The Perils of One-Stop Shopping
Like many new-home buyers, lead plaintiff Debbie Bolden had availed herself of the builder's in-house services. KB Homes offered not only in-house real estate agents, but an affiliated mortgage company - in a 50-50 partnership with Countrywide Financial. Countrywide also owned the appraisal company...California builder Ryland Group agreed to refund 850 buyers about $250 each and pay a $161,000 fine after North Carolina's banking commissioner's office accused the builder/lender of using unlicensed loan officers and charging borrowers excessive fees... Altlanta's Beazer Homes, another large builder that began funding its own loans during the boom and has since closed its lending division, is also being investigated by the North Carolina banking commissioner's office for alleged violations of federal lending laws. In 2005 a HUD investigation led to KB Home shelling out a record $3.2 million settlement in response to allegations that the builder's mortgage wing pushed through loan applications that overstated borrowers' incomes.

Like many new-home buyers, lead plaintiff Debbie Bolden had availed herself of the builder's in-house services. KB Homes offered not only in-house real estate agents, but an affiliated mortgage company - in a 50-50 partnership with Countrywide Financial. Countrywide also owned the appraisal company.

It may be years before the facts surrounding Bolden vs KB Homes emerge, but the whole case got me to thinking about the practice of one-stop shopping for new homes.

Compared to buying an existing home wherein a buyer must wander the city with an agent, tour a smorgasbord of houses, then pick a mortgage broker who searches for the right loan from the right lender, which in turn hires an independent appraiser, (tired yet?), new-home buying has become more streamlined.

In the world of new-home purchases, the buyer typically takes a tour of easily comparable model homes, their prices conveniently printed on a brochure. Before making an offer, the buyer is asked to fill out an application with the in-house mortgage broker and lender to obtain loan pre-approval. The in-house lender then arranges for an appraisal and the affiliated title company takes care of the paperwork. Presto, the process is complete without ever going outside the builder's family of businesses.

"One-stop shopping has evolved over the last decade or so," said Joseph Perkins, president and Chief Executive Officer of the Home Builders Association of Northern California, "It's not unlike what's happened in other consumer markets - when you buy a new car, for instance, they also provide the loan. It makes it as easy as possible for the home buyer to complete the transaction. It's a wonderful thing - you do all your business in one place."

Of course, new-home buyers have a right to hire their own agents, and to shop for their own mortgage or title company. But the builders don't always make this choice as attractive. Some builders (especially in a hot market) refuse to pay a commission to outside agents. As a spokesperson for a real estate regulator once told me: "You can be represented by whomever you want, but no builder is required to pay them."

Builders can make choosing the in-house lender, broker and title company appealing in various ways: sometimes they offer extra incentives like a hardwood floor upgrade if you borrow from their affiliated lender. Other times they simply offer interest rates that seem too good to pass up. Besides, when everything is so convenient, many home buyers just don't see the point in chasing down outside lenders or agents.

This is the beauty of one-stop shopping - a process of home buying that simplifies those wretched complications of real estate into an effortless process catering to consumer desires.

When builders become the bank

Yet such in-house real estate services, while remarkably convenient, have come under fire since the mortgage crisis.

• Earlier this month, California builder Ryland Group agreed to refund 850 buyers about $250 each and pay a $161,000 fine after North Carolina's banking commissioner's office accused the builder/lender of using unlicensed loan officers and charging borrowers excessive fees. According to company spokesmen, Ryland agreed to the settlement to avoid litigation, but did not admit to wrongdoing.
  
• Altlanta's Beazer Homes, another large builder that began funding its own loans during the boom and has since closed its lending division, is also being investigated by the North Carolina banking commissioner's office for alleged violations of federal lending laws. In the past year, Beazer's lending practices have also become the subject of investigations by the FBI, the Internal Revenue Service, the Justice Department, the inspector general of the Housing & Urban Development Department and, most recently, the Securities and Exchange Commission.
  
• In 2005 a HUD investigation led to KB Home shelling out a record $3.2 million settlement in response to allegations that the builder's mortgage wing pushed through loan applications that overstated borrowers' incomes.

Questionable appraisals

True one-stop shopping also extends to appraisers - another aspect of the business that has recently come under the legal spotlight. As was true in the Bolden vs. KB Home Countrywide case, the builder/lender also often partners with, if not owns, an affiliated appraisal business.

Early this month, New York Attorney General Andrew Cuomo and the federal Office of Housing Oversight announced that the government had come to an agreement with Fannie Mae and Freddie Mac that would effectively drive a wedge between such close appraiser/lender relationships.

