New home purchase borrowers are trapped into using mortgage companies determined by builders, according to a consumer advocacy group praised by trial lawyers. But homebuilders refuse to respond to the accusations except to question the legitimacy of the findings.
The National Mortgage Complaint Center recently announced that "millions of new home purchasers have been overcharged after they felt like they...were forced into using the mortgage product of a regional or national home builder."
The center is backed by the Justice & Integrity Project Consultants, a group that says it was recognized by the American Trial Attorneys Civil Justice Foundation for work on behalf of homeowners nationwide.
But when asked to comment on the findings, a spokeswoman for the National Association of Home Builders declined to comment unless she could see "legitimate" data from the center and suggested the center uses "questionable" practices.
Calls and e-mails from MortgageDaily.com were not returned from KB Homes, Centex Homes, Pulte Homes, Perry Homes and Drees Homes.
By offering "incentives," such as "bonus" construction features or a portion of the closing costs to be paid, the builder "lures the unsuspecting new homeowner into a trap" -- where the borrower ends up with an interest rate much higher than their credit deserved or gets stuck with junk mortgage fees that "even the most crooked mortgage lender would think twice about ever charging," according to the center's president Thomas Martin.
In 90 percent of the cases examined by the center, the new borrower did not understand or was unaware the builder was receiving a yield spread premium, which lenders are not required to disclose, for increasing the consumers interest rate or monthly mortgage payment, the center reported.
And frequently, builders have shell title or escrow firms "that in no possible way can act as a disinterested third party with respect to closing, or the issuance of title insurance to the consumer," Martin said. "By controlling the entire transaction there are little to no safety nets for the consumer, because the builder typically will say "take it or leave it," or "if you don't use our mortgage product the house costs $10,000 more."
"As a result, tens of millions of home owners are now paying a much higher monthly mortgage payment than anything close to what they deserved or could have received on the open market," he added.
Recently, there was a hearing on a Texas House bill that sought to ban builders from offering incentives to steer borrowers into mortgages, by affiliated companies, with higher mortgage rates than nonaffiliated lenders or brokers could offer. The bill, which was the first of its kind by any state, did not make it past the House.
Everett Ives, director of the Texas Association of Mortgage Brokers, told MortgageDaily.com there is much evidence that the builder gimmicks are widespread and that although his group and the National Association of Mortgage Brokers "have nothing against builders," they would continue pursuing legislation for a national stop to such practices.