Is HUD Caving In To Home Builder Demands?

Josh I’m not surprised – I’m sure there was a lot of pressure from the builders to keep their “preferred” lender system in place – definitely think what HUD was trying to do was in the best interest of the consumers.

Carolyn – I agree, I think HUD tried their best but there is just too much money flowing and the market is too weak to for HUD to be able to stand its ground.

I always review the pros and cons of accepting builder incentives with my buyers and, even after we talk it through, 99.9% of my buyers still go with builder financing.

I think HUD should step on these builders — BIG TIME. I was out at Agave– an Austin Subdivision on contemporary homes. There are multiple builders in the subdivision.

They tie the builder paid title insurance to the use of their preferred lender.

I really felt hi-jacked. The lender who had given us a pre-qual had really worked with the buyer. And they are someone I know and trust. And seller paid title insurance is standard in this market!!! This is a total hi-jack! I felt bullied!

This builder held to his guns — big time. Even when I crossed through it in the contract. They insisted that the buyer go through their lender or they WOULD NOT pay the title insurance. The way they handled that situation really put them at odds with me, the agent. Builders need to realize that the agent is a key influencer with the client. The deal fell apart because the contract already had a contingency contract on it. The first buyer ended up lifting her contingency. Another home had to be selected. I went out of my way to present other contemporary alternatives. Ended up finding my buyers a wonderful new contemporary build closer to town in progress that was NOT even on the mls.

After reading your post — I have to really ask myself if some of this mistrust I felt occurred from the way they handled the title insurance tied to the lender issue.

I think HUD should do something about this and I think realtors should ban together and gang up against these builders.

Great post Dena. I agree, it needs to be handled but the issue we’re facing is temptation. The temptation home buyers have of receiving these benefits without fully understanding (or accepting) the consequences.

Glad to hear you were able to find another home for them. How did you come across it?

I think that the conspiratorial scenario often runs even deeper. The builder/developer usually has a close relationship with the lender through the original construction loans, and often the underlying land acquisition loans. These loans may be given and preferable rates and terms in exchange for the “preferred lender’ status when they go to market as final product for the consumer.

So now you have big bank interests lobbying to keep the status quo as well. But remember that if the developers original acquisition and construction loan costs go up, so does the final price tag of the home.

I think that ultimately the consumer probably does pay more under the old preferred lender system. And if HUD succeeds there is the added benefit of transparency by having a “freedom of lender choice” requirement.

Great article Josh and great comments so far. Dena’s comment is right on. I have sold a lot of new homes and when the builder ties all the incentives to using the builders “preferred lender” it really puts undue pressure on the buyer and the buyers agent.

I have represented buyers that had a much better loan approval, yet with sometimes very large incentives they felt forced to use the “other” lender which has either been very detrimental to them over time or they had to refinance 18 months to 2 years down the road. The loan stipulated they had to wait that long without heavy penalty.

It leaves the buyers agent feeling kind of helpless because you know they should be using another lender. What are we there for after all?

When homes are not selling well, builders tack on these sometimes huge incentives for a couple reasons. 1) To compete for the buyers in the market. 2) So they don’t have to lower the price of the home which will hurt area comparable sales prices and seriously piss off recent home buyers in the same neighborhood.

Some people may ask themselves if builders would still offer these incentives if they couldn’t “steer” buyers to their lenders. The answer is a definite YES. For that 2nd reason alone builders would still offer incentives.

I was an agent in Las Vegas when the market was starting to slow down and one of the largest builders dropped the price $100,000 on all their new homes. There was a huge uproar over this, on the news every night for weeks, buyers did buy and recent buyers filed lawsuits. I don’t know the outcome of the lawsuits, but no other builders dared make that same mistake. Instead they offered huge incentives.

[...]  Is HUD Caving In To Home Builder Demands?Posted by seattlejim via StumbleUpon   [...]

Dennis — I couldn’t agree more and I’ve been in that situation before. Builders are very protective of their home prices now and instead I’ve seen them offer closing costs/HOAs paid, rate buy downs and free option packages.

So it leaves us in an awkward position: Sell a house with outrageous financing or try to convince the buyer they aren’t seeing the other side of this deal. Most buyers look at me like I have two heads when I go for the latter.

I have run into the same problem many times, buyers having to use the builder preferred lender to get incentives. Most of the time it works for the better, but I still think it would be better if every lender worked on an even playing field and that way my clients know they are getting the best deal.

