A moratorium on foreclosures against FHA-backed mortgages has been extended for another 90 days in Baltimore neighborhoods where property flipping has been rampant.
The moratorium, covering most of the city east of Harford Road, will give federal officials more time to try to help homeowners who face the threat of losing their homes. In other neighborhoods, the U.S. Department of Housing and Urban Development has allowed a citywide moratorium on FHA foreclosures to expire.
"We felt that in some areas that were impacted, it made sense to continue," said Matt Franklin, a top aide to Federal Housing Administration Commissioner William Apgar. FHA is a HUD agency.
Lenders who issue FHA-backed mortgages were told of the action in a letter dated Thursday. The moratorium, which expires Oct. 12, applies to zip codes 21205, 21206, 21213, 21224 and 21231. It includes Belair-Edison and Patterson Park, two areas hard-hit by flipping.
The moratorium prevents lenders from initiating court action to auction the homes of FHA borrowers who have defaulted on their payments. It also halts action in cases where foreclosure proceedings have begun.
The original moratorium, announced in April, was part of a HUD effort to get a grip on a serious problem in Baltimore - the use of FHA-backed loans to finance inflated property sales, many of them flipped houses, to first-time homebuyers.
Margaret Johnson was one of those buyers. She got a $76,300 FHA mortgage in July 1998 to pay for a problem-filled Belair-Edison house that the seller had bought 10 months earlier for $32,000. Subsequently, she filed a lawsuit against several parties to her transaction that was settled out of court.
After HUD imposed the initial moratorium, it began a review of hundreds of troubled FHA-backed mortgages and took steps to prevent the use of FHA loans to finance property flips and inflated sales. Baltimore is the testing ground for solutions HUD plans to use nationwide.
HUD acted after the nonprofit St. Ambrose Housing Aid Center examined every foreclosure petition filed at the city courthouse between Jan. 1 and March 31. One-third of the 1,600 foreclosures involved FHA loans.
Of those, FHA initially reviewed 264 loans that had been made after Jan. 1, 1997. In about half the cases, the review found, lenders did not meet FHA standards in approving the loans. And a fifth of the properties had been flipped - sold at least twice in a one-year period "with a significant increase in the sales price each time," according to HUD.
Among other things, HUD says it will demand that inflated mortgages be reduced to the actual value of the house. It made that demand recently in a half-dozen cases already in foreclosure where mortgages exceeded the value of the house by 140 percent or more. It is waiting to hear from the lenders.
The agency expects to take similar steps with additional loans, including inflated mortgages that have not gone into default.
"The trick is to catch folks sooner than the foreclosure stage," Franklin said.
HUD is also scrutinizing appraisers suspected of inflating valuations that were used in making inflated loans.
In cases where a reappraisal confirms HUD suspicions, the original appraiser is being asked to explain why the original valuation was so high. Thus far, Franklin said, explanations have been sought in about 30 cases.
Franklin said HUD is trying to prevent abuses in the future. Among other things, it is checking all sales financed with FHA mortgages to make sure the properties are not being flipped.
The high-profile attempt to deal with flipping may be having an effect.
"I did a quick review of FHA loans from April through June 30, and flips don't stand out the way they did in previous months," said Vincent P. Quayle, who heads the St. Ambrose Housing Aid Center.