The Department of Housing and Urban Development said some homebuyers are getting the "back door" shaft from certain builders, even if these companies are offering $10,000 discounts or kitchen upgrades to use a seller's mortgage subsidiary.
The agency is seeking evidence that buyers who use a related mortgage affiliate of a home builder might be paying higher rates and closing costs than applicants who use nonaffiliated lenders.
Many of the nation's largest builders, including DR Horton, Pulte Homes, KB Home, Ryland Group and Toll Brothers, have mortgage subsidiaries to expedite the sales process for their customers.
"True" discounts are allowed under the Real Estate Settlement Procedures Act to buyers who voluntarily use a builder's mortgage subsidiary, but it is a violation of the law's "required use" guidelines if a property's value is inflated or the subsidiary turns around and charges noncompetitive fees and mortgage rates.
If HUD had its way, it would ban builder incentives outright. And agency officials are not content with the regulatory status quo on this issue, according to K&L Gates attorney Phillip Schulman. "They are looking for ammunition," he said.
The agency is formally seeking public input from consumer and industry groups and regulators for information on appraisals, sales prices and loan performance on builder-originated loans and how they compare to other purchase transactions. The comment period ends Sept. 1.
HUD reluctantly withdrew the "required use" section of the Respa rule, but warned that it would reconsider the issue at a later date. In requesting public input, the agency is raising concerns that discounts and upgrades discourage homebuyers from shopping for the best deal. HUD also is concerned that consumers may not have enough time to evaluate a builder's offer and consider other financing alternatives.