of this is now the appraiser is held
under our new guidance accountable for making these readily
observable conditions. A new regulation came out clearly
articulating exactly what the appraiser is responsible for. We
believe that the appraisers are at the core of many of these
property flipping schemes. That is why we have completely
revised our appraisal procedures. That is why we are expecting
the appraisers to do what they should be doing, alerting
homeowners to potential problems, and why we are going after
those who do not do that, and hold them accountable.
Senator Collins. Mr. Apgar, I do not know whether you
remember the first time you bought a house. I remember very
distinctly when I did. I had no idea between the difference of
an appraisal versus what a home inspection was. I did not know.
I did not really truly understand the adjustable rate mortgage
I was getting.
When you run an ad like that, that basically tells people
you do not need to worry about the pipes bursting, I mean that
is the image you have in the beginning, is water flowing out of
the pipes. That is not something the appraiser is going to be
checking for. That is not the kind of structural review that is
going to be done, and yet what that ad implies is that you can
just trust HUD, and you will not have problems with your house;
and I would think that would trouble you, particularly given
that you are overwhelmingly dealing with people who do not have
experience in this area.
Mr. Apgar. I understand your point, and if the ad were
taken in isolation, but we do other things in order to
encourage folks to get an inspection, and it is also true that
our appraisers today, under the new guidance, are providing
information to consumers that they have the capacity to make.
How could any appraiser have, without looking at the
conditions, appraised in the homes that you saw at the prices
they did? There are defects in those homes. They are readily
observable, and the appraiser has to note those defects. When
they note them and provide that information to the consumer,
that arms the consumer with additional information.
Senator Collins. Some of the defects would have been noted
by an honest appraiser. There is no doubt about that.
Mr. Apgar. And then that is followed up with a caution to
say this house has serious issues, you should go and get a roof
person to look at that, you should go get a systems person to
look at that, you should get a comprehensive home inspection.
Senator Collins. But the problem is that the kinds of
problems you are showing at the beginning of that ad are not
the kinds of problems that you could guarantee that an
appraiser is going to detect. Those are the kinds of problems
that a home inspector would identify.
Mr. Apgar. Our appraisers find problems like that all the
time and alert our consumers. I mean, you can look at our forms
and check it out.
But, trust me, I am not in any way saying an inspection is
not necessary. We believe that a home inspection is an
important thing, and we urge all our consumers to get it.
Senator Collins. Have you ever thought of requiring a home
inspection as a condition of the loan?
Mr. Apgar. We have thought about that. We think our
appraisal requirements are aggressive enough in order to
protect the consumer in that instance, and we have left it to
just strong encouragement.
Our particular concern about mandatory inspections is that
we are going to mandate a requirement in an industry that is
very unregulated and that it would just potentially lead to
inspections at an expensive price that are not necessary, but
we have under our active review this issue of mandatory home
inspections. It is certainly one of the possibilities.
Senator Collins. I would encourage you to take a close look
and listen carefully to that testimony, listen to what Stekeena
Rollins told us at the hearing about her thinking she could
rely on HUD to protect her, and think about the image that ad
is sending, because that ad is basically telling that first-
time, unsophisticated home buyer that HUD is going to protect
them, and I think that you do not have the process in place to
make those kinds of assurances.
Senator Durbin.
OPENING STATEMENT OF SENATOR DURBIN
Senator Durbin. Thank you very much, Madame Chair, and
thank you, Mr. Apgar, for joining us today.
I want to say again what I said yesterday. We had three
people who came and testified before this Subcommittee
yesterday. I believe we let them down. When I say we, I mean
all of us who are involved in public service.
We should have done a better job both at the Department of
Housing and Urban Development, as well as in Congress. There
are things that we can do and that we should do to protect
unwary consumers from the kind of exploitation that we ran into
yesterday.
I have a high regard for your Secretary, as well as your
Department, and I know that you have been part of an effort to
extend housing to low-income Americans. I do not think there is
a nobler task in the Department of Housing and Urban
Development than to give first-time home buyers the
satisfaction of realizing the American dream, but what we heard
yesterday is troubling, and I would like to go to a point which
I asked about yesterday, and the GAO could not comment on.
There was a reorganization when it came to your
surveillance of these HUD lenders that resulted in the
formation of four regional centers and reduction in staff of
people reviewing the FHA lenders by half. It was part of the
``20-20 Reform Plan.'' Can you please tell me was this an
initiative from the Department, or was this something Congress
either mandated or reduced your funds to the point where it was
inevitable? How did HUD reach a point where it put surveillance
of this kind into predatory lending and did not require the
number of personnel that it did in years gone by?
Mr. Apgar. OK. There is a two-part answer to that. The
first part is just the factual issue, is that, in fact, the
number of people doing lender monitoring has increased 7-fold
over the last 4 years. So we have taken the staff we have and
really focused them on an important lender monitoring task.
In terms of the overall staff cutbacks, they were a result
of ongoing erosion over time due to budgetary cutbacks. We were
at one time a HUD of 13,000. A decline in our Salaries and
Expense funding forced us to move into layoffs and other
attrition moves.
Secretary Cuomo arrived and he stopped this attrition. He
said no. Even though there was some sense that HUD would move
to a work force of 7,500, he resisted that and stabilized our
work force now at 9,300. Although, we are concerned because the
budget that was passed by the House of Representatives would
force another 400 layoffs.
So we have reorganized our programs as a result of staff
cutback. I do not think we have sacrificed, necessarily, the
quality of programs as a result. Again, with the lender
monitoring area, we are doing more lender monitoring now than
we ever did, even when our staff was larger. We used
automation, for example, to improve our functioning. Almost
half our loans now are written through automated underwriting
systems in which the computer does a lot of the work that was
once done by hand. Much of our analysis of fraud and fraud
protection tools are computer driven.
So a combination of automation and other things have helped
us maintain our focus on fraud protection, while cutting back
on the work force.
