End of Builder Affiliated Lenders?
Likely not, but big changes are pending that will benefit all buying a new home. RESPA changes scheduled to take hold for 2009 include a change to the language that relates to builder affiliated lenders. The change directly challenges the practice of builders providing incentives, such as those toward closing cost, and the practice of tying those incentives to the use of the builders own mortgage company. The key variable is the true relationship between lender and builder. Does the builder have a financial stake in the lender? If so, tying the use of incentives to the use of lender will be unacceptable. If not, then the incentives can be linked such as with smaller builders that have a group of non-affiliated “approved” lenders. These relationships will not be affected.
As expected there are groups fighting this vehemently with builders at the top of the list. I dont know if they will find success as those leading the charge, large builders, recently hinted at requesting the use of bailout funds.
Why the change? Simple conflict of interest. During the recent housing boom there existed many accusations (litigation involved) that builders used their mortgage companies, and bad loans, to force closings. If a customer did not want to follow through on their contract because they did not qualify for financing, some builder affiliated lenders allegedly approved the customers for low documentation loans with much higher payments. This practice was alledgedly combined with “gentle” reminders that the custmers deposit would be forfeited if they did not close.
The facts surrounding these accusations is for others to decide. The pending changes to RESPA related to builder incentives will force lender affiliated builders to compete on the “retail” level and they are generally ill-prepared. Stay tuned for the updates.
Here is a link to background stories that led to the changes. http://seattletimes.nwsource.com/html/realestate/2003435874_harney19.html