In these turbulent times, a new potential threat may be on the horizon for home builders.
Federal Housing Administration (FHA)-insured mortgages have taken over the significant void created by the tightening of conventional loans and the elimination of subprime and Alt-A loans. Builders and lenders run significant risks for lack of compliance with FHA loan requirements. Regulators are undertaking audits on foreclosed FHA-insured loans to find fault and deny insurance if and when it is determined that sellers are out of compliance.
Given that trend, should Realtor® bonuses cause builders concern? In San Antonio, a guide to builder inventories, new community openings, and current promotions is distributed to Realtors® weekly. The current rage in the Realtypak guide is big Realtor bonuses.
D.R. Horton is offering 6 percent commissions on all sales; Centex, 3 percent, plus $1,000 on every sale; Fieldstone Homes, 3 percent, plus $5,000 on spec sales; and Lennar, 5.5 percent commissions in honor of its 55th anniversary.
While we can have a thoughtful debate on the ethics of such bonuses and the usefulness of these structures, the immediate concern is compliance with FHA guidelines. We live in a time when there is significant scrutiny on mortgage fraud, excessive bonuses, and companies profiting at the expense of taxpayers.
FHA-insured loans are backed by U.S. taxpayers, who over the last year bailed out Fannie, Freddie, and numerous financial institutions that profited from but are now overrun by “toxic” mortgages. Payment of Realtor “bonuses” could be deemed excessive, and an argument may be made that these payments were an “inducement” by the builder to the Realtor to coerce the Realtor's client to purchase the home.
Some may be thinking “coerce” is a strong word. Fact is, Realtors are calling sales offices throughout San Antonio asking, “What incentives do you offer Realtors?” I recently spoke to one sitting in a D.R. Horton sales office. I asked what we needed to do to compete with Horton. Her answer was simple: “Pay Realtor bonuses like D.R. Horton.”
To be honest, Sivage pays Realtor bonuses. But our $500 gift card has a hard time competing. From time to time, we have offered additional bonuses on completed spec inventory. We've wrestled with the ethics and the potential risk. God forbid we are barred from having FHA loans provided to our borrowers, or worse, are accused of defrauding FHA.
FHA requires fees to be limited to “normal and customary.” The vast majority of Realtor transactions–existing home sales–compensate Realtors with a 3 percent commission. A valid argument may be made that Realtor compensation in excess of 3 percent is hardly “normal and customary.”
If such an argument is made, the “excessive bonus” commission may be reduced from the sales price in arriving at the mortgage amount. This is how FHA treats inducements for underwriting purposes. Buyers would be required to bring cash at closing equal to the 3.5 percent minimum investment plus the amount of the inducement. This would raise the amount of cash the buyer would need to complete the purchase.
Worst case, as FHA reviews foreclosures in the future, it and other federal agencies may argue that the sales price of the home was overstated by this “inducement.” In such a case, builders and lenders could be held accountable.
Taxpayers are demanding individuals be held accountable at companies that have profited at the expense of the taxpayer. It is possible the payment of “bonuses” to Realtors may be seen as an attempt to influence Realtor behavior at the expense of U.S. taxpayers.
It's a risk our industry needs to think about and gain clarity on.
Jamie M. Pirrello is CEO of Berkeley-Columbia Partners and acts as CFO and San Antonio division president for Michael Sivage Homes and Communities. He may be reached via e-mail at email@example.com.