Homebuilders Profit While Homeowners Eat Dirt

Editor’s Comment: Home builders made out like bandits as they were complicit in the rampant appraisal fraud that served as the keystone of the mortgage meltdown. Both the homes that were sold and the securities that were sold to fund the mortgages were inflated in the same way. But on the homeowner side there was the developer who would raise prices every 6 weeks giving existing home buyers the elation of getting rich and prospective home buyers the urgency of getting on the gravy train.

Without “comparable” asking prices and sales prices generated by developers who set up mortgage shops on the premises, the appraisals could not have been inflated so much. Without the inflated appraisals, Wall Street could not have moved (created) as much money as they did. Without new homes going up the illusion of a prospering economy could not have been sustained. So now we have the prospect of perhaps 30 million vacant homes over the next 20+ YEARS.

Everyone asks where the money went. It went into the pockets of those who were in on the game. And one of the sectors largely ignored up until now has been the home builders. Inflating the prices of homes by 50% or more meant incredible profit margins for home builders. So here we have it — huge salaries and bonuses going to the head of home building companies — and even continuing building in some areas where there is already a glut of housing for sale.

  • Maybe some smart lawyer can figure out a way to plead in the developer in this mess. Those developers that created mortgage brokering offices on premises must have had some interesting deals with the mortgage aggregators serving Wall Street.The “rebates” and “premiums” must have been sweet — and undisclosed contrary to TILA.
  • Maybe some homeowners who still own their homes and bought from the developer have a cause of action for economic fraud. And maybe the allegations are not much different than what is already in the complaints filed against mortgage brokers, appraisers, and other participants in the securitized mortgage scam that brought our country to the edge (we hope) of ruin.


Bailed-out homebuilders collect fat paychecks

While workers faced massive layoffs, housing execs raked in the dough

By Helen Chernikoff

updated 8:35 a.m. MT, Thurs., May 6, 2010

NEW YORK – No one rode the U.S. housing bubble higher than the company that calls itself “America’s Builder,” D.R. Horton Inc.

During the boom years, Horton and its peers sprawled across the map, opening new divisions and buying up smaller fry in an industry-wide frenzy of expansion and acquisition.

In 2006, the year home prices peaked, D.R. Horton’s sales did as well, with 53,099 home sales closed. Its founder predicted the company would break the 100,000-unit barrier by 2010.

Horton sold just 16,703 homes in 2009. Since the depths of the downturn in 2007, the company has lost more than $3.9 billion and laid off 53 percent of its workers.

But Horton has seen robust growth in one area: executive pay. The company’s founder and chairman, D.R. Horton, made $17.6 million from 2007 to 2009, as his annual compensation jumped from $2 million to $7.6 million, according to Equilar, a research firm that specializes in pay.

His chief executive, Donald Tomnitz, received a similar pay hike. Both will receive raises in base salary this year.

The two were not the only ones who profited handsomely during the most perilous stretch in their industry’s history, when homebuilders fired nearly half their workforce and lost more than half their market cap.

While Wall Street bankers have received far more scrutiny — and grief — for their fat paychecks, homebuilder executives have been doing quite well for themselves. In 2007 and 2008, the CEOs of the 10 biggest U.S. homebuilders earned an average of about $6 million a year each in total compensation.

And although banks and automakers got bigger bailouts from the government, homebuilders certainly got their share. This came in the form of tax benefits for buyers, tax refunds for builders and policies that kept mortgage rates low and foreclosures off the market.

“Without the government’s support, in all likelihood we would have seen more failures among the builders,” said Mark Zandi, chief economist at Moody’s Economy.com. “It’s almost hard to list all the things that have been done to support homebuilding either directly or indirectly.”

The federal homebuyer tax credit, which has provided up to $8,000 for homebuyers, cost taxpayers about $25 billion, Zandi said, while the tax refund amounted to a $5 billion cash cushion for big builders’ balance sheets. Individual states, such as California, helped out, too, offering their own baskets of tax benefits and breaks for homebuyers.

