Be Wary of Some Builders’ Incentives, Illicit Florida Home Loan Tie-Ins

One of the U.S. government’s top housing officials has this advice for anyone negotiating with a builder to buy a new house:

You can always say no.

Many Florida home builders are offering incentives to lure buyers in these leaner times, and the consequences can be detrimental if you aren’t careful. When a builder dangles thousands of dollars of free upgrades or closing cost incentives if you agree to use the builder’s affiliated Florida home mortgage loan provider — and threatens to yank those incentives if you go elsewhere for financing — you don’t have to roll over and play dead.

“Often consumers feel compelled to use a builder’s hand-picked mortgage company because they feel they’ve been offered an incentive they can’t refuse,” Federal Housing Commissioner Brian D. Montgomery said. “But federal real estate settlement rules require that these incentives be legitimate and not built in to the price of the house or the cost of the loan.”

In other words, builders are not permitted to tempt you with alleged discounts and benefits that you’re actually paying for — just some other way and place in the deal.

Montgomery was commenting on reports of home buyers being forced or urged to sign on with a builder’s mortgage company even if competing home loan offers from unaffiliated brokers or banks were far superior.

In one case described by Marc Savitt, head of the National Association of Mortgage Brokers‘ consumer protection subcommittee, an Arizona builder told buyers they could not purchase a house in a desirable subdivision unless they used the builder’s affiliated lender.

The purchasers had already deposited $11,000 and signed a contract for the property, only to find the in-house lender’s mortgage rates were a full percentage point higher than competing quotes from independent lenders. In turn, buyers opted for the independent broker offering the best rate and fees.

The builder retaliated by refusing to participate in the closing, pocketing the $11,000 good-faith deposit, canceling the contract and threatening to sell the house to another buyer.

Though federal officials declined to discuss this particular case, Savitt says Montgomery’s real estate settlement staff intervened and convinced the builder to put the $11,000 deposit back on the table, proceed with the sale and even contribute another $3,800 to buy down the purchaser’s home loan rate.

In Tennessee, Memphis mortgage broker Roseann Sullivan described a builder offering one of her clients a $3,000 rebate off closing costs if the client agreed to go with the builder’s wholly owned mortgage company. The buyer figured that nobody else would be offering $3,000 in cash, so why not.

Then the builder’s mortgage company pulled the classic bait-and-switch maneuver. It informed the client that after a second review of her credit history, underwriters concluded that she only qualified for a high-cost interest-rate package.

The buyer’s near-700 FICO credit score, however, actually qualified her for market-rate mortgage money.

“Builders think they can play games with people because buyers are in such an emotional state. They don’t want to lose the house, and they’re willing to believe that they really are getting a discount or rebate,” Sullivan said, adding that she sees this all the time.

For more than a year, Savitt has urged officials to aggressively police builder incentives, saying antitrust and illegal trade practices are also involved. According to the Federal Trade Commission, tie-in sales may violate federal antitrust law.

“The sale of one product on condition that a customer purchase a second product, which the customer may not want or can buy elsewhere at a lower price, is a tie-in. Requirements like these are illegal if they harm competition,” says the FTC website.

Mortgage brokers argue that when a builder links an upgrade or closing rebate to the required use of its affiliated lender, that’s a tie-in.

When the tied-in Florida home loan comes at a higher cost than a mortgage available elsewhere on the market and effectively prevents a customer from choosing a lower-cost alternative, that harms competition.

“You become their captive, and there appear to be huge disincentives for you if you choose to get your loan elsewhere, even if it’s cheaper,” Savitt said.

The bottom line?

As a home buyer, do not be compelled to use the builder’s lender. You can be enticed. You can be pushed. You can be attracted by the builder’s incentives, which may be entirely legitimate and a great deal. It is nothing you can’t turn down, however, when it comes to getting the best Florida home loan. Keep your options open and don’t believe the hype.