Marc Savitt has a bone to pick with the affiliated lending programs of many big builders. As vice president of the National Association of Mortgage Brokers (NAMB) and former chair of the association's consumer protection committee, he's seen the ugly side of these affiliations, where home buyers can be cajoled and coerced into accepting a builder's in-house financing, whether it's good for them or not.

That trend seems to be increasing, he says, with a raft of incentives flooding the market in recent months as builders try to cope with slowing home sales nationwide. “Many times, those incentives are illusionary. They're just not real,” says Savitt. “They're either built into the sales price of the house, or built into the financing. It's not unusual to see financing in these programs where the interest rates are anywhere from a half a percent to one-and-a-quarter percent higher than what you can get any other place on the street.”

While it's illegal to force a home buyer to use a builder's in-house lender, Savitt says he sees cases of extreme pressure applied to buyers regularly. In a recent case in Arizona, for example, a couple who initially agreed to use a major builder's lender decided to switch to an outside lender instead, and for good reason. “The difference on the interest rate was about a full percent,” says Savitt. “But the builder told them they couldn't switch. Well, the home buyers said ‘Baloney,' and went to the closing anyway, on the agreed date, with their own lender. They signed on exactly the date they were supposed to, and had the money, but the builder never showed up.”

Two days later, the would-be home buyers received a somewhat disturbing letter, sent via registered mail. It informed them that they were in breach of contract for not using the builder's lender, and that they had forfeited their earnest money deposit of $11,000. To top it off, the letter threatened to sell the couple's home to someone else. “Needless to say, the couple was frantic,” says Savitt. Fortunately for that couple, though, cooler heads prevailed. After what The Washington Post described as a quiet intervention by HUD's real estate settlement staff, the builder reconsidered its stance, reapplied the $11,000 deposit to the transaction, and even agreed to pay $3,800 to buy down the couple's outside interest rate, which had gone up in the ensuing months. In the end, the couple finally bought the house, using the lender of their choice.


“The builder knew they were in trouble, so they backed off,” says Savitt. “But we see builders all over the country who will tell you, to your face and in writing, that if you don't use their in-house lenders, they won't sell you the house. Period.”

Lending experts and home builders alike say that kind of tactic is clearly illegal under HUD's Real Estate Settlement Procedures Act (RESPA). But they say those kinds of pressure tactics, as well as incentives that strongly steer buyers to use in-house lenders, are widespread in the industry today. And now HUD, with the support of the NAMB, is reportedly investigating complaints about affiliated lending arrangements between financiers and home builders. All of this means that home builders' affiliated lending programs, even the legitimate ones, are quickly developing a bad name for themselves in the eyes of regulators and consumers. Indeed, even professionals within the industry say there's reason to look at them with a jaundiced eye.

“You and I both know that there are larger, qualified lending companies in this industry that will come to you and say, ‘I'll pay you $20,000 a month to ‘rent' the desk in your corporate headquarters,'” says Patrick Malloy, president of Carrollton, Ga.–based Patrick Malloy Communities, which builds approximately 400 homes per year and operates a preferred lending program with Paramus, N.J.–based Opteum Financial Services and Atlanta-based Home-Banc Mortgage. “Well, for us, that's the end of the relationship before it even starts.”

Of course, there is money at stake as well, with in-house and affiliated lending programs resulting in real revenue generation for many home builders, even as they face top-line pressure on the price of their homes in the current market. Given that trend now, observers say there can be even more pressure internally to steer buyers into these programs, especially when proceeds from an in-house program are split between the builder and lending company.

“It's a big moneymaker,” says Savitt. “But they have to charge more to make that money, because there are two parties involved splitting the profits, the builder and the lender.” The problem is particularly vexing for production home builders, who often feel at a loss when it comes to the financing portion of the new-home buying experience, even though that's often the key to closing a deal.