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Former HUD secretary Cisneros weighs in on how to help home buyers

Henry Cisneros addresses the CEO Technology Summit in San Antoinio, in this Aug. 4, 2000, file photo.
Henry Cisneros addresses the CEO Technology Summit in San Antoinio, in this Aug. 4, 2000, file photo. (William Luther - AP)
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Some clauses in a typical production-builder sales contract were things that Cisneros himself did not know. Although he was a board member of KB Homes for three years, he said that he had never seen a new-home sales contract and was not aware of the red flag that appears on the first line of most such documents: the name of the company building the house. It will not be the name that is plastered all over the building site and advertising materials. Instead, the builder will be listed as something like "Little Pine Tree LLC," a "corporate veil" employed by many corporations and manufacturers to protect their assets should a disgruntled buyer decide to sue. But, Cisneros said, "if the house is really as great as the company maintains, they should be willing to put their name on the contract."

It is understandable that a builder would want protection from endless nitpicky complaints about nail pops and barely visible hairline cracks in walls caused by routine ground settlement. But, Cisneros emphasized, the buyer also needs protection when major problems occur that render a house unsellable and cause its value to plummet to zero, even if the local health department says it is still safe to occupy. This situation can cause headaches for a builder, but it's catastrophic for the home owner. Each side has legitimate gripes, but the contract should be much more balanced, Cisneros said.

Beware freebies

The sales contract clauses concerning the builder's preferred lender is another example of the need for "transparency and clear explanations" so that the buyer understands the consequences of the choices being offered, Cisneros said.

A builder typically offers a buyer numerous inducements to use his preferred lender. These can include "free" carpet upgrades, deck or granite countertops. It sounds good, but buyers who choose this option often end up paying for these goodies in the end. That's because the builder's lender is not obliged to give the buyer a competitive interest rate on the mortgage at the time of closing, often many months down the road when construction is complete. For the life of the loan, the buyers may find themselves saddled with higher monthly payments than they would have had if they had forgone the granite or the deck and shopped around for a mortgage with better terms.

Ever the optimist, Cisneros ended on an upbeat note. Although many decry the current state of the housing market, he said, "the current slowdown in the housing industry presents a great opportunity to address these issues and avoid the mistakes of the past."

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