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| `No closing costs' add up fast - Charlotte Observer |
| Posted by Ruth Mitchell (rmitchell) on Aug 11 2008 at 10:41 PM |
`No closing costs' add up fast
When Beazer offers incentives, homebuyers think they'll save money. Some don't.
BINYAMIN APPELBAUM
bappelbaum@charlotteobserver.com
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Beazer Homes USA told Dina Franklin it would pay the closing costs when she purchased a new home in 2003 in northeast Mecklenburg County.
She just had to use a loan arranged by Beazer Mortgage.
Franklin was a single mother with a part-time job and scant savings. She couldn't afford a home on any other terms. She leapt at the deal.
She says Beazer didn't mention that it had charged her an interest rate about 1 percentage point higher than the best rate she could have received. Her loan documents didn't spell it out. She says she didn't learn until this spring that she has been paying about $81 a month in extra interest.
Beazer spent $3,050 on closing costs to convince Franklin to take the loan. It earned $8,920 for signing her at the higher interest rate.
Franklin says she didn't shop around because she trusted the company and believed it was giving her a good deal. Now she is struggling to keep the home.
"They took advantage of a first-time homebuyer," Franklin, 40, said this spring.
Beazer, like most large homebuilders, has a side business in arranging loans for its buyers. The company presents the mortgage arm as a convenience and a way to save money.
But in Beazer developments across the Charlotte area, the Observer found the company took advantage of financially vulnerable, inexperienced buyers through its role as both home seller and loan broker.
As the seller, Beazer won business for its mortgage arm by promising incentives. As the broker, Beazer in some cases recouped those incentives by charging higher interest rates and fees.
In effect, instead of receiving incentives, those buyers were financing their own closing costs. They ended up paying more than if they had foregone the incentives and obtained a lower interest rate from a different company.
An Observer analysis of federal data indicates the mortgage arms of other builders also charged higher rates on average to customers in the Charlotte area than did other mortgage companies. The Observer focused on Beazer as part of a broader investigation of the company's sales practices.
Financing customers' closing costs was among a number of ways Beazer reduced the upfront cost of home ownership by increasing the long-term cost.
The strategy was lucrative for Beazer. The Observer examined two dozen sets of paperwork provided by people who bought homes since 2000 in five local Beazer developments. For every $1 the company spent on incentives -- money that buyers viewed as a gift -- the company made $1.20.
It also allowed some people to buy homes they couldn't afford. At least 11 Beazer developments in the Charlotte area have foreclosure rates at or above 20 percent, the Observer has reported. An Observer analysis shows the financing of closing costs was among the factors associated with an increased chance of foreclosure.
Beazer did not respond to requests for comment. The company has disclosed in regulatory filings that its board of directors is investigating its mortgage practices.
Loopholes in regulations
Significant loopholes in federal mortgage regulations make it easy for any builder with a mortgage arm to lure buyers with illusory incentives.• A builder can advertise NO CLOSING COSTS or other incentives for a customer who uses its mortgage arm without explaining it will charge a higher interest rate to recoup those incentives.
• The mortgage arm must provide a "Good Faith Estimate" of loan terms to allow comparison shopping, but there is no law against being intentionally misleading.
• None of the documents presented to the borrower at closing must clearly state that the loan carries a higher-than-necessary rate.
There is some evidence that suggests builders are taking advantage on a broad scale.
The Observer looked at more than 35,000 government-insured mortgage loans made in the Charlotte area from 1999 through 2004. Because the government promises to repay lenders if borrowers don't, the loans can carry the same interest rates as loans to low-risk borrowers.
The Observer found that loans originated by the mortgage arms of builders carried average interest rates 0.38 percentage points above the market rate, compared with 0.2 points for loans originated by companies unaffiliated with a builder.
The average rate on Beazer loans was 0.5 percentage points above market, the highest for any builder. On a $120,000 loan, that is a difference of about $500 a year in additional interest payments.
The Department of Housing and Urban Development in 2002 proposed closing some of the loopholes in federal mortgage law, but industry opposition ended the attempt. A HUD spokesman said the department may introduce a revised proposal in the near future.
The N.C. banking commission, which regulates loan originators, is examining the practices of builders with mortgage arms, according to Mark Pearce, the head of enforcement. He said his office is responding to numerous complaints from independent companies that the mortgage arms capture borrowers unfairly and prevent free-market competition.
To be sure, builders have no monopoly on surreptitiously charging higher interest rates. Independent mortgage brokers can do the same thing.
Furthermore, builder incentives are often legitimate and can reduce the cost of buying a home by thousands of dollars.
And financing closing costs by charging higher interest rates -- when it is done with the customer's knowledge and consent -- can be an attractive and appropriate option.
Incentives prove lucrative
Atlanta-based Beazer, one of the nation's most prolific builders, in 1996 became one of the last large builders to create a mortgage operation.
Builders moved into the business following deregulation of the mortgage industry, seeing a natural opportunity to make more money from customers.
By 2003, the year Franklin bought her home, Beazer Mortgage was serving 66 percent of the company's homebuyers. It arranged more than 10,000 loans and posted its best financial performance to date, earning almost $2,600 on each, according to the company's filings with securities regulators.
Other large builders were writing loans for as much as 80 percent of their buyers.
The success of the mortgage arms was built on the use of incentives. Federal law requires builders to accept loans from any source. Beazer and other builders offered financial rewards to customers who stayed in-house.