Ashlee

I agree with Ashlee, We work with alot of buyer of New Homes. Sometimes the builders lender does get in the way. Most times we can get around it…

Unfortunately, the market is way too weak for HUD not to give in. Builder incentives, low rates, etc. are too many for buyers to pass up. How can a bank compete with, for instance Centex Homes who is offering 15-30 year mortgages at 4.25%…AND offering incentives on some of their developments. If HUD is proactive to help the market, they will need to back down on their stance. Realtors should always ban together, but buyers always try to circumvent so looking out for your own income becomes priority.

I think that the builders should concentrate on selling the houses and get out of all the other lines of business. To much room for them to play games with the home buyer otherwise.

Mike in Dallas – How do you get around it? Most of my buyers won’t entertain the idea of paying closing costs if the builder is willing to pay for them by using their lender.

Mike – You’re 100% right imo. HUD would have had a better chance of getting this passed in 2005 then they do now.

Jim – But builders will tell you that these incentives do help them sell homes by making it more affordable to buyers. What do you think?

Home builders are lying. Where I live the builder (Lenar Homes) uses a lender from another state. The real estate agent said it takes them 45 days to close a loan and that they deny a lot of files other lenders or brokers can do. She said she welcomed the change so she could close faster and deal with local people. The builders might be right in a few loans, but they are just blowing smoke up HUD’s “you know what”. They absultely jack up the price to cover this cost. What the builders are doing should be against the law.

This is the case with all the bigger builders. It is just a way for them to upsell and put more money into their pockets. But I don’t blame them because they have shareholders to answer to. What worries me is when I look at some of the HUDs closed by the builders’ mortgage companies, and these huds show that they are over charging on both interest rate and closing cost. Often times they would make as much as 3%-4% on one of these files.

So I hope that HUD clamps down on these guys sooner than later.

Van Metre Home Builder in Northern VA offers $10K for use of their lender, Intercoastal…a company they have an ownership stake in. Today they are offering me 4.75% with .875 points. Sun Trust can do 4.375 with 0 points. This amounts to a $40K difference over the life of the loan. So of course I’m going to walk away from the $10K incentive but it still sucks! Van Metre said they could have done something if I had told them ahead of time I was going to shop lenders. How can you shop lenders 6 months before your house is ready? It’s a total scam for the builder. Has anyone succeeded in getting the builder to cave on the fine (lost incentive) for not using their lender when their lender isn’t even in the same ballpark as other national lenders? I agree completely that no one is forcing me to use their lender…and in this case I won’t. But as a buyer you certainly don’t think that your being given a crappy lender with poor rates and the $10K sounds awfully inviting when you’re figuring out how much house you can afford.

RamblinWreck – I have had some success with very desperate national builders who were willing to give their financial incentives without the use of their mortgage company. One such success was because the builder’s finance company couldn’t do VA loans but still wanted the buyer.

Otherwise, I’d say you would have to refinance a couple years into ownership or forgo the incentives entirely as you did.

Ramblinwreck-I bought in Stone Ridge from Van Metre recently and got them to give me the $10K when I showed them that my lender was better than Intercoastal,and don’t be fooled the aren’t part owenrs in Intercoastal, they own 100% of them. and they own 100% of the title company. I would be surprised if they didn’t work with you and give you the $10K incentive though. They have been great to work with so far, our experience had been excellent. I don’t want to bash them at all..keeping our fingers crossed as our house isn’t ready yet. Good luck.

Cavlover, that’s very interesting. My buddy is closing about 45 days sooner than me..4/29 vs mid-June for me. He got his good faith estimate from Sun Trust and showed that he’d save $45K over the life of the loan based on their rates vs Intercoastal’s rates. He took this to Van Metre (we’re buying in the Broadlands…also Loudoun County) and this contact basically said “look, this is a legal contract, do you want to buy the house or not”. She wouldn’t budge. She made his sign new documents authorizing a $10K increase in the total sold price (a loss of his $10K incentive). So I’m assuming they won’t budge for me either. Who did you end up talking to get them to let you keep your $10K…just your sales rep…or did you have to take it up the chain? Also, how long ago did this happen? Hope you don’t mind me asking these questions but it sounds like it could really help me make my case. It’s hard to find any of the Van Metre big wig e-mail addresses…I’ve been searching for someone to take my case to. Thanks for your input and any add’l info you can provide.

