New-Home Incentives: Who Benefits More -- Buyer or Builder's Affiliate?

By Kenneth R. Harney
Friday, April 29, 2005

If you have shopped for a newly built house in recent years, you have probably run into this: The builder offers you a substantial incentive -- a finished patio, extra square footage or lush landscaping -- if you agree to obtain your mortgage, and maybe your title and settlement services, through an affiliate of the builder.

Many large builders and community developers routinely offer add-on incentives, and many buyers eagerly snap them up.

But now a major home mortgage industry group wants the federal government to take a closer look at these deals, calling some of them clever violations of real estate settlement and antitrust regulations. The National Association of Mortgage Brokers, the principal trade group for the country's more than 40,000 independent home loan brokers, says builder financing incentives frequently steer buyers to mortgage deals more costly than those competing, nonaffiliated brokers could provide. A delegation of mortgage brokers recently complained to the government's real estate settlement rules officials, asking for a nationwide investigation of builder incentive financing programs.

Marc Savitt, the association's government affairs committee chairman, said he recently posed as a home buyer at five Florida home builders' subdivision sales offices.

"There were violations [of federal rules] at every one," said Savitt, president of the Mortgage Center Inc., a Martinsburg, W.Va., brokerage.

Savitt said that one salesman not only threatened to withhold a $5,000 settlement cost incentive if Savitt declined to use the builder's affiliated lender but that he also refused to sell the house to Savitt under any circumstances absent an application to the designated lender. Savitt said another salesman handed him a printed notice that the builder "will not execute a purchase agreement" if the buyer did not use an approved lender. Tops on the list of approved lenders was the builder's own lending unit, which was labeled the preferred choice but not identified as an affiliate.

"What they're doing here is discouraging buyers from shopping in the open market," Savitt said. "They're trying to steer people to the lenders they've got deals with, and they try to make your head spin with big incentives" that may be more illusory than real.

For example, if a $5,000 to $10,000 upgrade incentive is simply an item covered by manipulating the home price, Savitt questioned the actual consumer savings.

In North Carolina, he said, a builder offered a house for $204,000 to buyers who used an affiliated lender but charged $210,000 if the buyer obtained mortgage money elsewhere.

Savitt would not name the builders in an interview but said his delegation had presented "very specific evidence" to federal authorities.

The brokers group said builder affiliate loan packages often are one-eighth to one-quarter of a percentage point higher than what competing, independent lenders and brokers can provide, adding thousands of dollars onto home buyers' long-term costs.

Federal officials had no immediate comment on the association's allegations. But one top realty settlement regulator confirmed recently that investigators at the Housing and Urban Development Department were already looking into home builders' incentives.

Ivy M. Jackson, head of HUD's settlement rules office, said when builders "offer incentives to buyers that are true discounts, then there is no violation." But if the seeming discounts or incentives "are being made up from other parts of the transaction," she said, "that is a violation."

Washington lawyer Phillip L. Schulman, who represents lenders, builders and brokers, gave this example: If you buy a house and the builder says he will provide you a $2,000 upgrade if you obtain your loan through an affiliated lender, that is fine.

"But if the builder increases your house price by $2,000 to give you the rebate or discount, that is not real." And it's not legal.

How should a home shopper deal with this? To begin with, be aware of the basic rules: Your builder must allow you to shop for title, mortgage and other services in the outside market. That's federal law. In all likelihood, your builder has established working relationships with certain lenders and may have created joint ventures or other "affiliated business" relationships, which must be disclosed to you. To the extent that lenders pass along discounted fees or offer preferred rates to builder partners, builder financing incentives to buyers may in fact represent true savings.

But check out those savings by comparison-shopping the competition. You may end up accepting the carpet upgrades or the finished basement. But you ought to know the rates and fees that competing, independent lenders and brokers would be willing to offer you on the same house.

Kenneth R. Harney's e-mail address

© 2005 The Washington Post Company