Builders, Renovation, Design, Furniture, Decorate

Have you ever wondered how home builders can offer such generous incentives -- thousands of dollars worth of upgrades, closing cost contributions and other financial goodies -- provided buyers agree to use the builder's affiliated or controlled mortgage company? Are these come-ons legit?

The federal government -- pressed by the National Association of Mortgage Brokers -- is concerned by these questions too. Though no details of investigations or regulatory actions are available at the moment, HUD's Real Estate Settlement Procedures Act (RESPA) investigative staff is interested in possible violations of federal rules in the builder-incentives field.

Brian D. Montgomery, federal housing commissioner, issued this statement on the issue: "Often consumers feel compelled to use a builder's hand-picked mortgage company because they feel they've been offered an incentive they can't refuse." But to comply with RESPA, he said, "these incentives (must) be legitimate and not built into the price of the house or the cost of the loan," and they must be voluntary to the consumer, not coerced.

Marc Savitt, chairman of the National Association of Mortgage Brokers' consumer protection committee, has been investigating home builder loan pitches for more than a year, and has presented top HUD officials with a dossier of alleged violations. Savitt even posed as a buyer in new home subdivisions in Florida and elsewhere, then turned around and delivered evidence of what he described as illegal and unfair tie-ins and marketing practices to HUD.

In some cases, according to Savitt, builders stated openly that buyers could not purchase a house unless they also financed their mortgage with the builder's affiliated or controlled lender. In other cases, builders' lenders routinely charged interest rates and fees substantially higher than the going market rate -- clearly "making up the discounts with higher costs to the consumer on the mortgage and settlement side," said Savitt.

In one recent case he outlined in an interview, Savitt said a major builder told home buyer customers in Arizona that unless they financed through the builder's affiliate, their contract would be rejected. Two customers refused to go along, and signed up with a lower-cost mortgage provider, believing the builder would back off and not endanger the sale. But the builder played hardball, failed to show for the settlement, refused to refund the buyers' $11,000 good faith deposit, and threatened to sell the house to other, more compliant purchasers.

The Arizona mortgage broker the buyers chose to finance their house was incensed. He contacted Savitt, who in turn contacted HUD's RESPA staff. Though officials at the department would not discuss the case, Savitt says RESPA officials warned the builder that mandatory use of affiliated mortgage lenders is illegal, even if the builder claims that it's offering an enticing package of upgrades or other financial incentives.

According to Savitt, "the builder got the message loud and clear," allowed the buyer to use the independent broker, and proceeded to settlement.

Savitt says "mortgage brokers around the country see this sort of stuff every day. Builders are misleading consumers by waving imaginary savings and upgrades in front of them, and are either tacking the 'savings' onto the price of the house or into the cost of the mortgage."

The practices may also violate federal anti-trust and fair trade statutes, according to Savitt. Under those laws, mandatory tie-ins are illegal when they hinder competition, "which is what builders are doing when they are stealing (loan applicants) from brokers and lenders" using intentionally misleading claims of discounts.

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