Beazer probe spotlights builder financing
While federal agencies scrutinize the lending practices of Atlanta-based Beazer Homes, other national home builders continue to promote financing incentives through the affiliated lending programs they have offered for decades. Critics say relaxed lending standards and a go-go housing market have created a system ripe for abuse. People in the industry defend builder mortgage services as convenient and safe for consumers.
Beazer probe spotlights builder financing
The Atlanta Journal-Constitution
Published on: 03/29/07
While federal agencies scrutinize the lending practices of Atlanta-based Beazer Homes, other national home builders continue to promote financing incentives through the affiliated lending programs they have offered for decades.
Critics say relaxed lending standards and a go-go housing market have created a system ripe for abuse. People in the industry defend builder mortgage services as convenient and safe for consumers.
Miami-based corporate attorney Ron Ravikoff of Zuckerman Spaeder said the current crisis in home mortgages reminds him of the savings and loan meltdown in the 1980s.
"I believe these things go in cycles where lending gets very free," Ravikoff said.
The temptation, according to Ravikoff, is that builders eager to sell out their new-home communities have little incentive to ensure that the buyer can manage the loan's financial demands throughout its decades-long term.
The builder gets both the purchase price of the home and an origination fee for the loan. The loan is typically sold almost immediately to a third-party investor.
And once all the new homes in the community are sold, the builder turns over its long-term maintenance to the homeowners' association.
By the time marginal buyers fall behind on loan payments a year or two after the purchase, the builder has earned its profit and moved on.
"It is in their own best interest to lend the money," Ravikoff said. "It's not like an arms-length lender."
Mark Marymee, director of corporate communications for Pulte Homes, a Michigan-based home builder operating in 27 states, including Georgia, said Pulte's 36-year-old mortgage program must meet all the underwriting standards required of other lenders.
The primary incentive to buyers, he said, is convenience: The mortgage can be handled at the sales center and financing can be carefully coordinated with construction and delivery of the home.
"We look at it just as automakers offer car buyers financing for their cars," Marymee said.
Brian Sullivan, spokesman for the U.S. Housing and Urban Development Department, said a 33-year-old law regulates the relationship between builders and their financing arms, carefully prescribing the ways the builder can profit.
For example, the mortgage arm cannot pay the builder a referral fee.
That would be considered a kickback.
Banking analysts say that, because these financing companies don't operate as full-fledged banks, they're not subject to the state and federal regulations traditional financial institutions must follow.
Banks also are subject to routine federal and state audits, which put pressure on financial institutions to maintain high underwriting standards.
"It's pretty clear that the guidelines for banks are somewhat more rigorous than they are for nonbank finance companies," said Richard X. Bove, a bank analyst at Punk, Ziegel & Co.
Banks have to set up reserves against losses, have capital requirements and lending limits in addition to regular audits and other laws, such as the Bank Secrecy and Sarbanes-Oxley acts.
"That system for 70 years has maintained the banking system of the United States," Bove said. "But we've set up nonbanking systems that are designed to go around it. There's no reserve, there's no Sarbanes-Oxley, there's no Bank Secrecy Act there's nothing. There's no oversight, so it's totally 'buyer beware' situations."
Nonbank financing firms also are regulated by different state laws. In contrast, many banks are regulated by a number of federal agencies including the Federal Deposit Insurance Corp., the Federal Reserve, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
The American Bankers Association, the industry's chief lobbying group, says state governments should address this issue.
"In many instances, these are state issues," said James Ballentine, the ABA's director of housing and economic development. "To the extent that there's a desire on the state level to want to enact stronger laws to address these issues, that's going to be required.
"We're not calling for investigations state by state, but as this issue continues to grow, it's important that states and state attorneys general look at cases like this," he said, referring to Beazer Homes' case.
The Georgia Bankers Association says state regulations particularly the Georgia Fair Lending Act of 2002, designed to go after predatory lenders includes nonbank finance firms.
"It's got a lot of good stuff that I would not want to violate," said Joe Brannen, president of the GBA. The group, he said, is satisfied with the state's oversight on nonbank finance companies.