Of course, homebuilding executive pay — including that of Horton and Tomnitz — isn’t what it was at the top of the market, when predatory lenders pushed few-questions-asked loans on people who could not afford them. In 2005 alone, for example, Horton and Tomnitz each took home cash bonuses of almost $13 million.

Then again, some investors say homebuilders were overpaid during the boom, when Bob Toll of Toll Brothers Inc., R. Chad Dreier of Ryland Group and Larry Mizel of MDC Holdings Inc. took home compensation and stock sales in the hundreds of millions.

“Homebuilding is highly cyclical. You can’t blame that on corporate management nor should you give them credit when there is an upturn,” said Eric Marshall, director of research for Hodges Capital Management, which owns shares of No. 1 builder PulteGroup Inc. “CEO compensation needs to be better balanced, especially in cyclical industries.”

D.R. Horton declined to comment for this article.

Location, location, location
Homebuilding falls in a sector known as consumer durables. That’s the technical term for the big-ticket items that cost consumers not just money but often sleep — such as houses and some of the stuff inside them. Besides homebuilders, the sector includes companies like appliance maker Whirlpool Corp. and furniture retailer Ethan Allen Interiors Inc.

But CEOs whose companies build homes make more money — four to five times more — than their counterparts who manufacture couches and washing machines, said Robin Ferracone, executive chair at compensation consultant Farient Advisors. She and others attribute homebuilders’ outsized pay to a quirk of the industry: the involvement of founders and their sons in companies such as Horton, Toll Brothers, MDC Holdings, Lennar Corp. and Hovnanian Enterprises.

“When a homebuilding company goes public, it often doesn’t make that psychological transition to being a public company,” Ferracone said. “They pay themselves as if they were private.”

17 Responses

  1. Cynthia H. and Brian Davies ,,

    That’s what I’m looking for .. reasoned explainations. THANKS! I have seen some of what you point out but at least in my area the way builders fudged comps in new neighborhoods was to upgrade the sh*t out of the first few models which at least gives the illusion of value…

    Steering to inhouse lending did go on and often ended up with rates that were no better than one could get outside the company but at least you got a few upgrades thrown in and yes their contracts usually had 3 year early pay penalties so you knew they were table funded and already included in a CMO.

    The biggest frauds I saw were on existing 25 year old starter homes/duplexes which were sold to illegal aliens with no SSN and no verifiable employment or income. small duplexes , filthy because you have 12 people living in 800 sq ft. selling for triple the replacement/build cost. The neighborhoods were terrible and wouldn’t support prices anywhere near what was appraised. I suspect most of those “sales” were fraudulent with the seller/owner making the payments for 6-12 months and the “buyers” knowing it was a sham and that they weren’t really risking anything because nobody really even knew their true identity.

    Amicusman ,

    I never said appraisal fraud didn’t happen … I’m just looking at the big cause and effect picture …. the money raining down was the cause of the bubble ,, all the other players were secondary and weren’t actually driving the situation (although they were complicit)… the need to lend $500,000,000.00 RIGHT NOW and fill all the cells in this particular excel spreadsheet was the driving force.

  2. http://www.scribd.com/doc/30868375/State-of-California-vs-Country-Wide-Financial-PREDATORY-LENDING-STEERING-UP-SELLING-FRAUD-universal-American-Mortgage-Company-NDEX-Deutsche-Ba


    spot on!
    “Wall Street is the root cause of blame – and continues to be,
    The US Government is covering up” – to protect not only the culprits, but themselves as well, this point to the ” mortons fork”
    The US Government Is either too inept or worse …complicit !
    Complicit gets my vote.
    They have been in bed with the fed therefore they carry the same disease as the fed = Greed & Control ..The ONLY avail cure is TERMINAL .

