FBI Probes Unusual Incentives for Home Buyers

Investigators Ask Whether Payments Misled Lenders

When home sales began to slow at the start of the downturn, home builders offered buyers incentives -- instead of reducing prices -- to stimulate demand. The incentives included cars, tuition and credit-card payments, and even cash.

Now, federal investigators are questioning whether some of those incentives misled lenders and caused them to write mortgages that were artificially inflated, contributing to today's home-price crash.

Using incentives to sell homes has long been a marketing tool for builders. When properly disclosed and structured, the practice is legal. But the Federal Bureau of Investigation is looking into allegations that home builders, brokers and appraisers defrauded lenders by not disclosing unusually large incentives to buyers, which could have added as much as $100,000 to the price of a home.

Housing analysts say incentive schemes prolonged the housing boom in hot markets like Las Vegas and, consequently, have made the downturn all the more severe.

The FBI wouldn't name individuals or companies under scrutiny, but confirmed that it is looking at cases where the disclosures of incentives "haven't made it all the way to the ultimate lender," says William Stern, financial crimes supervisor for the FBI in Palm Beach County, Fla., and the bureau's former national mortgage-fraud coordinator.

Interviews with real-estate agents, home buyers and former employees at home builders describe an industry where competitive pressures fueled unusually creative giveaways in a last-ditch attempt to prevent price cuts. Home builders hate to cut prices, not only because it reduces profit, but also because their customers who paid full price complain.

In the Las Vegas division of Dallas-based Centex Corp., the home builder paid off car loans, credit-card bills and mortgage payments on existing homes to entice new buyers on homes priced between $350,000 and $550,000. Those payments weren't always disclosed to lenders.

"You weren't buying a house. You were buying a package," says Dana Ellis, who worked as an escrow manager for Centex from 2004 to 2006. To qualify, Centex required the buyer to use the company's in-house mortgage unit to originate the loan, and the loan application included an incentive "addendum" that listed the incentives but wasn't always sent to the lender. "They weren't disclosing any of this. That was on separate paper that was pulled," she says.

In some states these incentives are not available. The state regulators are much more active and enforce laws that prevent home builders from offering buyers incentives that lead to mortgage and financial problems.

In reviewing the hot real estate markets nationwide, one state, North Carolina, is home to four of the top ten hottest real estate markets in the country.

North Carolina, unlike California and Las Vegas, Nevada, does not have "flipper" markets. Also North Carolina has a diverse employment base and many jobs are available is a wide range of industries.

The employment opportunities are vast in North Carolina and are fueling demand for homes and real estate throughout the entire state of North Carolina.

The relocation market in North Carolina, especially Raleigh Relocation opportunities increases demand and results in more consistent pricing levels.

North Carolina has a very strong network of real estate professionals that help homebuyers avoid costly mistakes that can lead to foreclosures and financial difficulties.

Let's examine some of North Carolina's hottest real estate and the proven professionals that help buyers and sellers make good decisions:

Raleigh Real Estate Agency: An exclusive buyers real estate agency that is based in Raleigh, North Carolina and dedicates themselves to representing you through the entire buying process.

Winston Salem Real Estate Agency: Another established real estate agency in the area. The Winston Salem Real Estate Agency provides custom profiles of homes for sale in Winston Salem, Greensboro, Kernersville, and the neighboring Piedmont Triad area of North Carolina.

Greenville Real Estate Agency: Part of Our Town Properties, the Greenville Real Estate Agency is will to help its clients by providing them with tips about buying local real estate, Greenville relocation, and how to handle Greenville real estate mortgages.

In many cases, an exclusive buyers agent could have helped homeowners in Nevada, California, Michigan, and Ohio avoid the many traps that national home builders such as: Centex and Beazer Homes often make available through deceptive marketing incentives.

Centex says that the program was confined to about 50 sales and was shut down in June 2006, about six months after it began. Centex averaged 63 home sales a month for the year beginning April 2006. "These incentives did not reflect standard corporate practice and, once discovered, the practice was immediately halted," Centex spokesman David Webster says. Centex says only one of the loans was government-backed, through the Veterans Administration home-loan program, and the builder has promised to stand behind all of those loans.

Elsewhere, developers offered "sweat equity," or payments for buyers to receive home improvements such as landscaping. "You're basically getting banks to give you a cash advance," says Chip Hickman, the general manager of Easy Street Realty in Las Vegas. He said such programs weren't heavily advertised and were offered by many area builders, although he declined to name them. "It was more sales agents in the model home saying, 'Look, tell me what you need and I got a lot of money to play with.' "

There aren't any strict limits on incentives, but they could run afoul of federal regulations if they cause the mortgage to increase by more than the cost of the incentive. "It's a phantom incentive to mask it in an excessive loan," says Brian Sullivan, a Department of Housing and Urban Development spokesman.

Stronger due diligence by banks might have caught some of these problems. Banks, however, say they relied on professional appraisal companies to insure property pricing. Mortgage-fraud experts say appraisers sometimes cooperated with builders because it was the only way to get business. Appraisers say that determining the value of new homes is more difficult because comparable sales figures are provided by builders.

In some cases, developers gave outsized commissions to real-estate agents who then gave that money back to the buyer. The average commission on a home sale nationally was 5.2% last year, up from 5% in 2005, according to a survey by Real Trends, an industry newsletter.

At the height of the real-estate boom, commissions in Las Vegas regularly reached double digits, real-estate agents say. Kurt DeWinter, a Henderson, Nev., agent, received a $70,000 commission on a $550,000 home from Beazer Homes USA Inc. two years ago. He says he gave half of that to the buyer.

