Buyers beware if it is too good to be trueKate Crawfordforeclosures, affiliated business arrangements, Real Estate Settlement Procedures Act
The recent rash of foreclosures has brought several theories to
light about why borrowers cannot afford their mortgages. I am going
to submit mine. New home sales have been soaring during the last
few years. They have been fueled by low rates and plenty of new
products that enable the borrower to purchase a home for little or
no money. We all know these products and have used them. But when
they are abused, the outcome is completely the opposite of what we
wanted it to be.
The lenders designed products to allow more prospective
homebuyers to buy homes. The new construction arena of the housing
sector fully embraced these. Millions of new homes were sold and
millions of loans were made to new homebuyers. The problem is that
many homebuyers bought a home with a loan that the builder, along
with its mortgage company, provided. You have seen the ads: "Buy
this home and get $25,000 in upgrades and closings costs." Well, if
you don't use their lender, the cost of the upgrades is higher and
the house still must apprise at that time. It always does. But when
the borrower, who was put into a 2/28 or a pay option
adjustable-rate mortgage, wants to refinance because his rate went
up, now the house does not apprise. No comparables to be found. In
fact, the house is less than what he bought it for or owes on it.
Now the crunch time comes for millions of families who are trying
to make it. What does the builder do? He keeps on building. He
keeps tearing down trees, putting up homes, ruining the
countryside, so he can get his 20 percent profit from their
mortgage operation. With neighborhoods in ruin, values are bleeding
downward into untouched neighborhoods. What do the local town
councils do? They approve more subdivisions "Hey, why not? Now we
have five more neighborhoods to go under." Why? The cities need the
taxes.
It is not a mortgage broker issue, it is an everyone issue.
Borrowers need to take some responsibility, but so do the builders,
town councils, appraisers and lenders. Building more homes than we
have buyers does nothing for this economy. The cost of new homes is
driving down the cost of existing homes. The inflated prices on the
homes causes existing homes to be valued less; plus, when the new
home is foreclosed, the house is sold and usually at a lower price,
bringing unacceptable lower comparables into play.
Greed is a horrible business partner. Forcing the borrower into
a home he cannot afford or not disclosing what will happen to his
loans in the future is a bad way to do business. But statistics are
showing that buyers are doing just that. Plus, the loans are
presented to borrowers after they have handed over huge earnest
money checks. The contracts read that they need to be approved for
a loan no specifics, just a loan. Then the screws tighten. The
borrower is told if he doesn't take this loan, he loses his earnest
money. This is the practice that is causing the most heartburn in
our country. It needs to be stopped. The National Association of Mortgage
Brokers is not against affiliated business arrangements (ABAs)
that are not done properly, but when consumers are losing their
homes and builders are thumbing their noses at them and going
against the rules, we have a problem. Tying incentives to the use
of a particular use of a vendor is against the Real Estate
Settlement Procedures Act (RESPA), yet it is occurring.
Non-disclosure is a Truth in Lending issue. Borrowers need to know
what they are signing. Telling them if there is a prepayment
penalty or an adjustable-rate feature comes second nature to most
loan officers, but to unlicensed loan officers who are not trained
in anything but making the sale and making the borrower fit the
house, you are asking for trouble.
We need this issue addressed very soon. Regulators and
legislators keep focusing on us, but the biggest problem right now
is the sub-prime borrower who was stuck in these new homes with
inflated values and then can't refinance due to the house not
appraising for what they, at least, bought them for.
The American dream of homeownership is a wonderful thing. We
need to stop the predatory practices being applied by these ABAs.
Steering is not illegal, but it is unethical. Tying is illegal and
needs to be enforced. Refusal to sell is illegal and needs to be
enforced. Intimidation and bullying is just bad business. Buying a
home should be a pleasant event, not the rollercoaster ride from
hell. Remember, if it is too good to be true ...
Kate Crawford is the consumer protection chair for the National Association of Mortgage
Brokers. She may be reached at (336) 586-0070 or e-mail
[email protected].