  4. Well then the next time a developer/builder courts your elected official at the town, village or city level, perhaps people outraged by this “bailout for builder’s” will now take the time to get involved, attend all local council and or board meetings held by your “elected officials”.

  5. Builders usually set the market price by buying the first few units themselves, after they have pet appraisers appraiser a few similar units in the neighborhood.

    Appraiser are the ROOT cause, not Wall St.. Wall St. didn’t create bogus mortgages, it just sold them.

  6. Wall Street is the root cause of blame – and continues to be the cause of blame. All others are accomplices – but Wall Street knew what it was doing from the onset. The US Government is covering up – to protect the culprits.

  7. Kickbacks

    One other thing Look for kickbacks on your HUD-1 There may be strange fees for builder materials or consulting, HOA set up fee or some such nonsence at the bottom to the sellers columns .. Those are undisclosed kickbacks cut to the builders LLC’s, HOA or Marketing firm or even to the buyer, sorry guys!

    Kickbacks like these happen more with condo conversions and NOOC rental properties

  8. Ditto and Amicusman,

    If you have evidence of that show me , I’m all ears … I have seen banks direct business to “friendly” appraisers and I have seen appraisals “adjusted” .. I can see a builder fudging sales by selling to friends to create a “baseline” appraisal model but I haven’t seen it ,, I know real estate in my part of Florida was so hot back then that those games weren’t “necessary”.

    My point was the big builders had their sales model in place decades before .. buy land cheap , wait for the city to move closer or a road to be built (pay politicians for the road) clear, build , have models and a sales center , maybe a finance desk … nothing has changed since the 1980’s really with the builders except they had a willing buyer for their paper … they didn’t change any rules ,, profiting from rules changes and changes in the market forced upon the market by the big wall street players was all they seemed to do .. and I’m ok with that… they got caught up in it just like the buyers ,, when the music stopped they had tons of unsold inventory and tens of thousands of acres of land bought at the top.

  9. Neidermeyer finds it hard to believe that Builders participated in the mortgage fraud because he has not seen it first hand like I have.

    I have been in the real estate business since 1993 during that time I was a loan officer for various independent loan brokers. ( no I did not fund ANY preditory loans, option arms, 3 year pre-pay penalties..etc. and my clients were forced to read their paperwork because I was at the closing table with them)

    The first fraud I was witness to was borrower steering. The builder would offer incentives to buyers for financing if only the borrower would use the builders in-house lender directly. The incentives on average would be around $3000.00 toward closing costs. At the beginning of the application buyers would be quoted a rate about 1/8 below market so it appeared that the Builders lender would give them a good deal. When the home was finished 6 months later, 9 times out of 10 the rate had risen and the rate at closing was actually 1/8 to 1/4 percent higher than the buyer could have gotten with their original broker.. So the incentive for closing costs was a sham to steer clients to in house banks.. aka Countrywide on many occasions..So new home buyers check the comparative rates the day you closed and you will see the builders lender saved you no money.

    2. Appraisal fraud was rampant. New homes always cost more than comparable resale because the prices for upgrades are added into the loan at retail..

    What has to be investigated are the first 3-4 sales in the development or nearby developments..who are those parties and what is their relation to the builder? And how was the comparable property purchased? Cash? Deed Transfer of some sort etc.. often employees or relatives of the builder would” buy”” a home and close on it to create a comp.. perhaps 2 and then the appraisor could go outside the development for 3rd comparable sale at another builders development.

    Voila they now have comps and they just turned $200k houses into $300k houses!

    Condo Developments/ condo conversions: the HOA and property management company will often still be owned by the developer under another LLC.. look for the same officers..the hoa will be asked to certify certain information about the development on the appraisal..such as owner occupancy ratios, number sold etc. And the HOA cert will lie about the ratios to get the appraisal approved in underwriting.