"They didn't care what you did with the money as long as the buyer paid the price they wanted for the house," says Mr. DeWinter, who personally went into foreclosure in that same neighborhood on a $500,000 Beazer home. He says he received a $50,000 incentive from the builder, which he used for his down payment. Beazer didn't return calls seeking comment.

Some builders continue to make generous offers. Wagner Homes Inc., a local home builder, advertises in big capital letters at the top of a flyer "$130,000 commission any way you like it!" for homes in developments like "Dawn Day Fusion," a northwest Las Vegas subdivision that offers homes with Asian-inspired architectural flourishes. New homes listed there in mid-July for $530,000 even though similar model homes in that development sold for $400,000 two years ago.

"A fee that high has got to raise a bunch of flags," says Kenneth LoBene, HUD's Las Vegas field director, because builders typically reduce the price of the home rather than offer such large incentives and because homes in that subdivision have sold for as little as $240,000 in foreclosure auctions. Representatives of Wagner Homes didn't return calls seeking comment. Steve Hawks, a Las Vegas real-estate agent, points to offers like this as one that a commercial lender wouldn't back if properly disclosed. "You find me an institutional investor that's going to buy this loan," he says.

Builders Feel Pinch of Key Omission From the Housing Bill

FHA's Elimination Of Down-Payment Gifts Could Dent Demand

Although a bill aimed at reviving home sales and curtailing foreclosures is about to become law, some of its provisions are proving a drag for the nation's large home builders.

Despite a rally Tuesday, the Dow Jones Wilshire U.S. Home Construction Index, which tracks the stocks of major builders, has fallen about 8.5% since President George W. Bush indicated last week that he wouldn't veto the bill that has been approved by Congress.

There have been months of intense lobbying by the building industry, but analysts say the legislation is a mixed bag for the new-home market. On the bright side, the bill shores up mortgage giants Fannie Mae and Freddie Mac, which should help restore some confidence in the mortgage market. It also provides a $7,500 tax credit to stimulate demand among first-time home buyers.

But for the builders, the bill's elimination of seller-funded down-payment assistance on mortgages backed by the Federal Housing Administration is a big loss -- one that could eliminate as many as one in 10 home buyers from the market, according to an analyst.

Starting in October, buyers using FHA loans can no longer accept down-payment "gifts" that are ultimately funded by the home seller, often a builder. Currently, the FHA allows a nonprofit group to gift the down-payment to the buyer. The nonprofit group is then reimbursed by the builder -- a practice the housing bill would stop.

Seller-funded down-payment assistance, which essentially allows buyers to purchase homes with little or no money down, has been filling the void left when the subprime-mortgage market all but vanished in 2007.

FHA officials have said loans that include the down-payment gifts are incurring higher default rates than FHA loans without the gifts. Builders say the gifts make homeownership possible for low-income buyers who have been unable to save money for a down payment.

Miami-based Lennar Corp. used down-payment assistance on 33% of the mortgages it originated in the second quarter, while Ryland Group Inc. said 18% to 20% of its buyers used down-payment assistance during the first half of the year.

"We believe a material portion of these people won't be able to find alternative mortgage-financing options," says Michael Rehaut, a housing analyst at J.P. Morgan. "This likely will result in an additional segment of demand leaving the market."

The elimination of down-payment gifts could bar as much as 10% of the nation's home-buyer pool and as many as 25% of buyers in lower-priced markets, such as Texas, where the gifts are more prevalent, according to housing researcher Zelman & Associates.

Complicating matters further for the builders, the housing bill would increase the down-payment requirement on FHA loans to 3.5% from 3%. Previous versions of the measure had lowered the down payment to 1.5%.

"There will undoubtedly be some impact, but we believe the buyers will adjust and the market will adjust," says Tim Eller, the chief executive of Centex Corp, which said that 25% of its sales in its fiscal year ended March 31 involved down-payment assistance.

In the absence of down-payment gifts, Mr. Eller says, his company can put buyers on a savings plan. In addition, he says that not everyone who uses down-payment assistance is necessarily unable to come up with a down payment.

Mr. Eller also is hopeful that a tax-credit provision in the legislation will help stimulate demand. "We know that this is no silver bullet, but it will have some stimulative impact," he say.

The tax credit mirrors a similar program in the 1970s that Mr. Eller says allowed him to buy his first home, a condominium outside Chicago. But unlike the credit Mr. Eller used in 1974, the credit proposed in the current housing bill has to be paid back over 15 years, making it more like an interest-free loan.

And a home buyer would typically collect a credit after they file their taxes. That may not help buyers who need a cash infusion -- like a down-payment gift -- at the time of the sale.

It is possible that builders could use their mortgage businesses to lend the tax credit to buyers at the house closing, and then be reimbursed after the buyer files their taxes. But that puts the builder at risk if the buyers default on these loans -- a risk the builder's mortgage units aren't necessarily designed to deal with.

"The primary purpose of the builders' mortgage subsidiaries is to get mortgage origination fees," J.P. Morgan's Mr. Rehaut says. "They don't want to take on default risks."

On a brighter note, builders say the housing bill could boost higher-end sales by raising the conforming-loan limits on Fannie- and Freddie-guaranteed loans and FHA loans to a maximum of $625,000 in some high-priced areas.

But many of those higher-end sales will depend on whether buyers can sell their current homes, often to first-time home buyers, which is why builders say the tax credit will help the overall market.

"First time home buyers can help bring back stabilization" in the market, Centex's Mr. Eller says. "It's a very large cohort, and they can have a big impact."

By: Michael Corkery
July 30, 2008