Published: Sep 19, 2007 12:30 AM
Modified: Sep 19, 2007 05:49 AM
Pearce did not name the builders being investigated.
Builder tactics under scrutiny
Offers defy lending laws, brokers say
Dudley Price, Staff Writer
State banking officials are looking into complaints that national home builders with operations in the Triangle are violating federal lending laws.
The allegations come from local independent mortgage brokers, who say the builders offer lower prices and other incentives to buyers on the condition that they take out loans through the builders' financial divisions. The offers do not stand if the buyer finances with another mortgage company.
The process has not only shut independent brokers out competitively, brokers say, but driven many buyers into loans that carry higher interest rates and fees than they could have received elsewhere.
The inquiry comes as regulators and Congress put the mortgage industry under intense scrutiny for loan practices that have led to record foreclosures across the country.
North Carolina has not been immune. In the first eight months of the year, foreclosure filings in the state rose 7.4 percent; in the Triangle, the increase was 9.5 percent, according to the Administrative Office of the Courts.
This spring, federal officials said they were investigating Atlanta-based Beazer Homes for potential fraud, including the builder's role in arranging mortgage loans.
Chorus of complaints
Mark Pearce, state deputy commissioner of banks, wouldn't name the companies the state is investigating. At least 14 national home builders -- including Centex, Pulte, Beazer and KB Home -- control 36 percent of the Triangle's $4.5 billion new-home market.
Violations of federal lending law could be violations of state lending rules, which carry penalties ranging from fines to revocation of licenses to operate in North Carolina.
"We had Realtors complaining, attorneys complaining, loan officers complaining -- and not only mortgage brokers and bankers, but anyone associated with a mortgage that's shut out of the business arrangement," said Kate Crawford, a Burlington mortgage loan officer who is the consumer protection chairwoman of the 25,000-member National Association of Mortgage Brokers.
"They're complaining [that] the borrower or buyer can't use who they want to use. The ability to have borrower choice is not there, and that's what everybody is screaming about."
Builders said they operate legally and offer a convenient alternative to other lenders.
"What ever happened to good, old-fashioned competition?" asked Doug Fenichel, a spokesman for New Jersey-based Hovnanian Enterprises, one of the Triangle's largest builders.
Financing homes is big business for builders.
Most large builders have in-house mortgage-loan divisions, or they partner with lenders to provide home loans. Centex Homes had $98 million in revenue from its financial services division for the quarter that ended Aug. 1.
Centex spokesman Eric Bruner said at least half of the company's loans were made to customers not buying a Centex home.
"We believe that robust competition and a healthy range of choices in the local mortgage markets is ultimately good for customers," Bruner said. Centex has not been contacted by the banking commission, he said.
Dan Klinger, who heads K. Hovnanian American Mortgage, said the mortgage brokers' complaints are unfair.
"Obviously there is income to be made, ... [but buyers] are getting one-stop shopping," he said.
Hovnanian, which expects to sell 442 homes in the Triangle this year, will finance about 75 percent of the sales through its mortgage company, Klinger said. Buyers who go through the loan division can get incentives ranging from free appraisals to no closing costs, "but if we weren't competitive, people would just walk down the street," he said.
The federal Real Estate Settlement Procedures Act allows builders to offer incentives to lure buyers, but it prohibits them from receiving unearned fees in exchange for referral of business, which might be considered an illegal kickback.
Builders are allowed to offer incentives such as stainless-steel ovens and reduced closing costs if buyers use their mortgage divisions. But the incentives must be "true discounts" whose value cannot be made up with higher costs elsewhere in the transaction, including higher loan rates, said U.S. Department of Housing and Urban Development spokesman Brian Sullivan. "You can't give with the left hand and take with the right and call it a discount," he said.
Sullivan said the rules are murky because some builders don't completely own their lending subsidiary, making it hard to determine whether a builder received an unearned fee. Some lenders have a business partnership with builders.
State digs into morass
The state legislature this summer enacted laws aimed at stopping lender fraud, but complaints about expensive loans from builders' lenders are increasing, said Al Ripley of the N.C. Justice Center, a nonprofit watchdog for low-income people.
"It's in the builders' interest to sell the homes and get out of there," Ripley said. "Being misled on a loan is not unique to the building industry, but it's definitely an issue."
Enforcing the Real Estate Settlement Procedures Act can be difficult because it's often hard to determine what other interest rates were available when a borrower took out a loan. Lower rates often are available, though buyers never find out about them, independent brokers say.
"It's captive financing," said Crawford of the mortgage brokers association.
"A main stumbling block into getting into a home is not having a down payment or closing costs. When a borrower doesn't have either one and the incentive is to not pay closing costs or down payment, it would be a disincentive to go somewhere else. They [builders] are saying: If you don't use my lender, you don't get my incentives. And a lot of people need the incentive to get in the house."
A small increase in the interest rate charged can make a big difference. The monthly payment on a $250,000 loan at 6.5 percent interest is $1,580, which is $82 higher than a loan at 6 percent.
'Rates were too high'
Marjorie and Bernard Sealy went to Beazer mortgage-loan division after company officials said they would knock $2,000 off closing costs on a $172,000 home the couple bought in Durham's Cardinal Lake area early last year.
According to loan documents, the Sealys borrowed 80 percent of the cost with an adjustable-rate mortgage at an interest rate of 8.56 percent for the first two years. A second mortgage covered the remaining 20 percent of the house's price at a rate of 11.65 percent for a 30-year term.
In comparison, the average 30-year fixed mortgage rate at the time was 6.25 percent.
The couple did not shop around for a better rate.
"A lot of people told him the rates were too high, but it was his first experience" buying a house, said Marjorie Sealy, a retired nursing assistant.
A Charlotte Observer investigation of Beazer this year found unusually high foreclosure rates in some of the builder's Mecklenburg County developments. In some cases, Beazer arranged larger loans than some buyers could afford, which allowed it to include the cost of financial incentives in the price of homes, the Observer reported.
Beazer is being investigated by the FBI, the U.S. Attorney's Office, the IRS and the Securities and Exchange Commission.
Beazer, the 10th-largest Triangle builder, said in a statement in March that it is committed to "managing business in an honest, ethical and lawful manner." Efforts to reach Beazer were unsuccessful.
Not all buyers get higher rates when they go through builders' lenders.
When Chad and Mischa Locklear bought a $230,000 townhouse in Beazer Bloomsbury subdivision in Cary three years ago, Beazer arranged a 30-year, fixed rate mortgage at 6.25 percent, about the same rate offered by several other lenders, the couple said. They also got $10,000 worth of upgraded carpet, lights and hardwood floors.
Criticizing Pulte
But the Locklears said that when they went shopping for a larger home last month, builders told them to forget discounts unless they went through their in-house lenders. In each case, the monthly payments would have been higher than those they would have paid with outside lenders.
In one case, Pulte offered to take $5,000 off the lot price of a $375,000 home in Apex, the Locklears said. But to get that discount, the couple would have to get a loan through Pulte, which offered a 100-percent financing arrangement with a monthly payment of $2,800, Mischa Locklear said. Efforts to reach Pulte officials were unsuccessful.
The couple said that when they told Pulte they wanted to put 10 percent down and finance the remainder with a Bank of America loan -- with a $2,200 monthly payment -- the incentive was withdrawn. "Now if you're not willing to go through their mortgage companies, they're really sticking it to you," Mischa Locklear said.
dudley.price@ newsobserver.com or (919) 829-4525