Developer In the Shadows: Be Careful of What You Ask For

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

Editor’s Comment: One of the many things that has not yet been fully developed on this site or anywhere else to my knowledge is that culpability of the Developer in the mortgage mess when it comes to sale of new housing. It’s true that around half of all these mortgages, contrary to popular belief were merely refi’s, or original financing on existing housing that families had lived in for years or generations. But the entire scheme was really driven by the creation of the illusion of rising prices and that was done and could not have been without the active complicity of the Developers.

The developers arranged the closing, took pieces of the action on the title policy, escrow closing, appraisal fee, and especially the brokering of the mortgage. At first I thought that the reason for the easy money was that the developers had a private arrangement where they were the guarantor of the mortgages and that was why the mortgages were so easy. But that wasn’t it. They were simply in the securitization chain as a participant making sure the wheels turned and providing the grease — the illusion that everything was proper and in order. The article below is from an attorney who advises “the other side.” I think it is revealing.

Be Careful of What You Ask For

Written by Howard A. Lax*

July 2010 edition of RESPA News Monthly.

A war is still raging over whether affiliated business arrangements are a device of the devil or not. Independent title agents, who, like cattle herders, gather their customers from the four corners of the earth, detest captive developer title agents who, like sheep herders, see their flock devour every customer in a development.

The Department of Housing and Urban Development (HUD) entered the war on the side of the independent title agents when it outlawed builder incentives tied to the use of affiliated or favored title agents and mortgage brokers. Under HUD’s new definition, only a settlement service provider could give the consumer an incentive to use its services. Builders fought back in court, forcing HUD to reverse its definition of “required use” of a settlement service provider. This was all for the better.

There were unforeseen loopholes in HUD’s initial revision of the definition of “required use.” Instead of eliminating builder incentives for use of affiliates, HUD’s definition might have encouraged more incentives and eliminated some of the current disclosures. Restrictions on builders giving consumers pools and decks to use their affiliated mortgage and title companies will simply alter the closing fee equation. Builders could simply set up mortgage brokerage companies that buy pools for customers of the builder, earn one dollar a year, and pay no dividends to the builder. The builder does not care if it throws in a free pool itself, or the affiliated mortgage broker pays for the pool. The builder just wants control over the financing process to make sure it sells its homes at a steady pace. The builder’s loan origination process could offer fewer disclosures, and discourage shopping for settlement services. As a special added attraction, the builder would have no concern for lawsuits for RESPA violations, and no need to retain Affiliated Business Arrangement Disclosures for five years.

However, setbacks rarely mean defeat. HUD published an Advance Notice of Proposed Rulemaking (ANPR) to gather evidence that changing the definition of required use is justified as a way to reduce consumer costs. In a somewhat rhetorical fashion, HUD asks whether builder incentives given to buyers are actually baked into the price of the home and are not true incentives for the use of an affiliated or favored business. HUD also asks, somewhat theoretically, whether forward commitments purchased by builders are proper under RESPA.

HUD’s ANPR mentions “builder” 23 times while no other incentive monger is mentioned even once. This does not mean that a definition of required use promulgated by HUD will not have any impact on other affiliated businesses. If a builder is prohibited from giving the borrower a pool or paying for the closing to induce the borrower to use the affiliate’s services, why should a bank be allowed to give its affiliated mortgage company a warehouse line of credit? After all, there is no difference, in theory, between the bank providing the money to close the loan at its affiliate and the builder paying for the closing at its affiliate. The borrower is getting something of value either way that is baked into the cost of the transaction.

There are, of course, other companies that provide incentives to use an affiliated title agency. Title agents that provide group unemployment insurance to borrowers are buying the policy from an affiliated insurance agency. Mortgage companies that give the consumer a TV at closing are buying the TVs from an affiliated or preferred appliance store. It is rumored that Amway previously provided its goods to consumers who obtained a loan from an affiliated mortgage company, with HUD’s blessing.

When we consider that HUD might restrict forward commitments, the potential impact of the rule that follows the ANPR becomes even greater. Forward commitments are integral to secondary market transactions. If HUD intends to restrict forward commitments, it can only do this effectively by eliminating the secondary market exception and requiring disclosure of all lender income on the Good Faith Estimate and HUD-1 Settlement Statement. The impact of disclosing secondary market income as a tolerance restricted origination fee will be enormous. Every loan will be hedged to lock in income levels to avoid a RESPA violation. And, if you thought that the new HUD-1 made Truth in Lending Act compliance difficult, wait until you throw loan sale income into the GFE block 1/HUD line 801 melting pot.

