HUD Bans Builder Incentives to Use Affiliated Mortgage and/or Title Companies
Here’s an email that I just got from a lender from Bank of America:
“Good news for our buyers!! Beginning January 16th, builders will not be able to offer discounts if the buyer uses their affiliated mortgage or title companies. My experience is that ultimately the buyer gets higher rates and inferior service when using affiliated companies of the builder. Now we can get our buyers into professional lenders hands like me! Please take a minute and read below.
The Department of Housing and Urban Development, in rewriting the RESPA rules, has clamped down on builder discounts that are tied to use of the homebuilder's mortgage company. Starting Jan. 16, builders won't be able to offer $10,000 discounts on the purchase price if the homebuyer uses their affiliated mortgage or title company. The final Real Estate Settlement Procedures Act rule issued by HUD on Nov. 17 says these referral arrangements are potentially "problematic" under RESPA. "RESPA and this final rule limit tying such a discount to the use of an affiliated settlement provider," HUD says. Homebuilders, Realtors, mortgage bankers and other industry groups opposed this rule change. The National Association of Home Builders contends the change will eliminate significant savings for homebuyers. But a NAHB spokesman said the builders are not ready to comment on HUD's action. RESPA attorney Phillip Schulman said builders will have to change the way they promote their affiliates. "They won't be able to link the incentive to the use of the affiliate," the K&L Gates partner said.”
I must admit that I have to agree with HUD’s decision on this - although I don’t agree with my lender buddy’s assessment that builder affiliates often have higher rates (note that I didn’t question his comment about “inferior service” – because I’ve seen this much too often with these affiliates). Oftentimes, the lenders do appear to have competitive rates, which is why buyers are apt to sign on to these programs. Sometimes, however, there are added fees that negate the “good” rate – which the purchaser doesn’t always know to calculate into the equation.
I think the bigger issue – and the reason why I believe that this is a good decision – has to do with accountability and the question of who is working for whom. The “in house” lenders certainly have more to gain by pleasing the builder than they have by pleasing the buyer. So who is their client? The two don’t have to be mutually exclusive (a good lender can certainly serve the builder and the buyer) – but when push comes to shove, I’d like my buyers to have someone in their corner (and not in the builder’s corner).
My husband and I bought a new townhouse in downtown Bethesda a little over 10 years ago directly from the developer. There was an offer of a $10K credit if we used both the developer’s lender and settlement company. We calculated the “savings”, we used their lender (even though the rate was a little higher than we could get “outside”), we settled with their company (not a great experience) and we refinanced as soon as possible to a lower rate. Using this strategy, we definitely put money into our pockets. But there isn’t always the choice to immediately refinance and the experience with both the lender and the settlement company was definitely challenging – something I would not recommend to my buyers.