Feb. 15: The current state of builder business, preferred lenders, incentives, and the CFPB’s take on it; a great joke

Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 31 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management firm. He was an account manager and partner at Tuttle & Co. until 1996, when he moved to Scotland with his family for 9 months. Read more...

The easy refi business is pretty much gone for most lenders in residential lending – which basically leaves purchases. Over the last 6-8 months many lenders have attempted to move into the purchase business, cultivating relationships with buyer’s real estate agents, attorneys, builders, and so on. But that is not easy, and few think that purchase business is going to replace refi business in nationwide numbers. Builder business, in particular, is seasonal in many parts of the nation, and can be complicated with stories of incentives (see below) and the need for extended financing. Many lenders just can’t handle lock periods that can go out 4-9 months. Just like Realtors, builders, large and small, now find themselves being courted by a variety of lenders offering various programs. So how are builders doing?

 

Much of the building industry has been frozen (yes, pun intended) in parts of the Northeast and Midwest due to weather. In California, however, the North State Building Industry Association states in its latest report this week that, “Construction added 700 jobs over the month. This increase bucked seasonal trends that normally saw the industry down an average of 1,700 for the month over. The job uptick was the only November to December gain reported back to 1990. Specialty trade contractors spurred the advancement with a 900 job increase.”

 

And Zelman Research reports that, “Consistent with optimistic feedback from our preliminary read on the early stages of the spring selling season published two weeks ago, our contacts reported solid trends for the month of January, with an acceleration in pricing power and traffic, a second consecutive increase in our overall survey score following five months of declines and optimism related to pricing, margins and order activity in the upcoming months…many contacts cited a significant acceleration in order activity in the back half of the month following a slow start to the year, while others indicated that weather-related delays in sales have diminished in early February…we…expect order activity to improve meaningfully in the coming months and throughout 2014, with our January survey providing increased confidence in our bullish outlook. Furthermore, with prices showing surprising strength in January, we believe the bias to our gross margin outlook in 2014 remains to the upside.”

 

But a certain portion of LOs question the process of how builders select lenders, and originators, and the legality of monies that count toward closing costs. I know for a fact that the CFPB is aware of issues like this. And, of course, there are two sides to every story.

 

This note came from a bank-owned mortgage company in the South: “I had a customer Friday tell me there is a builder offering $6,000 in closing cost to a borrower using that builders owned mortgage firm – how is this a fair market? I have community banks making 1% on average on their loans and consumers are forced to pay 3% in order to save. There has got to be a fair lending violation or a QM issue in there somewhere!”

 

And there was this note. “Rob, I have a story regarding builders requiring the use of their ‘preferred’ lenders. It is true that builders often receive outstanding terms from a lender for construction financing in exchange for being a Preferred Lender. So it’s in the builder’s best interest to steer the borrower towards that lender, and attractive credits and other inducements are often the way they go about doing so. (Sounds like a RESPA violation to me, but hey, in my opinion I doubt you’ll find anything in writing between the construction lender and the builder.) For example, a borrower of mine, having not read the fine print of the lengthy purchase and sale agreement, was prepared for a quick closing (as we were fully approved short of an appraisal). They balked when they learned they would have to start over with another lender with a higher rate and fees in order to obtain their ‘dream home’ under the terms they had agreed upon. The State Attorney General’s Office agreed that this was indeed an illegal activity but went on to tell me, however, that until a borrower takes a builder to court and establishes a precedent, this activity was likely to continue with no repercussions as its priority is low. The sad truth is, by the time the borrower goes to court and of course wins, the P&S contract has expired and the house is long gone. After spending money on attorneys and court fees, all the borrower has to show for it is the knowledge of knowing he has set the precedent for borrowers to come. But no house. Most are willing instead, to suck it up, use the builders preferred lender, move into the home they want and move on. In my case, my borrowers actually walked, but it took 3 months and a threatening letter from an attorney just to get their earnest money deposit back so they could start their home search all over again. This is the kind of thing the CFPB should be getting involved in, in my opinion.”

 

From Arizona: “Regulations aside, I think the builder/lender dynamic has changed quite a bit here in Arizona. Back in ‘04-‘08ish the builder’s lender(s) would gouge the client on rate. The consumer had to do the math to see if the builder incentives were worth taking an overly inflated interest rate. I don’t think we have too much of that anymore. It seems the builder incentives are a bit smaller and the lender’s rates are fair (not the best, but at least competitive). I agree that if a lender and builder have a symbiotic relationship that improves the overall consumer experience AND the lender has a competitive rate, then the more power to them. I’m fine with the CFPB having a low priority on scrutinizing builder/lender relationships unless there are widespread reports of gouging. Our company and many others are forced to comply with the strictest interpretations of all rules and regulations. I pine for the day that common sense and enforcement of the spirit of the law comes back. I sure would hate to lose my license for offering a Realtor partner of mine a stick of gum at the ballgame. They do say “ANYTHING” of value you know.”

 

And this from Nevada. “I will start by saying builders spend a lot of money.  The investment of time, material, and money for a project is tremendous.  I understand the builder wants to control the process: time is money. Unfortunately, like so many things in mortgage lending after 2000, the greed factor set in and a mess was created. The small local builder that builds 50 houses a year or the custom builder are not the issue.  The big production guys are the issue, and they control the NAHB. There is little or no attachment to the community, only profits. As I recall, prior to 2001, RESPA did not allow builders or RE companies to own and operate a mortgage company. It was considered a conflict of interest. And I believe that it still is.”

