I am curious if this is a nationwide epidemic or something just region specific?
Is HUD finally cracking down on builder's tying incentives (upgrades, freebies, closing costs paid, price fluctuations, house payment paid for one year) to their preferred lenders?
A collegue, Tom Burris, posted this article in a forum about a week ago. I found it very interesting and wonder how long it will take before builders will heed the call in regards to RESPA violations.
I am not saying all builder's preferred lenders do crazy things but I have not yet had a good experience with a builder's lender!
Just a few examples:
- One client had 50% down, near 800 FICO middle score, hundreds of thousands of dollars in liquid funds, qualified income wise and a builder's lender said he was getting a great deal at 7.5% fixed 30 years back in June 2006. We got lucky because we got a brand new sales rep writing her first contract and she forgot to tie the incentives to the builder's lender......OOPS!!!!! I got HELL for the following month after we switched lenders!
- Another client got 6% builder incentive towards closing costs. The builder's lender jacked the rate from 6.5/8.5 (piggyback) to 9.75% 100% with PMI. That 9.75% was discounted with his 6% cc's!!!!!!!!!!!!!!
- Just two weeks ago a condo developer, dropped the price, gave free upgrades AND all closing costs paid to use their preferred lender.........and wouldn't budge..........NEXT!
Many of these builder contracts will not allow for financing contingencies to CAP the interest rate like our board forms do. I find this VERY dangerous for he consumer!
Incentives tied to financing are wrong. Builders continue to do it, stating they want to "control" the lender because of so many unqualified rookie lenders who just woke up this morning and decided to be a lender.
The problem with builders tying the mortgage with the incentives is the buyer ends up paying for it in the long run anyway.
there is builders in the Indianapolis area giving away 10-15% back at closing for investors. I am not for sure of specifics yet though or how they are actually going about this.
In my market, if you provide a good faith estimate with better rates and terms and the preferred lender cannot match or beat it, the builder must allow the buyer to use their own lender and STILL retain their incentives. The contracts are written that the buyer must get approved with their lender for the incentives. If they're really close in rates and fees and all terms, the builder's lender is not going to throw the deal away and not match the offical good faith estimate from another company. I've had this several times. It starts by me telling the builder's rep that my buyer is already fully approved with an outside lender and if their lender cannot match or beat our deal, the buyer will still get the incentives, and I've never had one say no.
For the most part, it's not the builder's "preferred" lender, it's the actual builder's lender. In my area they are they same company running under the same umbrella which is why they can offer the incentives. I've never had a buy get "screwed" with a higher rate because of using the builder's lender, as I won't let it happen!!
Renee.... well, first time reading your blogs. Great topic for 2 reasons....
1. I hate competiting against these preferred lenders, unless I am one.... lol Seriously though, you are absolutely correct in saying that many of these lenders either aren't that good or have the incentives built into rates. But they disclose regular rates at first and then change everything later.
2. I was honored to be a preferred lender with someone in Florida, but my fees and rates were in check with what anyone else would have received. The reason being is that I am looking at it from a volume standpoint. Not a large profit on each deal, but the overall picture.
Renee... I did a blog in regards to this about a month ago. Misleading advertisement, at what expense to your client or the client in general......... I hope you don't mind me adding this link to your comments. But it's so true..read some of the comments. Free cars?, for buying a new construction... lol
In any regards... you are right on target...if I could get rid of these types of lenders, more business... lol But again... nothing wrong with a preferred lender, as long as they are still giving a good deal. Like Brian Brady said, money is not free.... but at least being on the up and up. What they are doing in a certain sense is baiting and switching their clients...from what you wrote. And on a little side note... I can do NV also....
Jeff: I have NO problems with you linking your blog! Great stuff! I did a seach before writing because I hate repeats and threepeats but didn't find it :(
Every new construction, preferred lender, deal I have been involved in is a bait and switch type of operation. I do not trust them for my own reasons. Your blog & comments in regards to NV proved exactly my point.
I can see where the builders are coming from, they want it streamlined and systems in place and there is no better way to do that than with a preferred lender. Now if only this were a perfect world....................
I do found what I have encountered as unethical and immoral and perhaps illegal. I am also a big believer in free markets and competition.......
This concept stifles my beliefs/ideals/business model and I now have a hard time selling new construction because I would love to build a referral based business rather than a hard core sell and hunt-for-the-next-deal business.
Actually, the original reason for builder's mortgage companies was to control the transaction, not necessarily make it a profit center.
Here's the cool thing, though Realtors. Let the builder's lender give them the high rate loan. It can be refinanced within 30 days.
Well, clients hsould be directed to NOT accept pre-payment penalty; they will get an even higher rate but that doesn't matter. They're going to refinance out of it.
NO lender can require a prepayment penalty; they always offer an option to "buy it out"
We really have to look at the preferred lender's rate carefully. I don't encourage our buyers to give up great incentives to use the builder's lender, but sometimes the builders get slick.
Example: Ryan Homes in Virginia tied $63,000 incentives to using their NVR. What buyer is going to argue with that.
Example: 40West in Howard County had a preferred lender tied to $5,000 closing help. However, the builder's lender tried to put my buyers in a sub-prime loan and they had decent credit. In fact, the builder's lender expressed doubt that they could even get approved. I took them out and got them approved in 3 days. They lost the $5,000 but gained a lot more in lower closing and mortgage payments.
Example: Centex's lender has a high enough rate that I told them that we would just not buy the house before paying their interest rate. We went outside and still got the incentive. That was a class act.
Examples are all over the place. Quite often our buyers can see the advantage of giving up the incentive to go outside. But, the slick builders like Ryan Homes tie so much of the incentives and upgrades to using their lender, the buyers really can't give it up. All we can do is try to find another home.
This is a problem. That said, I have sympathy for a builder not wanting to deal with 20 different lenders. If they didn't get so greedy, they wouldn't have to.
Can you say "bait and swtich" ? Thats all this is in my opnion. These clients whether or not they have a prepayment penalty will still refinance anyways.
the builder can say whatever they want about 'controlling' the process and 'trust'
i say bull****!!!!
they own a mortgage company most times.
the best we can do is keep fanning the flames and educate the borrowers/buyers.
Lenn:
Another great comment. In the words of the late Milton Freidman...There Ain't No Such Thing As a Free Lunch
Now you see it - now you don't. Not that I'm suspicious at all - but wouldn't you think that a builders lender should be able to do BETTER than their competitors given the volume they do?
I have run into situations where the builder has in house Realty Company, and Mortgage Company, and they do everything they can to keep everything in house. Hopefully Buyers will check out other financing options before locking themselves in with the builder’s lender. But that is usually not the case, my experience is that they follow their recommendation.
Much of my opinions have already been stated (above) - but I must agree, that I have yet to have a positive experience w/ a builders preferred lender. Not saying that it is impossible, but rare in our neck o' the woods.
Furthermore, I have often found that foregoing the builders' incentive (in many cases) in lieu of a reputable lender has actually saved the buyers' more money at the end of the day.
We have a couple major developers here that do it a little different.
They require that you do a pre-qual with one of their approved lenders.
You can do the actual loan with your own lender, but you will get some type of incentive from the approved lenders.
It's funny how the market downturn has taken care of this issue! I did get a call from a Fannie investigator about a month ago in regards to appraisals. He needed me to pull closed comps on one of the builders I HATE THE MOST that was guilty of this. It was interesting although he could give me only limited info. Nice to see that YEARS LATER they are still investigating possible fraud!