As part of the agreement to prevent appraisers from being pressured by brokers or lenders, Fannie and Freddie have vowed not to buy loans made by lenders that have more than a 20 percent stake in its appraisal company. The agreement also dictates that appraisal companies - irrespective of their ownership structure - must operate as separate entities without influence from the lender. It also says that brokers may no longer handpick appraisers, previously a common practice.

But don't sound a cheer just yet. The agreement won't be put into practice until 2009 and many details are yet to be worked out.

Checks and balances

"Inflated appraisals are a problem across the board, again and again, in predatory lending cases," says Mike Hudson, a senior investigator with the Center for Responsible Lending, nonprofit research group that fights abusive lending practices.

"If you're a builder, you need a working relationship with a lender who will push through loans for you. But … when you don't have an independent third party (appraising the property), offering another step in process, you can end up without the checks and balances that you need."

Although appraisers have been complaining about pressure from lenders for some time, recently a group of them took action. More than 10,000 appraisers have signed a petition asking for help in solving the problem of pressure from brokers, lenders and real estate agents to inflate appraisals.

In his recent book "Greed, Fraud & Ignorance: A Subprime Insider's Look at the Mortgage Collapse" former subprime mortgage lender Richard Bitner exposes the ways that the increasingly intimate relationships between appraisal firms and lenders have allowed a huge number of inflated appraisals to slip through the system.

After analyzing five years of subprime loans, Bitner found that 50 percent of his company's appraisals were up to 10 percent overvalued, that 25 percent were between 11 percent and 20 percent overvalued and that 25 percent were overvalued more than 20 percent.

"I spoke to other subprime lenders and they agreed this was standard," he said.

"Basically, the closer the relationship between the lender and the appraiser, the easier it is to manipulate the process - and get any appraisal you needed."

Historically, real estate has needed to address distinct interests: sellers and builders who want the highest possible price, buyers who want the lowest possible price, and lenders, agents, brokers and appraisers, who want a price that ends in a sale. Yet if the in-house lender has little skin in the game because it plans to resell the loans on the secondary market and its partner is a builder facing a sharp downturn in the market, there's plenty of motive for keeping up appearances that the market isn't softening.

In the worst cases - the kind that set off FBI investigations - buyers working with a builder's affiliated lender can get pushed into buying homes they simply cannot afford.

Even when there is no whiff of predatory lending, intimate partnerships between lenders, builders and appraisers can create distortions in the market as a whole. The widely practiced financial incentives that often come with using an in-house lender don't necessarily hurt the buyer. But in a changing market, such incentives can, as they say in "The Wire", "juke the stats."

By offering lower interest rates or covering closing costs, the builder can keep the home's asking price the same or close to it. This mollifies the builder's investors and stockholders. It also soothes the nerves of the next-door neighbor who might have paid full price. Yet such incentives also obscure the true values. Thus, builder-financed lender incentives can make the new-home market less transparent.

The best strategy

Although there's little that individual buyers can do to fix the greater real estate injuries that have driven our economy to the brink of recession , there's plenty you can do when faced with the appealing prospect of a one-stop shopping home buying experience.

As with all real estate purchases, it's usually wiser to use your own agent. In the current market, it's not a problem - many builders are even offering buyer's agents higher than average commissions. This means making sure you bring your agent the very first time you visit a development, because getting a tour from a builder's sales agent may give them a right to represent you (or at least collect a commission from your deal.)

The affiliated lender may indeed have the best rates and the best loans for you, but it also behooves you to shop around for an outside lender - if only for comparison's sake. If using the in-house lender is mostly attractive because it delivers extra incentives, do the math before you sign on the bottom line. Exactly how much are these incentives worth compared to a potentially higher interest rate or sales price?

Finally, if you have any concerns about the accuracy of your home's appraisal, it can't hurt to order a second appraisal of your own. One-stop shop to your heart's desire, but even as you bask in perks and convenience, maintain the vigilance of a conscientious consumer.

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martycourson wrote:
Recently, I have noticed at least one east bay developer manipulating the value of the homes by paying a cash rebate into the escrow. Example: the developer pays $50,000 directly into the escrow which acts as a discount on the sales price. The sale goes through and the comparable for valuation purposes is inflated by $50,000. The seller/developer gets the $50,000 back from the escrow company. New buyers (and their appraisers) in the development find the recent comps and - voila - they are inflated. The fact is, you have to tread very carefully when depending on the age-old mainstay of comps to determine value.