 

That writer is correct. From the production home builder’s perspective, one must differentiate between a smaller construction type of home builder and a “production” home builder, where hundreds of homes are involved. Let’s take a look at a production home builder’s view of owning their own mortgage company. They build homes and do forward planning with very little earnest money from borrowers to build the home. The production builder typically does not require the purchaser to obtain a construction-to-perm loan. They use their own funds or funding sources during construction. The builder often relies on a very in-depth understanding of the quality of the borrower. Having their own mortgage company helps a builder assess their risk to have construction of a production home commence. A large active builder may be closing 200-400 loans a month, each with unique aspects that are made to order for a particular customer. Builders believe that with an affiliation they gain coordination allowing the process to run smoothly and improving overall experience for the customer.

 

Keep in mind, production home builders rely on volume to build more affordable homes, the efficiencies and predictability provide cost savings and thereby can be passed on to their customers by way of closing cost incentives. Improved coordination helps the builder balance the pace of production with timely home closings. This is why a reliable mortgage process working at the same pace and toward a common closing goal is important. Remember, homes close and fund when the home is 100% built to the purchasers and lenders satisfaction. This can take months and require processing and reprocessing a loan file and updating documents that expire.

 

Lenders have found that if they are willing to work as closely with a builder and bring value in the way a builders affiliate mortgage company does, while making the same commitment to a competitive offering for the home buyer, many builders are just as thrilled to work with a preferred lender and may be able to afford similar a seller contribution.

 

Builders are required to disclose affiliated relationships prior to the referral. All fees and the nature of the relationship is disclosed upfront, by the builder, and the disclosure specifically informs the customer that they are not required to use the affiliated lender in order to purchase a home. Builders cannot require the use of their affiliate or preferred lender. The borrower may choose to utilize the builder’s lender or use another lender of their choice. The whole one stop shop concept has value to the borrower and there are benefits that come from the builder and lender knowing the process and working together during the construction process. This provides value beyond just dollar incentives. Builders will pay to buy down rates, secure forward commitments during a rising rate environment and work with their lender for agency approvals, condo project approvals etc.

 

Any incentives offered cannot be tied to excessive upgrades or different purchase prices etc.  Bone-fide closing costs that are competitive to the marketplace are certainly acceptable and of course fall within allowable seller paid contributions established by the agencies. Builders are allowed to pay or not pay seller contributions the same as any seller in a transaction. Builders believe that if the market will bear incentives toward closing costs, then they can afford to pay those because of increased efficiency.

 

Many builders believe that most lenders, accustomed to 30-45 life span of a loan, are not set up to handle new construction or production home builder business. Most home builder’s lenders go through the entire process knowing that the borrower can qualify before the home is started. The loans often take 4-8 months to fund, and the builder & lender incur the expense of holding on and servicing to that borrower through many of life’s events, keeping the buyer informed, working with them and making adjustments accordingly.

 

From the CFPB’s vantage point, it inherited the situation (read: lack of clarity) from HUD. HUD was dealing with this though RESPA, and years ago HUD had proposed rulemaking to change the regulations to try to prevent certain activities. HUD tried to tighten RESPA to cover certain elements that would be seen as a violation of Section 8 (dealing with preventing an exchange of something of value for a settlement service) but was sued by a home builder’s organization in 2009. In 2010 HUD took another stab at it, and wrote an “Advanced Notice of Rulemaking” where HUD asked for information from the public to do a future rulemaking. Here is the link to HUD’s 2010 ANPR, with background history on this issue: http://www.gpo.gov/fdsys/pkg/FR-2010-06-03/pdf/2010-13350.pdf (page down a couple times and look in the right column). But HUD transferred RESPA to CFPB under Dodd Frank, so new rulemaking was never pursued. At this point nothing has been done by the CFPB, although it is monitoring the builder incentive situation through complaints or its whistleblower site. The CFPB encourages anyone who believes a builder is steering the borrower into using a certain lender, or doing something that appears to be in violation RESPA, to write: http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-begins-taking-whistleblower-tips/.

 

In the end, builders, lenders, brokers, and banks must do what is right for the consumer and be compliant.  Serving the consumer by providing an option for one-stop-shopping with a seller’s incentive is a value to today’s consumer. If another lender is able to provide a better package; that is competition and may the best win. All of us must work for the consumer and it is always their choice.

 

 

A priest says to his friend, the rabbi, that he has a perfect way of eating for free in restaurants. “I go in at well past 9 o’clock in the evening, eat several courses slowly, and linger over coffee, port and a cigar. Come 2AM, as they are clearing everything away, I just keep sitting there until eventually a waiter comes up and asks me to pay. Then I say: ‘I’ve already paid your colleague who has left.’ Because I am a man of the cloth, they take my word for it, and I leave.”

The rabbi is impressed, and says: “Let’s try it together this evening.”

So the priest books them into a restaurant and at 2AM they are both still quietly sitting there after a very full meal. Sure enough, a waiter comes over and asks them to pay. The priest just says: “I’ve already paid your colleague who has left.”

And the rabbi adds: “And we are still waiting for the change!”

 

Rob

(Copyright 2014 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)