Will HUD have the foresight to draft a rule that avoids the foibles of unintended consequences? It seems a Herculean task to draft a rule that addresses “builders” without impacting other portions of the industry. A rule that is expressly targeted at builder joint ventures is subject to attack as arbitrary and unauthorized by RESPA. A rule that is too broad could increase costs across the board for consumers. Is there a happy medium, or should we expect another round of pandemonium?


* Howard A. Lax, is a corporate law attorney with the Bloomfield Hills, Mich.-based firm Lipson, Neilson, Cole, Seltzer & Garin PC. His practice concentrates on financial institutions consumer compliance and regulatory affairs, and real property law. Lax earned his J.D., cum laude, from Wayne State University’s  School of Law and holds a bachelor’s degree from the University of Michigan. Active in the legal community, he is a member of the State Bar of Michigan’s Business Law Section and is a member of the governing council of the Real Property Law Section. He also publishes a bimonthly legal newsletter for the mortgage banking industry. Contact Howard A. Lax at hlax@lipsonneilson.com.

13 Responses

  1. Just remember this government does not work for the tax payer. This government works for the global elite who holds the key to the agenda. The US Taxpayer and US Home owner are not part of the agenda are not part of the agenda. But rather, the US Taxpayer / Homeowner is only part of the slavery systems to support these lazy slobs.

  2. […] This post was mentioned on Twitter by Shu Lee, Start Revolt. Start Revolt said: Developer In the Shadows: Be Careful of What You Ask For …: As a special added attraction, the builder would h… http://bit.ly/a21nXm […]

  3. THE A MAN,
    “GOD BLESS THE UNITED STATES OF AMERICA”

    Wow, I’m suprised you said that.
    But I do also want to apologize for my asking you or rather recommending you to convert from your faith. I kind of consider it improper for anyone to force their own beliefs upon others or discredit those of others and looking back in retrospect I see that it was overly hypocritical of me to make the suggestion I made. So, please accept my sincere apology. And even though I have already lost mine, I do hope you are successful in fighting to keep your home and wish you and your family all the blessings of a happy and peacful life.

  4. neidermeyer- there are alot of Fla. newspapers following this mess, you can get names, reporters,email addresses from posts on MattWeidnerlaw, dinsfla,etc. and approach them to run the story. Tell the reporters who you contact that they themselves can be acclaimed for closing Florida’s budget gap. Then do that in all the other states-good luck!

  5. pelucheven

    Good comments.

  6. The United States has the strongest military in the world. It controls the oceans. So it can do what it wants to do as long as it does not succomb to Fraud in the long term.
    THE BANKSTERS NEED TO BE DEALT WITH. THEY ARE THE TRUE ENEMY FROM WITHIN AND FROM ABROAD. DEUTSCHE NAZI BANK HSBC ETC.. AND THEIR DOUBLE AGENTS BANK OF AMERIFRAUD WELLS FARGO ETC…

    GOD BLESS THE UNITED STATES OF AMERICA

  7. “When we consider that HUD might restrict forward commitments, the potential impact of the rule that follows the ANPR becomes even greater. Forward commitments are integral to secondary market transactions. If HUD intends to restrict forward commitments, it can only do this effectively by eliminating the secondary market exception and requiring disclosure of all lender income on the Good Faith Estimate and HUD-1 Settlement Statement. The impact of disclosing secondary market income as a tolerance restricted origination fee will be enormous. Every loan will be hedged to lock in income levels to avoid a RESPA violation. And, if you thought that the new HUD-1 made Truth in Lending Act compliance difficult, wait until you throw loan sale income into the GFE block 1/HUD line 801 melting pot.”

    Dear Mr. Garfield or any one with deep knowledge of TILA and RESPA, is there an exemption to report the income derived from the forward selling of the mortgages?

    As I understand many of the players that earned commissions and fees from the forward selling of the toxic mortgages were not National Banks but intermediary brokers, aggregators, securitizers, etc. Their yield on the transaction does affect the APR and is a TILA violation, ther was no proper disclosure.

    Entities like Pinnacle Financial, First Magnus Financial were in essence REIT’s, their business practice is decribed in their BK filings.