Senator Durbin. I want to make sure the record is clear.
You are saying that the number of people involved in this has
grown by what over the last 4 years?
Mr. Apgar. A factor of 7-fold. I think the particular
numbers are 23, which was the number around the early 1990's,
to 140 today. So 23 to 140, about 7-fold.
Senator Durbin. These are FTEs? These are Federal
employees?
Mr. Apgar. Full time in terms of lender monitoring. The
number of lender monitoring reviews have increased by a factor
of four. Our lender monitoring reviews are more in-depth. We
are asking people to stay longer and do more in-depth analysis
at the site.
Senator Durbin. These are not independent contractors or
private contractors?
Mr. Apgar. No. These are HUD employees, and as a result,
the number of referrals--again, before you arrived, I submitted
for the record just the number of referrals we did in the three
States where the women from yesterday came from, New York,
Florida, and your own State of Illinois. We have literally
hundreds of referrals to the IG, to other agents, as well as
referrals to our own bodies, the Mortgagee Review Board and the
like, and this list is just in the last 15 months.
Senator Durbin. I believe our notes indicated that Easy
Life in Chicago had been cited and fined by FHA prior to Ms.
Rollins' bad experience. What kind of efforts do you make to
ferret out these bad actors based on actual penalties and proof
of violation?
Mr. Apgar. Well, the automated system, the Credit Watch
system is a performance-based system. So it is very quick. When
we identify a lender who has a high rate of defaults and claims
relative to the peers in that metropolitan area, we terminate
them and do not need to have a lengthy process. Our mortgagee
review process is more of a quasi-judicial process, an
administrative hearing board.
Again, the number of cases coming through the mortgagee
review board are substantial, and when we identify people, we
do one of several things. We can ask them to indemnify us for
the loans, i.e. make FHA whole. We can impose civil penalties
against them, and/or we can debar, suspend them for various
lengths of time.
Just last week, we had a major case in New York where we
debarred one of the larger lenders in the area who had a record
that was very poor, and we managed to suspend that lender, the
principal, hit him with a pretty good fine. Those deterrent
efforts, we believe, are sending a signal through the mortgage
industry that we mean business.
Senator Durbin. You said in a public comment about this
hearing that you thought what we found yesterday was isolated.
You were kind enough to meet with Ms. Rollins and her attorney,
and her attorney probably told you, as she told me, that she
represents some 200 home buyers----
Mr. Apgar. Right.
Senator Durbin [continuing]. Who were exploited by this one
operation. So do you still maintain that this is an isolated
situation?
Mr. Apgar. Not in South Side Chicago, it is not. It is a
big problem there. What we see when we look at our detailed
information is you can see these scams just emerge. As a
combination of a broker, a lender, an appraiser, and lax
oversight by other State and local officials, allow these scams
to take hold and grow. So we will see heavy foreclosures, heavy
defaulted mortgages and the like.
We are able to go in with the help of FBI and others, rout
some of that out. So in the blocks where it is happening, it is
not isolated. It is all pervasive.
Senator Durbin. So when does the red flag go up? When does
HUD first have a suspicion that a lender or an operation is
exploiting or deceiving consumers?
Mr. Apgar. Well, in our current system, we collect
appraisal data on line. We are monitoring the work of
appraisers. As soon as we have a couple of indications that
there is suspect of an appraisal--maybe because the appraisal
seems out of line with the data we have on prior sales, maybe
it is because the appraisal seems out of line relative to other
indicators--we then bring our appraisal monitoring teams in. We
do a review of all the recent appraisals they have done.
And, again, that system is just reaching its full maturity.
Last month, 40 appraisers were sanctioned as a result of that
program. So that is one way. Another way is tips and other
things, individual complaints. We are able, through our data
base, then to run and see how the other loans that that lender
that was involved in the initial accusation occurred. I believe
that is how we got many of the lenders in New York--a tip from
a group that was being scammed from some non-profits.
Senator Durbin. You mentioned in your testimony that FHA is
doing a better job of serving African American and Hispanic
borrowers, and two of our witnesses yesterday were African
American, one from New York and another from Chicago. I am told
that the data collected by HUD, perhaps not in your agency,
suggest that there is a higher incidence of sub-prime lenders,
even in neighborhoods of comparable income, when it comes to
African American and Hispanic borrowers.
Mr. Apgar. Right.
Senator Durbin. And I would imagine, then, if you go to the
next subset of first-time borrowers, you can put all of this
together, the outrageous interest rates on the mortgages and
the exploited practices for people who are brand new to this
business. I mean, when I listened to the witnesses yesterday
explaining their lives in these dumps that they had been
swindled into purchasing, and it was heart-breaking, but it
also told a story that for many of them, they had never owned a
home before and really did not know much about a home in terms
of how it operates. There is no super to call.
Mr. Apgar. Right.
Senator Durbin. You may have to buy your own little tool
box to try to deal with some things, and you have to be
conversant with items that a lot of homeowners just take for
granted, and for a lot of these people, it is not part of their
life experiences. They have never done it before, and I think
that is a reality.
What is FHA doing in those situations? I mean in terms of
being vigilant and not waiting, perhaps, for a red flag, but
anticipating some areas where you are going to have a high
incidence of exploitation?
Mr. Apgar. Well, exactly, our home buyer counseling program
of course is part of a broader effort of this administration to
promote financial literacy among the low- and moderate-income
families. It is just not about mortgage lending. It is about
use of credit cards debts, other ways, the banking system. So
there is a broad set of issues.
We have a national network of home buyer counselors that
provide home buyer education. We incentivize them to
participate in FHA programs. So we believe home buyer education
is one of the first steps.
