Testimony of Thomas E. Perez, Secretary of the Department of Labor, Licensing and Regulation
House Economic Matters Committee - Briefing on Mortgage Foreclosures


January 16, 2008

Good afternoon Chairman Davis, Vice Chairman Rudolph and Committee members. Thank you for inviting me to brief the Committee on the work of the Homeownership Preservation Task Force and Governor's proposals to stem the rising tide of foreclosures in Maryland.

Earlier this week Secretary Skinner and I joined the Governor to announce his proposed initiatives in front of the home of Velma Floyd in Landover. Mrs. Floyd's story has become all too familiar in Prince George's County and around the State - she and her family began to struggle financially after her husband, an electrician, was injured in an accident in 2005 and could no longer work. The Floyds fell behind on their mortgage and were facing foreclosure when a broker contacted them offering to help them refinance. Instead, the broker stole more than $100,000 of equity and conveyed the property to his sister-in-law, who is now threatening to evict Mr. and Mrs. Floyd and their three children.

Had the Governor's current proposals been in place, this would not have happened to the Floyds. I am grateful that the Legislature has a sense of urgency about this issue, as immediate action is needed to help protect other families from the hardship endured by the Floyds.


Foreclosures have spiked dramatically nationwide, and Maryland has not escaped the trend. The foreclosure rate statewide increased by 639 percent between the 3rd Quarter of 2006 and the 3rd Quarter of 2007. Even worse, yesterday we learned that in October and November of 2007 there were 6,969 foreclosure events in the Maryland, only 32 fewer than the 7001 foreclosure events in the entire 3rd quarter.

The rise in foreclosures is the fallout of a boom in subprime lending that coincided with skyrocketing real estate values over the first half of this decade. Exotic mortgage products led many homeowners into loans and homes they could not afford. While subprime loans account for only 12 percent of the market share of all mortgages, they account for 58 percent of loans in foreclosure.

Subprime lending - and the repercussions - disproportionately impact minority communities. While only 18 percent of white homeowners have subprime loans, 54 percent of African Americans and 47 percent of Hispanics have subprime loans. Baltimore City recently brought a lawsuit against Wells Fargo, accusing the lender of targeting minorities with subprime loans. An article in yesterday's New York Times noted that women are 32 percent more likely to receive subprime loans than men.

Unfortunately, the problem is poised to worsen - interest rate resets for Adjustable Rate Mortgages (ARMs) will peak this year, which means many more homeowners will soon face monthly mortgage payment hikes they cannot afford.

The Governor's Homeownership Preservation Task Force

Recognizing the need to combat foreclosures in Maryland, Governor O'Malley last summer formed a Task Force to bring stakeholders together to study the issue and make recommendations. Members of the task force included representatives from the banking and lending industries, federal, state and local government entities and consumer advocates.

The Task Force identified three working groups: financial resources, education and outreach and legal and regulatory reform. The Task Force and its work groups studied the issue, looked at best practices in the industry and examined laws enacted in other states.

The report and recommendations of the Task Force, submitted to the governor in October, represented broad consensus - all stakeholders at the table were interested in proposals that would reform lending and provide greater protections for consumers while increasing the resources available to deal with foreclosures and prevent future scenarios like the one we face today.

Likewise, the proposals that Governor O'Malley announced Monday - which draw largely from the work of the Task force and represent the Governor's commitment to securing meaningful solutions - have widespread support across stakeholder groups.

The Governor's Proposals

The Governor's initiatives represent an effort to comprehensively address the mortgage foreclosure problem. The legislative and regulatory pieces fall in DLLR's jurisdiction and aim to reform lending practices, tighten licensing standards for mortgage industry professionals, make the foreclosure process more fair to homeowners and crack down on fraud.

In Maryland, it is far more difficult to become a barber than a broker. Homeowners in this state deserve to know that when they are completing the most important financial transaction of their lives, the purchase of their home, they are working with a competent and qualified professional. DLLR licenses more than 10,000 mortgage brokers and originators, but the licensing system we inherited was an assembly line process with little quality control and no meaningful protections for consumers.

The Governor has proposed sweeping reforms for licensing, as well as measures to tighten lending standards and eliminate defective products from the market in Maryland. Financial Regulation Commissioner Sarah Bloom Raskin will discuss those initiatives in more detail.

Meanwhile, we are also preparing to submit an emergency regulation to require loan servicers to report monthly to DLLR all loss mitigation and loan modification efforts. All players in the industry claim they want to avoid foreclosures, but there is a wide gap between their words and their efforts to actually help homeowners. We want to shine a bright light on those individuals to determine whether their actions are in line with their words. Servicers will also be required to report to DLLR information about all ARMs that will reset in 2008. The collection and analysis of this data will provide an early warning system to alert the agency about troubling trends and problem areas for homeowners in distress. In addition, it will afford us a chance to provide those homeowners in danger of foreclosure with information and assistance.

Mortgage Fraud

Maryland does not currently have the tools needed to combat mortgage fraud. There is no criminal mortgage fraud statute, and prosecutors have been reluctant to take cases involving violations of the Protection for Homeowners in Foreclosure Act (PHIFA), enacted in 2005.

The Governor's plan would create a criminal mortgage fraud statute that would include restitution, forfeiture, enhanced penalties for violations involving vulnerable adults, a private right of action and a duty for companies to report convictions to any licensing body.

We are also proposing to amend PHIFA by banning the conveyance of real property in the foreclosure rescue context. This deceptive practice - the same practice that scammed the Floyd family out of their home - preys on homeowners in danger of foreclosure and has become increasingly common as the foreclosure rate has climbed. The proposed changes would grant the Commissioner of Financial Regulation concurrent jurisdiction with the Attorney General to investigate, enforce and enjoin action in these cases.

The Foreclosure Process

Maryland's foreclosure process is among the fastest in the nation - from the time of the first foreclosure filing, a foreclosure sale could conceivably occur within 15 days. The proposed reforms would codify the industry's best practices and lengthen the process while giving homeowners more notice.

The proposed changes would:

  • Require the lender to wait 90 days from the borrower's default before filing the foreclosure action;
  • Require the lender to send a uniform Notice of Intent to Foreclose to the homeowner by certified first class mail 45 days prior to the filing of the foreclosure action;
  • Require the lender to produce proof of ownership when filing the action;
  • Require personal service;
  • Allow 45 days from service before the Order to Docket for the foreclosure sale;
  • Reduce the number of times notice of the foreclosure sale must be published in a newspaper from three times to one; and
  • Codify the right to cure during the time between filing the Order to Docket and the sale.

Commissioner Raskin and I look forward to working with you in the coming weeks on this package for comprehensive reform. Passage of these reforms will help create for Marylanders a better lending environment that not only protects consumers in the short term, but supports sustainable homeownership for the long haul.