    The made lots of money by pushing you the borrower their title companies, their design centers, their mortgage companies, their deck builders, and of course they provided incentives and high pressure tactics for people not to have a Real Estate agent representing you ( even if that would not have made any difference, since most real Estate agents only care about what appears on the top three lines of the second page of the HUD1).

  8. DOES ANYONE THINK THAT LENNAR, THE BUILDER WHO STEERED LENDING TO THEIR SUBSIDIARY–IF BEING FORCED TO BUY BACK POORLY QUALIFIED LOANS.

    http://www.scribd.com/doc/41307475/Big-Builder-Online-News-and-Analysis-Exploring-the-Management-Finance-And-Operations-of-America-s-Big-Builders

    OR IS THIS JUST A BUSINESS DECISION. YOU CHOOSE.

  9. MOODY LETTER—SORRY THIS IS THE LINK.

    http://www.scribd.com/doc/41300872/Moody-s-1999-Letter-on-Mers-MERS-MERS-MERS

  10. ORIGINAL MERS APPROVAL FROM MOODY’S OFTEN QUOTED IN MANY PSA.

    http://www.scribd.com/doc/41298829/Moody-s-1999-Letter-on-Mers-And-Their-Ratings-THEY-WERE-WRONG-MANY-TIMES

  11. Also unrelated but must be said,
    Apparently not only did Americans buy homes they couldn’t afford (sarcastically speaking), they also bought a Government they couldn’t afford.

    The scary actual U.S. Government debt $200-Trillion – 840 per cent of current GDP

    http://www.theglobeandmail.com/report-on-business/commentary/neil-reynolds/the-scary-actual-us-government-debt/article1773879/

    It appears that “Obama and Congress” (NOT US) has not only spent beyond OUR means, but our great grandchildren as well.

  12. Lennar was my builder. They owned the originiator, paid the credits, made $25,000 on the loan, was paid for the insurance, was the trustee of the deed of trust, owned the title and excrow company, was the servicer, sold the note, and the list goes on.
    Affiliates are:

    here:http://www.scribd.com/doc/41291909/Lennar-Subsidiaries-Universal-American-Mortgage-Company-North-American-Title-Company

    Cruel Hope written about this very topic:

    http://www.scribd.com/doc/37992667/Cruel-Hope-the-Practices-of-the-Home-Builders-and-Their-Mortgage-Subsidiaries-in-California-Lennar-Universal-American-Mortgage-Company-of-California-Kb-Homes-Dr-Horton

    Lennar in a study in California by me perfored nearly 70 per cent of sales of homes with their affiliated subsidiary Universal American Mortgage. They additionally recieved $14,000 rebates from a Mello Roos tax that they as one of the land owners voted to encumber on the homes. They got the credits for water school fee, sewer fees when they pulled the builder permits.

    This is a complicated story but I have made a website of my community with the history to prove it. Was able to get $3,7 million returned for this tax. Collected two surety bonds for a total of $240,000 from Suncal the master developer. Working to get more.

    Here is the community website with all the education.

    https://sites.google.com/site/cfd20043melloroosspecialtax/

    I could go on and on as I feel this is the key in California. Lennar is a teflon as they get away with everything.

    brian davies
    760-904-4928

  13. This is totally unrelated but I would want to ask for comments from people with inside knowledge… I beg your indulgences.

    In the court foreclosure auctions I have attended there is usually a single designated person representing a multitude of law firms and banks/plaintiffs who bids for their interests. In my experience that person will cry out when his properties come up something along the lines of “I bid $100 with a maximum of $499,000” ,, of course the $499k is the amount the bank is supposedly owed and won in the judgement.

    My question(s) are … A.) Is it ethical for the court Clerk to allow these pronouncements? B.) By freezing out all other bids my county loses doc fee and other tax revenue on approx. $2B of real estate sales over the course of a year when they collect on $100 vs an estimated true cash value of $150K (average) that could be collected from real bidders who wish to occupy the houses. and C.) What does the court get out of this? It sure looks like someone is getting greased…

    My county represents about 10% of the statewide foreclosures and all that I have seen and heard in court sales in surrounding counties tells me this is the norm… My state is losing taxes on over $20B in sales…

    Is there anyone with connections to news media in Florida that wants to tell this story? This alone could solve our revenue shortfalls.

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