In terms of the national task force, one of the
recommendations was to launch a national public service ad
campaign to alert people to the fraudulent practices that are
out there. Baltimore has such a program. Boston has one, and we
are thinking about how to make that go national. I mean, the
people on TV pushing these bad programs every night on the
night movies and the late night TV, we ought to be on there
with, saying, Hey, pay attention, do not borrow trouble; think
about what you are doing before you are here; if it looks too
good to be true, it probably is; call somebody, call your
church, call whatever to get some honest advice before you get
caught up in one of these scams.
Senator Durbin. Now, what is this hot zone that you have
made reference to?
Mr. Apgar. Hot zone is a focus where our data suggests
there is high share of defaults, people in arrears with their
mortgage or a high share of foreclosures. That is a place where
we can concentrate our resources for workouts, loan loss
mitigation. We can focus our enforcement tools to try to
identify who are the lenders or the appraisers, the brokers who
are getting people involved with this trouble.
Senator Durbin. My last question to you, and I see my time
is up, concerns the situation with the Easy Life Realty and the
loan operation that exploited Ms. Rollins. What does HUD or FHA
do, if anything, to follow through on the licensure of the
people involved in these scams?
Mr. Apgar. We can debar the appraiser from ever
participating in Federal activities. We can debar the lender
from ever participating.
Senator Durbin. Is this by individual or by company?
Mr. Apgar. By individual and company.
Senator Durbin. Both?
Mr. Apgar. The list I have is both individual action and
corporate action, people by name as well as their companies.
Obviously, the company part is tricky because some of these
folks quickly form other companies.
Senator Durbin. Well, what about the State licensure part
of this? For instance, when I learned from the attorney for Ms.
Rollins is that some of these people, these realtors who had
treated her so badly were still in business in my State. That
is embarrassing, and we are going to contact the Illinois
Association of Realtors and the State of Illinois to try to
figure out why this exists, but what does HUD do? What does FHA
do as part of this?
Mr. Apgar. We notify appropriate agencies of our actions.
We hope that they will follow through, but we are trying to do
more than just hope. We are now piloting in Baltimore a
mortgage system called MARI. I do not know what it stands for,
but it is an effort by the mortgage industry to track all the
bad guys and make that information widely available to others
in the industry.
So they will bring the information of FHA debarrments,
other State and regulatory actions together in one screen
source so that everybody will be on notice of who the bad guys
are, so if they are debarred in one system, you will know it in
another context.
That is one step, but there is certainly a lot more room
for State involvement in these mortgage frauds.
Senator Durbin. Let me close with this comment. I have
worked with Secretary Cuomo on what I think is going to be a
revolutionary change in public housing in the city of Chicago.
It was a subject of a lengthy negotiation between the Chicago
Housing Authority, the Department of Housing and Urban
Development, and the families affected by these decisions. What
came out of that, I thought was a realistic and sensitive
approach for housing for people in low-income categories, and I
believe that is in the heart and ideals of the Secretary and I
believe of this administration.
What we heard yesterday is a rude awakening in terms of one
aspect of the Department of Housing and Urban Development. I
would never characterize it as isolated. I do not think it is
isolated. I think to assume that is to assume a situation which
may not even be close to the truth at this point. So I would
hope that as a result of this hearing and the leadership of the
Chairman in this hearing, that HUD will renew its efforts and
take this as a constructive suggestion that we all have to work
together a little more diligently both at the other end of
Pennsylvania Avenue and up here on Capitol Hill.
Mr. Apgar. Fair enough. Today's HUD is all about making
sure that the things you heard about yesterday can never happen
again.
Senator Durbin. Thank you very much.
Senator Collins. Thank you very much, Senator Durbin. I
want to note, Senator Durbin, before you leave that according
to my staff, HUD still has not taken any action against some of
the individuals involved in the Rollins case. For example, the
president of Dependable Mortgage and the underwriter are still
operating in the loan business in Chicago, and that is
troubling to me.
Mr. Apgar. Right. As I mentioned earlier, in 1996, we did
refer Easy Life to the inspector general because we believed
that this was criminal party involved, and we did debar the
company.
Senator Collins. I am talking about the lender.
Senator Durbin. What about the lender?
Mr. Apgar. The lender disappeared.
Senator Collins. Well, we found them.
Mr. Apgar. What?
Senator Collins. They are still operating in the loan
business in Chicago. So we will help you find them.
Mr. Apgar. No. The lender, we took action against the
lender, and the lender went out of business.
Senator Collins. The lender, Dependable Mortgage--you are
right--no longer exists, but the principals of Dependable
Mortgage have simply gone on to another company, and that is
the whole point.
Senator Durbin. That is the point. What is your answer to
that?
Mr. Apgar. The answer, we took action against Dependable
Mortgage. If the new lender is engaged in deceptive practice,
we will take action against them.
Senator Durbin. John Smith, President of Dependable
Mortgage has now done so many terrible things that HUD and FHA
have decided that his Dependable Mortgage company is no longer
eligible for FHA. John Smith says it breaks my heart. I just
spent $200 with my attorney, and now we are the Ultra
Dependable Mortgage.
Mr. Apgar. Right. I hear you. John Smith should be in jail,
and we should not do business with him.
Senator Durbin. Well, the question is what is your action?
Do you have a way of taking action so that John Smith is
tracked from this point forward, as opposed to the name of the
next company or the last company that he worked for?
Mr. Apgar. We track each of our lenders, and if it is
current business--if he goes back into business, we can stop
him, and then we can permanently debar him as an individual.
Senator Durbin. As an individual?
Mr. Apgar. Yes.
Senator Collins. But that has not happened in this case.
Mr. Apgar. You could be right on that.
Senator Durbin. Would you look into that?
Mr. Apgar. Sure will.
Senator Durbin. I am glad the Chairman brought that up, and
I really hope we can follow through and get a good answer on
that, because there is no reason why these people should
continue to do business.
Mr. Apgar. In Chicago, we work with the community groups
who give us particular names all the time, National People's
Action and others, and so that is one of our main sources of
evidence on who the bad guys are, and we are taking, as I said,
in this list hundreds of actions in Chicago. I do not know if
we took action against this particular person or not.
