Are Builder Incentives to Use Their Loans Discounts?

WASHINGTON--The federal government’s new crackdown on home settlement-cost abuses is shedding light on fees and practices that are commonplace in the home building and mortgage industries, but may be illegal.

New home buyers frequently are offered substantial financial incentives for using their builders’ in-house mortgage, title and other subsidiaries instead of outside competitors. This is frequently the case with the nation’s highest-volume, multi-state home builders.

For example, a Bel Air, Md., home buyer says he was offered a “free morning room” worth $13,000 if he used the builder’s mortgage company. Suspicious that the free items carried a cost somewhere, he began digging.

The base price he was offered on his model was $265,990, including the morning room. But the builder told that if he used an outside mortgage company, the cost of the same house would be $279,000.

“I asked other people in the community with the same house as mine what their base price was,” said the buyer, “and it turned out to be $252,000. So you can see all [the builder] did was add the cost of the morning room to the base price.”

What particularly disturbed the buyer was the noncompetitive deal he was offered by the builder’s in-house mortgage subsidiary: a higher than prevailing interest rate, higher loan fees, a $60 credit report fee and a $300 appraisal charge.

“I feel trapped and backed into a corner,” said the buyer, effectively coerced to use the in-house lender. “Is this legal?”

A Florida condominium buyer recounted a similar experience: On a $169,000 unit offered by a large builder, she was offered $7,000 in free upgrades if she would use the company’s wholly owned mortgage and title firms to close the deal. The package included kitchen appliances, upgraded cabinets, bathroom amenities, window screens and a garage door opener.

“Some of these things you really need,” she said.

The builder’s mortgage company’s rate and fees were not the lowest she could have obtained, according to the buyer, but the $7,000 in extras dangled in front of her pulled her in. Nonetheless, “I know as a consumer that I did not appreciate having my choice [of mortgage source] taken away so I could have a refrigerator,” she said.

Are builder incentives such as these legal when they compromise consumers’ federally guaranteed rights to shop for and choose settlement service providers? Interviews with officials at the Department of Housing and Urban Development and private legal experts last week turned up these answers: Builder inducements to use in-house mortgage, title and other services are legal, as long as they constitute true discounts or rebates, and are optional.

Under HUD’s guidelines, builder incentives “must be a true discount below the prices that are otherwise generally available and must not be made up by higher costs elsewhere in the settlement process.” In other words, a builder cannot claim to offer a discount for customers who use in-house services when, in fact, the savings are illusory.

HUD officials declined to discuss the specifics of either of the two cases, but emphasized that builders “cannot require you to use a specific lender,” title company or other builder-controlled entity.

A second common practice in home settlements getting renewed attention concerns appraisals. Many appraisers complain that in order to obtain assignments from lenders, they must work with so-called “appraisal management” organizations, some of which are wholly owned by the lenders themselves. One appraiser, who asked not to be named, said he gets paid $200 on average per valuation by a lender-owned management firm, but the home buyer is charged $400 or more at settlement.

“How can this be right?” he asked. “What are they [the lender-owned management company] really doing other than skimming off profits?”

Worse yet, he said, there is no disclosure whatsoever to the consumer that there has been a 100% markup by a lender-controlled middleman.

HUD officials said markups on appraisals may--or may not--be legal. Large markups with little or no additional services are violations of the law. Where extra services are rendered, the charges must be “reasonable.”

What can consumers do to ensure that they’re not being bilked? For starters, ask for explanations from the lender, builder or settlement agency for any charges you don’t understand. Make sure any discounts you’re offered are real, not manufactured.

If you see settlement-related practices that are questionable, send in a written description to the federal official who wants to hear about them: John C. Weicher, FHA Commissioner, HUD, Room 9100, Washington, DC 20410.

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Distributed by the Washington Post Writers Group.