Austin TX Real Estate - Hill Country Austin Lakeway Homes for Sale: Builder Incentives Cannot be Tied to Mortgage and Title Companies Anymore

Builder Incentives Cannot be Tied to Mortgage and Title Companies Anymore

My broker forwarded me an article this morning that talks about Builders and their affiliations with Mortgage Companies and Title Companies, and how those affiliations are set to change come January 16 and into 2010.

Currently, when buyers go to a Builder's community, the builder tries to say something along the lines of, "If you use my mortgage company and close at my title company, I'll give you $5000 for closing costs."  The buyers always perk up.

I usually turn around and ask the builder to write into the contract that the builder's mortgage company must match or beat a good faith estimate or loan approval that my buyer gets elsewhere, from a reputable mortgage company.  "Reputable" is the operative word as our position is not as strong when bringing in a GFE from some ma & pa shop who is probably going to low-ball and then say they can't do the loan at that rate.

Overall, in my almost 9 years, I've only had a couple of builders balk at the thought of putting that in the contract.  Over the years, there have been a handful of times when my buyers did have to use an outside lender because the builder's lender couldn't approve the buyer.  In those cases, my buyer was protected and was still able to receive the "incentive" the builder was offering.

What new legislation is trying to enforce is that Builders can no longer tie incentives to particular mortgage or title companies.  They want builders to offer their incentives and allow the buyer to obtain financing and title work where they please.  In Texas, the title company doesn't matter because title insurance is regulated by the state so it's the same cost from company to company, you're just looking for customer service.  I understand in other parts of the country, title insurance is not regulated so that will effect those people in a great way.

Where I'm a little confused is, this legislation is coming in because of the "big" banks like Wells Fargo, Chase, and Bank of America (Countrywide) having long-standing relationships with builders.  However, what if the builder owns the mortgage and title company they're trying to get the buyer to use?  Probably nine times out of ten, in my market, the builder owns the mortgage company and they own the title company.  Will the new rules apply to those lenders and title companies too?

Starting in January, companies are going to start tracking their business, and the new legislation is supposed to take effect in 2010.  By the start date, they will know how they will be effected, and they'll have to change their marketing accordingly in order to get buyers to close where they want. 

What do others think about this change in Builder relationships being tied to Buyer incentives?

Comment balloon 8 commentsDonna Harris • December 19 2008 09:17AM

Comments

Hi Donna,

Thanks for writing about this.

It has always been my understanding that these types of incentives were a violation of RESPA in the first place as it was never disclosed yet it was understood that kick backs were indeed taking place.

I hope that this new legislation will put these types of "relationships" into extinction.

Posted by Mark MacKenzie almost 10 years ago

Mark, You're welcome!  I'm not sure it is against RESPA since they do give you the opportunity to go whereever you want... however, as I stated, most of the builders actually own the mortgage company, so I don't think "kickbacks" are involved, just another income stream that they wanted to build.  Either way, it's more money in their pocket to use their company over another.

Posted by Donna Harris, Realtor,Mediator,Ombudsman,Property Tax Arbitrator (Donna Homes, powered by JPAR - TexasRealEstateMediationServices.com) almost 10 years ago

Donna,

Thanks so much for bringing this up!  This has long been allowed by RESPA.  Here's what RESPA has to say (*note: I have taken this directly off the HUD website):

Example Situation

Question: A builder is offering to pay my closing costs or give me an upgrade package only if I agree to use his mortgage company. Is this legal under RESPA?

Answer: Yes. While a builder cannot require you to use a mortgage company with whom he is affiliated, a builder is allowed to offer you a discount if you use a specific company. Under RESPA, the builder cannot charge you more for the home if you do not use his affiliated mortgage company.

click here for link

Have a great day!

Maryellen

Oops, goofed, meant to say "allowed" by RESPA.  I guess I was so excited to make this a violation, my fingers moved faster than my brain.!!  LOL!

Posted by Kevin & Maryellen Garasky, KMG Mortgage Group - ID & WA (KMG Mortgage Group - Kevin & Maryellen, Idaho & Washington) almost 10 years ago

Found it!  There was a similar post to this one some time ago that I commented on.  I went to look for it just in case you might find it helpful.  CLICK HERE is you feel it would assist you in any manner.

Thanks again for posting!

Posted by Kevin & Maryellen Garasky, KMG Mortgage Group - ID & WA (KMG Mortgage Group - Kevin & Maryellen, Idaho & Washington) almost 10 years ago

Maryellen, Thanks for your comments and taking the time to find the other link.  Many people confuse attaching incentives to the mortgage company with the RESPA rule of not being allowed to change the actual sales price and charge a buyer more.

Posted by Donna Harris, Realtor,Mediator,Ombudsman,Property Tax Arbitrator (Donna Homes, powered by JPAR - TexasRealEstateMediationServices.com) almost 10 years ago

Hi Donna... at the very least, in the past the waters have been muddied by these arrangement/incentives.  I am hoping that the new legislation clears them up a bit!

Posted by Steve Shatsky almost 10 years ago

Steve, Legislation doesn't always clear things up. They usually just create more loop-holes, but we'll see. Too many builders own their own mortgage companies, so I'm just not sure how that's going to work.

Posted by Donna Harris, Realtor,Mediator,Ombudsman,Property Tax Arbitrator (Donna Homes, powered by JPAR - TexasRealEstateMediationServices.com) almost 10 years ago

Donna:  I really have to take issue with the new ruling.  Not only will the builder's "marketing" be affected... their profit picture will also be affected.  Yes, the builder wants their lender used by the buyer... and there are several reasons.

First... I have never seen a loan program that was promised by the builder's mortgage company "disappear" when it came time to close because the loan program disappeared.  I have seen this happen with some outside lenders.

Second:  It is very important for a loan to close on or before the date it is supposed to... as written in the contract.  If a closing is scheduled for the 29th or 30th of the month, and the lender runs into a "glitch," the builder's mortgage company will somehow close on the loan... somehow make it work.  Often times... if a loan is not ready to close and falls into the next month... it is an outside lender.  When it falls into next month... it can have a costly effect on the builder... making them liable for extra construction financing on their (the builders's) end.  if this happens because of the buyer's lender... no way is the builder going to "eat" that cost... and they should not have to.  That leaves the buyer to eat the cost... but often times the buyer cannot.  What happens next... often the deal blows up.

Sure, the builder makes some profit on the loan... but that is taken into consideration by the builder when arriving at a selling price.  If that profit disappears... it's got to comeback  from somewhere.

My final thought.  If it ain't broke, don't fix it.  And make sure while you are trying to find out if it IS broke... make sure you know ALL the facts.

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 9 years ago

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