What template are you running on this site ? I really like it. Could you post where you got it from ?

It’s a custom design. :)

Not sure about other states, but here in Texas a buyer and seller can agree to just about any terms in the sale or purchase of a home.

Home builders are not special, they are just “very experienced” sellers who have specific goals included within their contract negotiations.

Loans and purchase terms are always “agreed to” by buyers and/or their representatives, therefore HUD has no place to mingle regarding negotiated incentives.

If the deal does not make sense, both the buyer and seller have the right to walk away prior to contracts being executed.

Not sure about other states, but here in Texas a buyer and seller can agree to just about any terms in the sale or purchase of a home.

That’s so oversimplified, it’s ridiculous.

Lance, the problem is that the practice is anti-competitive. If you offer $10k in incentives, but tie it to your lender (who you have an ownership interest in) then that lender can offer a deal that’s $9999 worse than the competition, and still win it. It becomes even more convoluted when the lender offers a worse interest rate in order to make a nice yield spread – the buyers are often focused on the $10k incentive and so ignore the poor interest rate.

In my opinion, for the same reason that banks can’t sell real estate or offer legal services, builders shouldn’t lend. At the minimum, this anti-competitive practice should be legislated away.

It’s plain old Yankee ingenuity. Builders are competing for a limited resource ie: a Buyer and they will do what ever it takes to close one. There is a fairly large builder / developer in our area that is offering commission advances to the selling agent after the purchase agreement is written.

I think with any incentive, it’s imparative that the people involved read the fine print & understand what bumps in the road might be waiting for them. If it sounds to good to be ture, it probably is.

As a VP of Sales for a builder/developer I can tell you we provide paid closing costs through preferred lenders primarily due to the fact that we need to maintain operational control of the closing. The fees we pay for such financing are typical to the industry and any savings is minimal. The need for operational control is of key importance. We have millions of dollars invested with only a small fraction of the sales price given as a deposit. We have to rely on our lenders to submit pre-approvals, update us regularly on issues which relate to the financing and notify us of any problems immediately so that we can either rectify or stop construction on the home.

If we didn’t have our preferred lenders, we would not have this control. When we do allow “outside” lenders, we invariably run into problems receiving the information in a timely fashion. Not only do these delays hurt the builder, but the buyer as well.

Further, we do not tell the buyers they must get their financing with ABC Mortgage. What we explain to them is that they have the option of going with any lender they choose; however if they use one of our preferred lenders we will participate in paying closing costs, because we have faith and confidence in these lenders to get the job done for both the builder and the customer.

Will,

No one is disputing the fact that builder financing can be useful for having control over the transaction and expediting the closing.

The problem lies in the yield spread premiums and other increased fees that negate the savings the buyer receives upfront. If builder financing was on par with the most competitive “outside lenders” while still providing incentives with no strings attached we wouldn’t be having this conversation.

Thanks Josh, I can appreciate that, however we do not use an “in-house” lender where this would occur. LIke many builders, we have preferred lenders outside of the organization, such as Wells Fargo, SUntrust, BOA, etc; These lenders understand our need of operational control and attend weekly meetings to update us on status. These preferred lenders are very competitive on pricing and rates. They have to be in order to compete for the business from our buyers. Therein lies the beauty of “preferred” lenders as oppposed to in house lenders. They are competitive, offer exceptional service to both the builder and the buyer and give us the control we need. It’s a beautiful thing!

Thanks!

[...] protect consumers from unfair incentives tied to a builder’s financial affiliates. We all saw how well that worked out. Then we saw the continued rise of foreclosures in 2009 and now we have the newly implemented bank [...]

Will…I think you’re absolutely right…if I am getting an incentive for working with one of your pre-approved lenders then that’s one thing. Our issues rise from the monopoly of being incented to work with a lender and title company that is owned 100% by the builder..if the rates and costs illustrated on the good faith estimates were comparable that would be one thing but in our experiences the builder is getting their incentives and more by charging higher title fees, and points on the loan.
Ramblinwreck..I got everything done through the sales rep, didn’t need to take it up the ladder anymore and I am sure they screwed us somewhere else in the contract to get that money back…pretty sure I paid at least $10K too much to the sight and sound guys..now talk about a monopoly the audio video and window treatment guys the builders make you work with really screw you!:)