HUD looks at builder rebate programs tied to affiliated loans 
The Obama administration examines the legality of builder incentives promoting their own mortgage company.

By Kenneth R. Harney (kenharney@earthlink.net), LA Times, 6/13/2010
http://www.latimes.com/business/realestate/la-fi-harney-20100613,0,6931947.story

The Obama administration wants to stir the pot on a highly contentious issue involving home builders and their customers: the legality of the discounts, rebates, closing costs, upgrades and other lures that builders often dangle in front of buyers — but only if they agree to use the builder's own affiliated mortgage lender.

[This may be in response to The American Homeowners Resource Center's request that Obama look into "America's Housing Fraud" and the lack of federal response to numerous homeowner complaints. The government offers similar incentive programs to promote the American Dream of home ownership, but they aren't tied to builder-owned mortgage companies. The homebuyer tax credit, for example, was a form of rebate that allowed builders to sell homes at artificially high prices. Those prices would then carry over into the appraisal of other homes in the neighborhood, contributing to the possibility of another housing bubble. Other programs consider dangerous and artificial include govenment loan guarantees, zero-down  sub-prime loans with subsidized  deceptive interests rates, closing cost and down payment assistance, construction loan guarantees, and tax loss carry-back programs, to name a few.]

In the real estate business, the issue is known as "required use." Under the Real Estate Settlement Procedures Act, consumers cannot be compelled to use the services of affiliates of realty firms, title companies, builders and other participants.

For example, a realty broker cannot legally force you to obtain your title insurance or mortgage from one of its affiliates. It can inform you of the availability of affiliated service providers but may not require you to do business with them.

In recent years, the Department of Housing and Urban Development, which administers the settlement procedures law, has received complaints about builders allegedly steering purchasers to affiliated lenders in exchange for discounts off the house price or other incentives.

Some consumers complained that not only were they pushed into mortgages with higher rates, fees and closing costs than those readily obtainable in their local marketplace, but when they objected, the builder demanded that they go with the affiliate or lose the discounts that attracted them in the first place.

In one case outlined by HUD enforcement officials, a large builder canceled a buyer's contract and seized an $11,845 good-faith deposit after the buyer's refusal to use an affiliated mortgage lender. In another case, a buyer complained that a builder seized her $10,000 deposit when she rejected the high-cost loan deal proffered by the builder's mortgage affiliate. According to HUD, not only did the affiliate's loan officer "fraudulently" alter financial documents, but the terms of the deal itself "would have placed the consumer in a home she couldn't afford."

To prevent future abuses, HUD broadened its definition of "required use" to include economic duress — situations where consumers believe that they must use an affiliated or recommended service provider "to avoid an economic disincentive or penalty." HUD also said any discount or rebate must be bona fide, and not made up by higher costs elsewhere, such as above-market loan terms.

The National Assn. of Home Builders objected to the change and filed suit in federal court to block HUD's move. The suit charged that HUD had not performed adequate research before adopting the rule, and that it would unfairly cut consumers off from legitimate, valuable discount programs offered by many builders.

Rather than fight a prolonged court battle, HUD withdrew the rule change and put the issue on ice. Now, however, the administration wants a full public airing of the pros, cons and mechanics of builder rebate programs that are tied to affiliated loan deals. In a Federal Register notice June 3, the agency invited consumers, mortgage market participants, realty agents, builders and other interested parties to provide information on their experiences and what they know about the programs' operations.

For example, is there any evidence that some builders tack the costs of the incentives — whether upgrades, rebates or discounts — into the cost of the home? Is there hard evidence that affiliate loans come with higher rates or total fees than those available elsewhere in the local market? Since builders can earn hefty fees in the secondary mortgage market by selling loans with higher-than-prevailing rates, is that a key source of profit? Do builder incentives discourage or prevent consumers from shopping for better financing — thereby costing them more for years down the road?

Roy DeLoach, chief executive of the National Assn. of Mortgage Brokers, has no doubt that builder affiliates charge puffed-up fees and rates and take business away from his members. "We've gotten hundreds of complaints from buyers who want to use lower-cost financing," he said, "but who can't because they're locked in to contracts that effectively shut them out."

David Ledford, senior vice president for housing finance at the National Assn. of Home Builders, disagrees strongly. Builders have no economic or competitive reason to charge higher mortgage rates or fees through their affiliates, Ledford said. That's because "most builders do not intend their affiliates to be a profit center," but rather a means to a more efficient, dependable transaction.

[That's a true statement since the vast majority of builders (the small and medium sized ones) do not own their own mortgage companies. HOT, however, did an informal survey of the largest out-of-state volume builders operating here and found that ALL of them were vertically integrated with their own mortgage company and sometimes with their own title and insurance companies. Ledford represents NAHB, but sixteen of the largest builders recently broke ranks and formed their own industry association, The Leading Builders of America, so they could have more influence on politics in their favor.]

The main purpose for the affiliates, Ledford said, "is to make sure the financing process doesn't foul up the sale of the house."