Builders beware: The FBI is looking into 21 companies concerning mortgage and subprime issues, and rumors are swirling that the focus of the investigation is home buyer incentives offered by builders throughout the housing bust.
A Wall Street Journal story in August gave some details of the investigation and named Centex Corp. and Beazer Homes USA as two companies that used questionable incentives. Beazer declined to comment for this story.
While Centex would not say if it is under FBI investigation, the company acknowledges that between late 2005 and June 2006, its Las Vegas division agreed to pay off consumer debts on items such as credit cards, car loans, and mortgages after closing on about 50 homes ranging in price from $350,000 to $550,000. The practice, which was not always disclosed to lenders and was limited to Centex’s Las Vegas operation, was discovered internally in June 2006 and was immediately discontinued.
“These incentives did not reflect our standard corporate practice,” Centex spokesman Eric Bruner says. “Since that time in 2006, we have centralized and standardized many of our business practices, increased training, ensured compliance, and adopted a pricing model that greatly reduces our use of incentives to sell homes.”
Centex has reached out to the investors who bought the loans in question, “and we’ve told them we will stand behind each loan,” Bruner says.
Problems with incentives often begin when decisions about them are made in division offices without legal counsel, says attorney Samuel Alhadeff, a partner in the Temecula, Calif.–based firm Buchanan Ingersoll & Rooney, which represents several public builders, including Centex.
Bruner declined to say if the company did or does now check with its corporate lawyers or outside legal counsel when considering incentives, and he also declined to say if those responsible for the Las Vegas policies were disciplined.
A number of builders, it turns out, may not have been doing their legal due diligence in regard to incentives and have left the door open to government investigations as well as lawsuits from settlement agents, lenders, investors, and home buyers.
Of course, there is nothing inherently wrong or illegal about offering home buyers incentives to purchase a home—as long as the incentives are disclosed to all parties involved in the transaction and are noted on all relevant forms, be it the HUD-1 Settlement Statement or state government–mandated paperwork.
The incentives also cannot be tied to requirements to use affiliated services such as a mortgage broker. A builder can legally offer a cash incentive for using that broker but cannot require use of the broker for the consumer to buy the home. Brokers also cannot kick back money to the builder for referring services unless the builder owns a share of the broker. Referral fees are illegal under the Real Estate Settlement Procedures Act, which is overseen by HUD.
Builders can stray into trouble when incentives take place after closing or are not included in the sales contract or as an addendum. Another problem occurs when the parties involved know they are supposed to disclose incentives but intentionally hide them to artificially inflate sales prices.
“There are some people out there that are intentionally trying to do this,” says Christopher Monahan, an attorney with Morgan Miller Blair in Walnut Creek, Calif. “But there’s also a lack of knowledge. The biggest fear I have for my builder clients is that they might not know that they can’t just offer an incentive to a buyer without actually complying with the [California Department of Real Estate] requirements.”
Unfortunately, says Monahan, he and other real estate attorneys first hear from builder clients only after a violation has been identified. Penalties for violations can be severe. In California, authorities can shut down developments by pulling the permits necessary to sell homes, called “white reports.”
“These are tough times, and it’s understandable that sellers would want to discount their properties,” says Phillip Schulman, partner in the Washington-based law firm K&L Gates. “But they need to be vigilant about making sure that the true transaction is disclosed to all parties—not just the title agent, not just the lender, not just the buyer, but everybody.”
Learn more about markets featured in this article: Las Vegas, NV.