Senator Durbin. Thank you.
Senator Collins. Mr. Apgar, I just have a couple more
questions for you. One of the concerns I have about the latest
plan that you have unveiled to try to crack down on these
predatory lending practices and property flipping is that when
I look over the past 7 years, I can count at least 12 reports
or audits that have criticized HUD's management of the single
family program.\1\ Repeatedly, HUD has been put on notice by
its own IG, by the GAO, by outside auditors that its programs
are vulnerable to fraud.
---------------------------------------------------------------------------
\1\ See Exhibit No. 18 which appears in the Appendix on page 314.
---------------------------------------------------------------------------
Why is it taking so long for HUD to propose improvements to
crack down on the fraud? I mean why, I have got reports that go
back to April 1993, May 1995, February 1997, March 1997, July
1997, another July 1997, March 1999, April 1999, January 2000,
February 2000, March 2000, and April 2000. This makes me
question whether or not HUD is really going to take sufficient
action and be committed for a sufficiently long time to solve
this problem when 7 years of reports and we still see the
problem today.
Mr. Apgar. Well, I mean, we could go back even further into
the mid-1980's when the Department was a total mess. The FHA
fund was nearly bankrupt during the 12 years that preceded the
arrival of the Clinton Administration. In 1990, the fund was so
poorly managed that it was $2.7 billion under water. We did not
have enough to even cover the claims for the insurance that was
outstanding, much less make new loans, and so a lot of time was
spent digging out from the mess that was inherited. That is no
doubt.
Senator Collins. Well, there was a significant premium
increase for the insurance fund that helped make the insurance
fund look better.
Mr. Apgar. Well, I would like to submit for the record the
facts about the premiums, because I understand that came up
yesterday.\1\ In fact, the premium, which was legislated,
mandated as the maximum, was set at 3.8 percent, the front-end
premium, and since then, it has dropped almost 40 percent to
about 2 percent today. We have a couple different premium
structures, and so, in fact, we have cut the premiums
substantially as we have been able to make the fund more
healthy by our improvements.
---------------------------------------------------------------------------
\1\ See Exhibit No. 16 which appears in the Appendix on page 313.
---------------------------------------------------------------------------
And, again, today the fund is in its best financial shape
ever. This is not us speaking. This is our own independent
auditors and an independent actuarial study that suggests that
FHA has an economic value of $16 billion, up from the minus
$2.7 billion just a few years ago. So there has been
improvement, not to say that we did not get a big jump start
when Secretary Cuomo arrived with all his vigor and commitment
as being zero tolerance for waste, fraud, and abuse. We really,
in the last 3 years, put a major amount of energy into
restructuring all our systems so we can protect the folks that
were testifying today from abusive practices.
Senator Collins. For the record, I am going to follow up
with some questions on what this administration did in response
to each of these reports, but in the interest of time, I will
ask that the----
Mr. Apgar. If I could make one request to you, yesterday
when I was reviewing the reports of the testimony, it seems to
me that these are very complicated matters, and in a give and
take, there can be many misstatements and misperceptions. So I
would like to request the opportunity to review the report
myself and point out any inconsistencies on how we see it.\2\
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\2\ On July 11, 2000, Assistant Secretary Apgar was provided with
copies of the Permanent Subcommittee on Investigations' June 29 and 30,
2000, hearing transcript for his review and comment as well as a copy
of all prepared remarks of witnesses and the General Accounting Office
Report on this matter. On August 3, 2000, the Subcommittee received and
incorporated into the record editorial changes to Assistant Secretary
Apgar's testimony of June 30, and materials on New York City, Chicago
and Florida Lending Activities/Actions Taken (See Exhibit No. 15 on
page 296) and FHA Premium Policy (See Exhibit No. 16 on page 313).
---------------------------------------------------------------------------
Senator Collins. We would welcome any materials. We want to
make sure we have the fullest possible understanding.
Mr. Apgar. Right, because, again some of these issues are
pretty complicated.
Senator Collins. They certainly are, and HUD has a lot of
explaining to do. So I look forward to getting your comments on
all of the testimony, and we will happily share with you the
hearing record from yesterday.
Let me ask you one final question. We have talked a little
bit this morning of the position of debarring or suspending or
otherwise taking enforcement action against those individuals
who are ripping off the FHA program, but equally important, as
the GAO testified yesterday, and as its April report of this
year demonstrates, is making sure that bad actors do not get
into the program, in the lender program in the first place. I
want to talk to you just briefly about the process that HUD
uses for granting direct endorsement authority to lenders.
GAO did an in-depth investigation, looking at the front-end
process and found that in the 6 months prior to its office
visits to the four homeownership centers, that the centers
granted direct endorsement authority to a total of 36 lenders.
Now here is the part that troubles me: Fully one-third of the
lenders, 12 of them who were granted the direct endorsement
authority got poor ratings from HUD when HUD was reviewing the
15 mortgages that they are required to submit for review. Poor
ratings, and yet they received the direct endorsement authority
anyway. I do not understand that.
How can a lender who does not pass the threshold test at
the front end be given the authority by HUD to underwrite these
mortgages without HUD's review?
Mr. Apgar. OK. Our rules for the direct endorsement system,
a lender submits to us loans in their initial work, and we rate
them. When we identify a loan that is judged poor, we talk to
the lender and help them understand what part of the process
they did not understand. We continue that process until the
judgment of the review staff that that lender is fully capable
of managing these loans.
In some instances, a poor rating may be a minor issue. In
other instances, it may be more substantial, but in any event,
we continue to work with them until they are able to
demonstrate sufficient understanding and capacity to exercise
this responsibility. Then--and the part that was not mentioned
at all in the GAO report--we continue to monitor that lender
through the next 50 loans or 180 days with a complete review,
and at that point, a lender can be, in fact, sanctioned or not
allowed to continue on with the program. And, finally, of
course, some direct endorsement lenders are removed from the
program and put back on either 100 percent review of these so-
called post-technical reviews or remove their direct
endorsement authority entirely.