    I just had a client win a settlement due to my research..The appraisal was one of the worst I had seen and ordered the Landsafe and Countrywide in house..The comps used were 5 miles away and 2 times the sq ft and bedrooms.. completely uncomparible properties to start with and the adjustments down for sq ft and bedrooms was laughably small..the HOA cert( by the developers other llc) stated 175 owner occupied when there were only 3 mailing addresses in the development in public records for owners that were not in another state! I also found that one of the signatories for the builder had her own LLC’s and one of her business addresses was the one comparable sale within the development included on my clients appraisal and “owned by an entirely different individual!

    And the worst thing I found on this appraisal was the appraiser’s comments section where he admitted the unit had not yet been renovated and that the builder intended to do so after the next tenant changeover..NOT RENOVATED YET! and yet still he appraised the unit as/if it was renovated..the targeted client lived out of state and never saw the property he purchased..

    I also looked at the early transfers..of course there were 2 that were sold at 160K when nothing prior had sold over 64k..interestingly after the initial inflated transfers there were several deeds recorded by the officers of the builder llc and friends for the same units at 48-68K done quietly so as not to hurt their comparable sales.

    Check the upgrade sheets and what you were charged for certain upgrades… a client of mine was charged over $30,000 for paint upgrades! I am not talking murals here.. a sponged hallway and 2 tones for moldings and walls..

    So yes the builders are more than responsible for the inflated values..the partnered with the banks to create this market..It is all in the research!

  10. Developers/builders would take investment buyers on bus tours of condo projects. One developer was asked how he set pricing and he said that he would figure out what they wanted to make and then sell the first 10-12 units to family, friends and employees to set the appraisal pricing. Who can really say if those less than arms length transactions really paid what the closing docs say they did. Then those “comps” were fed to the appraisers. I saw one appraisal that said lender requested that these “comps” be used.

  11. neidermeyer, maybe you can convince the law firms representing all of the class action suits against developers there was no appraisal fraud.

  12. I find it hard to blame the builders unless you’re talking about them packaging loans or selling loans in bulk to a particular bank. They participated but the problem was created by the cash tsunami foreign banks dumped on wall street because they were dissatisfied with treasury yields. The builders in my estimation were tougher on buyers in their own lending programs than the independant storefront “lenders”. You can bet your last dollar that Hovnanian , DR Horton , US Home and others got paid at least 95% on the bulk sales and didn’t allow the secondary YSP game to bite into their piece of the pie. They made money but they didn’t create the game , they just played it and they folowed the rules a bit closer than other participants.

    I also don’t buy the argument about appraisal fraud ,, if the builder sold 6 of model zzz last month at 300k then the appraisal of house #7 at 300k should be valid, people are definately willing to pay that amount for that house. You can’t add up every stick stone and foot of wire and use that as a basis for the appraisal, sure prices were driven up crazily but that was a function of the money pouring in and had to be accounted for… a diamond may sell for $1M but if you appraise it based on the few ounces of graphite that make it’s structure you would appraise it at $1 ,, it’s a function of available money and the willingness to buy.

  13. Appraisal fraud is and was rampant. Every mortgage transaction we’ve ever examined in Arizona, California, Florida and Nevada has shown appraisal fraud. On a nationwide basis we find it in four out of every five mortgage transaction examined.

  14. the builder, the pretender lender “front shop” the title company, same guys (developer) known for their dirty landbank maneuvers who fly below the lagal radar rippingb people off everywhere they go, a smaller goldman sacs outfit and no less gulity. false afvertising and pumped up those illusionary prices by creating a waiting list for new homes. we were lambs to the slaughter. Today i read about whats happened in Greece and i pray it doesnt happen here. People are fed up, we hard working citizens the backbone of our socirty get to loose everything and those fat cats are untouched and while they should be brouht to a full accounting in a court of law and go to jail, they get there slick lawyers to smooth it all over and off they take on their boats to the island they own. Its all such an atrocity. globally its a mess. I must work on my Zen today!

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