In the battle between brokers and builders, builders can claim a victory -- for now.
The first state bill attempting to ban builders from offering incentives to use affiliated mortgage companies recently fell by the wayside.
Texas House 822 bill died in the committee meeting held Monday in the state's capital, Everett Ives, director of the Texas Association of Mortgage Brokers, told MortgageDaily.com.
Ives said the bill sought to halt what are believed to be Sherman Antitrust and RESPA violations by builders: offering financing incentives to steer borrowers into mortgages that have interest rates higher -- usually by a quarter to half a percentage -- than competing, nonaffiliated brokers or lenders could provide.
Purchasers should be able to choose their mortgage lender, Ives said, but "over the years builders have built scams to trap borrowers."
The builders offer to add $10,000 worth of carpet and cabinet upgrades to a $250,000 home only if the prospective borrower agrees to obtain financing from an affiliated lender, Ives said when giving an example of how the scams typically play out. In cases where prospectives prefer to use an unaffiliated lender, builders will not only refuse to do the upgrades, but threaten to raise the home's sales price by $5,000 to $10,000, "making it almost impossible for somebody else to provide financing for that house on that deal," he said.
In one case, a mortgage brokerage owner was told the price on his home would be raised by $15,000 if he did not obtain a loan from the builder's mortgage company, the director said -- adding that much evidence has been gathered that such practices are widespread.
The National Association of Mortgage Brokers "and TAMB have nothing against builders," Ives said. "What we're outraged about is consumers getting trapped" in overpriced loans and "enough borrowers have been ripped off" to where legislators seek regulation that would redress victims of this type of gimmick.
In the bill's hearing, a state legislator recognized that one of the testimonies, who was enticed into a 30-year mortgage with a rate 2% higher than the market, perhaps finished paying the upgrades in the first year, but would be paying for those upgrades over the next 29 years, Ives said.
"I think that the legislators heard compelling testimonies by consumers that they needed to hear," Ives said, adding that the committee was very receptive and empathetic.
"The builders responded that their reason for needing to patrol the financing was that if they had many different lenders they wouldn't be able to stay on top of the status of each one of the loans and the cost of producing their product would go up," which it might go up a $100 or $200, but the cost of financing would go down by $1,000 or $2,000, he continued.
In the end, the committee chairman did not approve the bill to be voted on and it was delayed, which in Texas is a very effective way to kill a bill, according to Ives. The state's legislature meets from January to May every two years. TAMB is laying the groundwork to introduce a similar bill in January 2007.
The director opinioned that "the builder lobby spent so much PAC money on the legislature that they were able to delay the bill until it was almost pointless to proceed with it."
According to WFAA Channel Eight News, the homebuilder industry spent nearly $9 million lobbying in Austin over the last four years.
Ives said that although the HB 822 did not proceed further, the fact that it was the first such bill by any state marks an important step toward achieving a national stop to the gimmicks.
"This is the beginning of a long process and we think that over the next five years we'll get many states to adopt similar laws," Ives continued. "If not we'll get Congress to adopt a similar law and if not we'll convince HUD that its a violation of RESPA, and we think that it might be. Particularly with the way these incentives are being implemented today."
Currently, Illinois and California are the only states considering similar bills and there is not a federal law that directly addresses the issue.
"There's a lot that's going to be done over the next five years to bring to legislators, regulators and Congress's attention how consumers are getting ripped off and we'll make sure that something is done about it."
HUD looking at incentives to use builder-owned mortgage companies
December 10, 2001