Again, in the papers I submitted, I give you examples in
each of the cities of lenders that have in the last 15 months
been treated with all those remedies, put on 100 percent post-
technical review, removed their direct endorsement status, and,
of course, ultimately in the sense of lenders that are not
performing, we move to sanction them and terminate them from
the program.
Senator Collins. Well, you have been misinformed,
apparently, about the 12 lenders that I am talking about, the
one-third of the cases, as GAO said very clearly yesterday
these were not minor errors. These were not paper-work
problems. They were significant deficiencies.
Mr. Apgar. I reread the report on that point. They said the
types of----
Senator Collins. Well, you did not hear the testimony, the
exchange I had where I followed up.
Mr. Apgar. That is an area of qualification I would like,
because the testimony was inconsistent with their own written
report. The written report identified four areas and four
examples of what were poor, but there was no evidence and no
indication that the lenders had committed the worst part of
those things. Some might have. Some did not.
Our own understanding, looking at the greater detail of
that report and talking with follow up, is that it is a range
of types of activities.
Senator Collins. Well, that is not what GAO said yesterday,
and I would also indicate to you----
Mr. Apgar. Well, again, I just encourage----
Senator Collins. If you could let me finish my sentence,
and then I will let you finish yours.
Mr. Apgar. I am sorry.
Senator Collins. GAO said that these were not minor
problems, but rather they were basic fundamental and serious
errors, such as failing to verify the buyer's income, and that
the procedures being followed would not ensure that the loan
was appropriate. They were serious errors, and my point to
you--I mean, if you are satisfied with the front-end system, I
think we have got another real problem here.
Mr. Apgar. No. We took many of the GAO recommendations to
heart and are, in fact, working to tighten up the front-end
system. What we disagreed with is the characterization that
this suggests that we were in a very lax way letting totally
unqualified lenders into the program. We do not believe that to
be an accurate statement of the facts.
On the other hand, they had many excellent suggestions on
how we can improve this process and we can, in fact, implement
them.
Senator Collins. Well, I am glad to hear that last part,
because I think GAO did an outstanding job on this report and
that they identified many weaknesses in the process at the
front end and in the reviews, and I might add that GAO also
identified more than 200 lenders nationwide during Fiscal Year
1999 who received poor ratings for mortgage credit analysis on
more than 30 percent of the reviewed loans. That is troubling
and nothing happened in those 206 cases. HUD did not take any
action.
Mr. Apgar. Right. We use that information in our new system
to target lender monitoring reviews. Again, the GAO mentioned
but did not elaborate on our new effort to track the post
technical reviews and use them as a targeting device, the so-
called ART system.
Senator Collins. Mr. Apgar, I hope that you will take to
heart the testimony that you have heard. We are happy to give
you the hearing record, because I very much want you to read
the hearing record.
I hope that you will commit yourself to recognizing that
this is a serious, widespread problem that it is not isolated,
that it is something that is going to require the joint and
cooperative efforts of us all to solve. I am aware of your
Credit Watch program, which I think is a promising program, is
under attack in the courts. If we can provide a statutory basis
for that, that is helpful, that is something I am certainly
willing to help with, but I have to tell you that I think your
whole approach to these hearings has been extremely
disappointing, and it raises questions in my mind about whether
or not HUD is interested in just PR, such as that ad, or really
solving the problem.
So I hope you will commit today to working with us and to
working with your IG and GAO in a cooperative effort, because I
think both of us, all of us share the goal of making sure that
these home buyers are not exploited, and that is what is
happening now, and we just have to do everything we can to put
a stop to that.
It is not just losses to the insurance fund. Those concern
me as well, but what concerns me even more are these home
buyers who, rather than living the American dream, are finding
that their dream of homeownership has turned into a true
nightmare, and I would hope that that is something we could all
agree is a common goal of preventing these kinds of scams and
fraudulent schemes.
Mr. Apgar. Well, I certainly look forward to working with
you and others who want to join us in our efforts to end
abusive practices in the FHA or any other mortgage market. So I
appreciate that.
Senator Collins. Thank you. I am now pleased to welcome our
final witness today, Susan Gaffney, who is the Inspector
General of the Department of Housing and Urban Development. The
Inspector General's testimony will include the historical
causes for HUD's present problems with flipping and mortgage
fraud, and I very much appreciate the great work that she and
her office has done on this issue. I would ask her to come
forward and to introduce the two individuals who are
accompanying her.
Before you get comfortable, I do need to swear you in.
Do you swear that the testimony that you are about to give
will be the truth, the whole truth, and nothing but the truth,
so help you, God?
Ms. Gaffney. I do.
Ms. Kuhl-Inclan. I do.
Mr. Kesaris. I do.
Senator Collins. Ms. Gaffney, welcome, and I look forward
to hearing your testimony. You may proceed.
TESTIMONY OF SUSAN GAFFNEY,\1\ INSPECTOR GENERAL, U.S.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, ACCOMPANIED BY
KATHRYN KUHL-INCLAN, ASSISTANT INSPECTOR GENERAL FOR AUDIT, AND
PHILIP A. KESARIS, ASSISTANT INSPECTOR GENERAL FOR
INVESTIGATIONS, U.S. DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT
Ms. Gaffney. Thank you, Madame Chairman. I would like to
introduce, as you suggested, Phil Kesaris, who is our Assistant
Inspector General for Investigations; and Kathy Kuhl-Inclan,
who is our Assistant Inspector General for Audit. They are the
real experts and are available to help me with this hearing.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Gaffney appears in the Appendix
on page 107.
---------------------------------------------------------------------------
I would like to commend you and the Subcommittee for your
interest and concern about the flipping issue. I would also
like to commend Senator Mikulski and John O'Donnell, who is a
reporter for the Baltimore Sun. They have also done a lot to
raise awareness of this issue and to galvanize HUD into some
action.
Senator Collins. I certainly agree with your comments.
Ms. Gaffney. Over the past few years, single family fraud,
including flipping, has become a major component of our
investigative workload, and I think it is fair to say that the
growth in these cases is to the point where it is about to
overwhelm the resources of the OIG and the U.S. attorneys who
have to prosecute these cases.
What we have learned from our flipping investigations is as
follows: First of all, the Secretary and Mr. Apgar talk about
predatory lending, and typically they talk about predatory
lending as a phenomenon in the sub-prime lending market. We are
not talking about sub-prime lenders here. We are talking about
FHA-approved prime lenders.
Second, we have forever seen fraud in the single family
program, but it is only recently, only in the past several
years, that we have seen this phenomenon of flipping. It is
new. It is not historical. This is not business as usual.
Another point about flipping is that it typically involves
collusion by multiple people. This is not like your deciding to
commit fraud on your own by making a false statement on your
income tax return. These flipping deals require collusion by
multiple people, and further, these multiple people tend to be
quite professional in perpetrating the frauds. Their actions
tend to be quite orchestrated, and to give you an example of
that, in December 1999, a U.S. attorney in central California
announced 39 indictments of persons who were involved in
massive flipping and fraud, and all of those cases rested on
our having identified one person whose full-time occupation was
generating forged documents to be used in obtaining FHA
insurance.
My point here is that this is not casual fraud. This is not
seat-of-the-pants fraud. This is orchestrated. This is
collusion. It is, as you have said, also distinct from other
types of single family fraud because this does not just harm
the mortgage insurance fund. It destroys human beings, and
there is no doubt that you are right that they still believe in
their government, and they still believe that if their
government is standing behind a loan, it is a good loan.
The other area where we have a difference with Mr. Apgar:
He said these are isolated problems. We find, in fact, that
flipping is pervasive. We have open flipping investigations now
in 14 States. Perhaps the best indication of the pervasiveness
is we started, about a year and a half ago, a new initiative
called the Housing Fraud Initiative in six judicial districts.
We now have 139 open single family fraud cases in those six
judicial districts, and half of them involve flipping schemes.
This is all over the place, and when we find evidence against a
particular lender, a particular appraiser, typically what is
happening is they are saying, Well, OK, you got me, but guess
what, I know 10 or 20 other people who are doing the same
thing.
So not only is it pervasive, but it is not a secret. They
all know what is going on, and in this day of the Internet, it
is simply foolish to think that some people have an enormously
profitable scam, and nobody outside those isolated little
centers knows anything about it.
Your concern about flipping led you to ask GAO to do a
review of the single family loan origination program. Our
concern about flipping and single family fraud led us to do an
audit of the same area. We, in addition, looked at two major
cases of fraud and went back and did specific audits to try to
find out why such massive frauds could be perpetrated without
HUD's having detected them. I think it is fair to say that all
of these audits have reached the same conclusion and that is
that the internal controls that should be working in the single
family loan origination program to prevent fraud, waste, and
abuse really are not working effectively, and, of course, that
is the same boring message that IGs always convey and it does
not have a lot of pizazz.
I actually thought that our two follow-up reviews on
specific frauds had some pizazz. In the first case, Allstate
Mortgage Insurance, we had a situation where Allstate generated
400 fraudulent mortgages valued at $97 million. So we went back
into the homeownership center to say, how could this possibly
happen with no one finding any indication of it at all? And
what we found was that, in fact, 17 of these loans had been
subject to post-endorsement review by a contractor to HUD; and
the contractor's reviews were severely, were grossly
inadequate. The contractor reported no problem with these
loans, even though there were blatant examples of fraud in the
case file.
The other instance of fraud was not flipping, but it was a
case where a HUD employee was responsible for selling HUD
property that was valued at $9 million. She sold it for $2
million, and this went on for over a period of a couple of
years, and no one in HUD detected it. We found out about it
from outside of HUD, and when we went back to HUD to find out
how in heaven's name could this happen and go undetected, the
answer was that this employee was subject to no supervisory
review at all. She unilaterally made these decisions, made
these sales, and they were not subject to review by anyone
else. That is $9 million worth of sales for $2 million.
So HUD's reaction to this situation, the investigative
cases, and the audits has been 3-fold. First, HUD mightily
proclaims that the mutual mortgage insurance fund is in the
best shape ever, and I am not here to dispute that. The latest
actuarial study certainly puts the fund on sound footing. I do
not think, though, that any of us would say that because the
fund is on sound financial footing, we are perfectly prepared
to tolerate fraud against the government and against individual
victims, at least I hope not.
Second, HUD's reaction has been to announce a series of new
initiatives that you have discussed, such as Credit Watch, the
certification of FHA appraisers, a new centralized appraisal
review system, and the restructuring of flipped mortgages down
to the true value of the properties.
And HUD's third reaction has been pretty extreme
defensiveness with respect to the GAO and OIG audit findings.
So let me go through these three HUD responses very
quickly. First of all, as I said, the MMI fund is in good
shape, but what does that have to do with stopping fraud?
Second, we think the new initiatives, as you have indicated,
are generally good ideas. We have not seen the results, and HUD
is notoriously good at planning new initiatives so that we are
always looking prospectively, but my important message to you
today is these initiatives cannot substitute for the day-to-day
work that is being done by the homeownership centers. The
controls that we need to have are there. They are in the day-
to-day business. They are not extra, added endeavors off to the
side, and after the fact. I am not opposed to those things, but
they should be building the fundamental internal controls in
the business operations.
With respect to HUD's defensiveness about the audit
findings that we lack adequate internal controls in the
business operations to prevent waste, fraud, and abuse--I
really do not understand why they are so defensive, because if
you stand back and look at the situation, what has happened
over the past few years? What has happened is the volume of FHA
loans has increased very substantially. The FHA underwriting
standards have changed very substantially. The single family
staff has been cut in half, and it has been dramatically
reorganized. It is any surprise to anyone in light of those
facts that they do not have their act together very well?
I say that not as a negative. I say that as a plea to you
and others to understand that the time has come. We must now
stand back and say we have been through all of these changes,
we have problems, let us allow the dust to settle, and let us
figure out how to make the program really work to prevent
waste, fraud, and abuse.
Now, it is going to be boring to do that, because it is
going to require writing policies and standards. It is going to
require training people. It may even require obtaining more
resources and people from the Congress, but until we take on
the real task, we are just playing at the edges.
Thank you.
Senator Collins. Thank you very much for your very helpful
statement, and, again, I want to commend you and your
colleagues for the excellent work that you have done in this
area.
And one of the reasons that I feel very uneasy about HUD's
commitment to solving this problem is to have Mr. Apgar sit
here and continue to maintain that this is just an isolated
problem when you are in 14 States, and whenever where we
looked, every single city where we investigated, we easily
found evidence of flipping schemes. It just seems to me that
the denial of the extent of the problem does not bode well for
concerted effort to solve the problem, and your testimony is
very helpful.
I think you also raise an excellent point about the
insurance fund. Just because the insurance fund is healthy does
not mean we should tolerate fraud, and, indeed, with an
economic downturn, the insurance fund could be in trouble very
easily. Moreover, when you look at--and there have been premium
increases that were responsible for restoring the health. Is
that not true?
Ms. Gaffney. That is correct.
Senator Collins. Let me ask you about a comparison of the
delinquency and foreclosure rates of FHA-backed mortgages and
conventional mortgages. You recently--I think it was in March
of this year--issued an audit report entitled Single Family
Production Homeownership Centers in which you compared the
delinquency and foreclosure rates of FHA-backed mortgages with
conventional mortgages, and the charts that you used--and I
believe these are your charts----\1\
---------------------------------------------------------------------------
\1\ See Exhibits No. 11 and 12 which appear in the Appendix on
pages 230 and 231.
---------------------------------------------------------------------------
Ms. Gaffney. Yes.
Senator Collins [continuing]. Seemed to me to show that FHA
delinquency rates have risen steadily over the past 5 years,
and the foreclosure rate has risen even more dramatically,
particularly when you compare it to conventional loans. Could
you comment on this?
Ms. Gaffney. I am going to ask Kathy to comment.
Senator Collins. OK. Thank you.
Ms. Kuhl-Inclan. This information, we took from the
Mortgage Bankers Association. They have been taking a phone
survey of lenders for about 4 to 6 years, and our point was
just to illustrate a difference between where the conventional
market is going and where the FHA market is going, and we know
that the FHA foreclosure and default rate will be higher than
the conventional rate. Our loans tend to be of higher risk, but
we expected it to be somewhat parallel, not those huge spikes,
and we wanted to just make the point that there are some
problems and concerns and reasons to be looking at, as Susan
talked about, the internal controls and the processing of the
mortgages because these rates are so much higher than the
conventional rate.
We only wanted to demonstrate comparisons, and, again, just
to show that there should be some parallelism between the
differences, not these spikes as they are showing.
Senator Collins. I think that is an excellent point. As you
mentioned, you would expect the foreclosure and default rate to
be higher, because, after all, that is why we have the
government-backed loan program, but when you see it so much
higher and going in the wrong direction, and you see these
spikes, it suggests to me that something else at play here,
that it is not just because the loans in general are going to
be riskier, but, rather, it suggests to me that there is some
weakness in the system.
Is that a fair analysis?
Ms. Kuhl-Inclan. That is exactly right. That is sort of our
basis for them looking at what is behind those spikes and
looking at the weakness that we talked about in our report.
Senator Collins. Ms. Gaffney, in your written statement,
you stated, ``That the liberalization of FHA underwriting
standards, the severe reduction in HUD's monitoring staff, and
the major organizational changes in HUD all combined to
increase the vulnerability for fraud,'' and it was suggested
yesterday that there is a lack of resources devoted to the
high-fraud areas or the areas that are most vulnerable to
fraud.
The GAO, however, indicated that the changes within HUD are
not so much of the result of any budgetary cutback as
managerial decisions made solely by the Secretary. Could you
comment on that? Are you seeing a growth in central office
staff versus the homeownership centers? Could you enlighten us
on that?
Ms. Gaffney. Perhaps I could go back to Senator Durbin's
question.
Senator Collins. Yes.
Ms. Gaffney. About whether the cutbacks in staff were the
result of Congressional cutback or action by HUD. I have now
been at HUD for more than 7 years, and I can tell you what I
know. The cutbacks in HUD started as a result of a proposal by
Henry Cisneros to cut the staff in HUD from 13,000 to 7,500.
There was no basis for that proposal; there was no analysis
that supported that HUD could live with 7,500 staff, but he
felt it was a dramatic enough proposal to save HUD from being
dismantled, and, in fact, he was right. The forces for
dismantling stepped back at that point.
When Secretary Cuomo became Secretary, he and the Congress
went along with Secretary Cisneros' downsizing proposal. When
Secretary Cuomo became Secretary, he did not put that proposal
up to question. He made a decision to continue the downsizing,
and it was not until several years after he became Secretary
that he took the position, I believe, that Mr. Apgar spoke
about, which is we will stop this downsizing at 9,000.
As far as I know, the impetus for downsizing has been HUD,
but it is true that the Congress has not disputed the HUD
actions. Does that answer your question, Senator?
Senator Collins. It does. Has there been a growth in
central office staff, in the Secretary's office, do you know,
versus these other areas that have been cutback?
Ms. Gaffney. Well, the big area that we have had problems
is the Secretary's implementing a whole new program involving
some 800 people against the backdrop of HUD's major downsizing.
For the Secretary to set up a new program involving 800 people
is quite extraordinary. That program is called the Community
Builders Program. We did an audit of that program within the
last year, and our conclusion was that, principally, what the
community builder program does is public relations.
Senator Collins. So it might be better to have those 800
slots devoted to making sure that we are policing the single
family program?
Ms. Gaffney. Right.
Senator Collins. One final question for you. I have looked
through your audit reports and the reports issued by GAO over
the past 7 years, and one of the things that troubles me most
and makes me wonder about the commitment of HUD efforts to
getting a true handle on this problem is it seems to me that
throughout the 7 years, the same problems are identified over
and over again, and I want to give one example to you.
In April 1993, your office released an audit report on
HUD's direct endorsement program. We have talked a lot about
that during these hearings, and it was very critical of it. It
found that sanctions were not taken, were not effectively used
to protect the integrity of the direct endorsement program and
that the direct endorsement underwriter approval process was
not effective. Those are the exact same findings that the GAO
found this year.
Is it your experience that some of the same problems that
you flagged or your office flagged 7 years ago still exist?
Ms. Gaffney. Absolutely, and what you are specifically
talking about is there is an unwillingness, historically, in
the HUD programs to take actions against bad actors to remove
them from the HUD programs. When Mr. Apgar talks about the
Department's fight against fraud, waste, and abuse, he tends to
be talking about centralized offices in HUD that have pretty
narrow missions, such as the enforcement center.
Where you really need the willingness to take enforcement
action is in the program areas where they are seeing the
problems right at the beginning, where they can stop it, and
somehow that message has not been conveyed in HUD.
Senator Collins. Kathy, did you want to add to that?
Ms. Kuhl-Inclan. One comment is that they do not seem to
realize--when we do our audits, we are actually in the field
dealing with the people at the lowest level all the way up to
the directors, and they are telling us we cannot make our goals
unless we look at the low risk lenders, we do not have time--we
are going to take the path of least resistance in order to make
our goals, in order to do our jobs.
So the idea of going after the lenders where there are
indications of risk or of the appraisers where there are
indications of risk is time consuming. They cannot make their
goals, and what is frustrating to us is that we are saying that
these frustrations are being said by their staff, and they just
say, Well, we are doing a new program, or we have a policy in
place, but those policies are not working, are not being used,
and are not being implemented. They have to listen to what
their staff is telling them.
Senator Collins. And it sounds like what you found is that
low risk lenders will be reviewed because it is quick and easy,
and you can make your numerical goal, and you do not go after
the high risk lender because that is going to take a lot of
work. Is that fair?
Ms. Kuhl-Inclan. It is fair, and it is not only what we saw
through looking at the statistic, but it is what they told us
too. So we backed up what they said by the statistics that
prove it out.
Senator Collins. And I would add to that that you are not
alone in reaching that conclusion. That is precisely what GAO
found and said in its report, as well as when they talked to
the individuals involved out in the field.
Mr. Kesaris, do you have anything you would like to add?
Mr. Kesaris. On the point, Senator Collins, that the
flipping schemes are an isolated instance, we have 240 criminal
investigators in 38 States, Puerto Rico, and the District of
Columbia, and they would ask me to tell this Subcommittee that
it is not isolated at all. We have seen a rapid increase in
this type of scheme as the ``fraud de jour'' and not just in
the locations where our agent-auditor teams have intensified,
such as New York, Chicago, and Los Angeles, but in many, many
States, and the number of complaints is just continuing to
increase.
Senator Collins. I appreciate your adding that information
to our understanding and to the record. It is evidence to me,
given how hard you have all worked and GAO has worked, that we,
in Congress, need to keep a spotlight on this problem if it is
going to be solved, because when I read 11 different reports
over 7 years warning HUD time and again of the same problems,
it is evidence that Congress needs to play an active role here.
I just want to thank you all very much for your assistance and
for the excellent work that you have done. You really are on
the front lines. You are our watch dogs, and I have great
admiration for the work that you do.
So thank you very much for your contributions, and I hope
you will continue to work with us as we seek to make sure that
this time HUD takes this issue seriously and important policy
changes and standards are implemented to crack down on this
fraud once and for all. Thank you.
Ms. Gaffney. Thank you.
Senator Collins. I want to thank everyone who has
contributed to these hearings in addition to our panels today.
The testimony of the three very courageous witnesses who were
willing to tell their stories publicly, which was obviously
very difficult for them. It is awfully hard to come before
Congress and admit that you were deceived, and I think those
stories were very important because they put a human face on
this problem, and as we go forward and seek to solve it, I
think we should always remember the three women who testified
yesterday, because their stories are duplicated thousands of
times across this country. That is one reason that I am so
committed to working with the IG, to working with HUD, to
working with GAO to solve this problem.
I also want to thank the Subcommittee staff for its work on
this investigation. As the IG and her staff know better than
most people, and as GAO knows, this is an enormously complex
subject. We have been working on this investigation for 9
months. We did extensive work on it, and the staff worked very
hard.
I want to thank a few of them by name: Lee Blalack, who is
the Subcommittee's Chief Counsel and Staff Director, did an
excellent job. Lee is going to be leaving us for the joys of
the private sector. These are his last hearings--we will miss
him. Rena Johnson, who is the Deputy Chief Counsel. Karina
Lynch, who regrettably is also leaving us for the joys of the
private sector. We have got to do something about salaries
here. Claire Barnard, Jim Pittrizzi, Ray Kessenich, and Bob
Groves, who has been on detail to the Subcommittee from the HUD
IG's office--we are delighted to have his expertise. Brian
Jones, Elizabeth Hays, and Mary Robertson all contributed
greatly to the success of these hearings. We were also
fortunate to have help from three very talented summer
interns--Courtney Hays, Joe Kosnow, and Adam Thomas. So I want
to thank them as well.
This hearing now stands adjourned.
[Whereupon, at 12:45 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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