In the Charlotte area, Beazer often offered to contribute a sum equal to 3 percent of the sales price toward closing costs. It would help pay the lawyer, the taxes and other fees associated with buying a home. At times Beazer offered other incentives such as paying the interest on the buyer's mortgage for six months, or cutting the price of a home.
In June, Beazer advertised a special, "Cool Homes. Hot Savings." deal in markets including Charlotte. Buyers who agreed to use a Beazer loan were offered up to $10,000 in upgrades such as appliances or fancy countertops.
Critics say incentives are often a false promise because builders charge higher interest rates to recoup the money spent.
The National Association of Mortgage Brokers, whose members compete directly with the builders' financing arms, wants the federal government to prohibit any incentives tied to the use of a particular lender.
"When the incentives are rolled into the financing, that's when you have problems," said Kate Crawford, a Burlington broker who is head of NAMB's consumer protection committee.
The building industry says companies are simply sharing with customers the money they save by arranging loans, and that the deals are generally good for the customer.
"Nobody is making you buy that house," said Bernard Markstein, senior economist at the National Association of Home Builders, the industry's trade group. And if you do, he asked, "Who's at fault? The company for trying to make an extra dollar or two? Or me for being lazy and not shopping around?" -- Database editor Ted Mellnik contributed.
Binyamin Appelbaum: 704-358-5170
THE HIGH COST OF BEAZER MORTGAGES
Beazer Mortgage's total compensation on the 24 loans examined by the Observer averaged 5.4 percent of the loan amount, about three times the industry average.Some of the money came from "yield spread premiums," collected for charging a higher interest rate.
Some of the money came from discount points, collected for lowering a borrower's interest rate.
Iowa's attorney general has proposed a law, the first of its kind, banning the collection of both kinds of fees on the same loan as inherently against the customer's interest. -- Binyamin Appelbaum
HIGHER INTEREST RATES
In each of the 24 cases examined by the Observer, Beazer collected a bonus called a yield spread premium, which is paid when a customer receives a higher-than-necessary interest rate.
Beazer works as a mortgage broker, matching borrowers with lenders. Lenders make more money from loans with higher interest rates, so they pay bonuses to brokers who charge customers higher rates.
On average, Beazer got a bonus of $2,822 for charging higher interest rates on the loans. In all but two cases, the bonus was paid by National City Corp. of Ohio, the company that approved and funded most of Beazer's loans in the Charlotte area.
Beazer was recouping the money it had spent on closing costs by charging its customers higher interest rates. In effect, instead of receiving incentives, buyers were financing their own closing costs.
None of the 24 said they were aware this was happening.
Federal law requires loan originators to provide a "good faith estimate" of loan terms. Beazer's good faith estimates do contain a standard disclosure at the bottom that "Beazer may receive a fee for ... premium pricing up to 1.625%," referring to the yield spread premium.
But the reference is obscure. Also, in 18 of the 24 cases, the actual yield spread premium exceeded this percentage.
"The yield spread premium disclosure as it currently exists is oftentimes a cryptic reference at the bottom of the good faith estimate," said HUD spokesman Brian Sullivan. "And there's nothing that compels lenders to make a clearer disclosure."
Leasa Wright's experience
Leasa Wright paid $126,149 in June 2003 for a Beazer home in northern Charlotte. The closing costs were about $4,200. Wright's documents show Beazer paid most of those costs on her behalf.
The documents also show that Beazer arranged a loan for Wright with a 6.5 percent interest rate. The market average was about 5.24 percent. Wright says she wasn't told her rate was higher than necessary.
Beazer received a yield spread premium of $7,286 from National City.
Wright was charged about $87 a month in extra interest. She says that she cannot afford her monthly payments.
"It's good you can get a house, but what if you can't stay in it?" she mused recently. "I know so many people that had houses, but they don't have them anymore."
HIGHER CLOSING COSTS
In 20 of the cases examined by the Observer, Beazer collected a fee called a loan discount, which is charged to reduce a customer's interest rate. The Observer found no indication that borrowers' interest rates were reduced in those cases.
Most of the loans Beazer arranged for buyers in the Charlotte area were insured by the Federal Housing Administration, which encourages lending to lower-income families by promising to repay the lender if the borrower does not.
The FHA limits mortgage brokers such as Beazer to a fee equaling 1 percent of the loan amount, the industry standard.
Beazer collected that 1 percent fee. Then it collected a loan discount fee that averaged 2 percent of the loan amount.
The combination netted Beazer an average of $3,311 on the 24 loans examined by the Observer.
Typically, a borrower's interest rate is reduced by up to 0.25 percentage points for each lump sum payment equaling 1 percent of the loan amount. But the loans examined by the Observer carried interest rates at or above the market average despite the discount points.
"Quite often, a discount point in the supbrime market doesn't mean anything," said Kathleen Keest of the Center for Responsible Lending.
She said only one state, Iowa, requires companies that collect a discount fee to tell the borrower how much the interest rate was reduced. She said it was quite common in other states for companies to collect the fee without reducing the interest rate.
Willie McCullough's experiencE
Willie McCullough paid $102,218 in April 2002 for a Beazer home in northern Charlotte. His sales contract shows that Beazer agreed to contribute toward his closing costs an amount equal to 3 percent of the sales price, or $3,067.
That should have been enough to cover all the closing costs, which averaged about 2 percent of the loan amount in North Carolina, according to a 2006 survey by financial Web site Bankrate.com.
But despite Beazer's contribution, McCullough was still charged an additional $4,497 in closing costs, including a discount fee of $4,207, or 4.18 percent of the loan amount. He said the fee was not explained.
In general, it should have reduced McCullough's interest rate by up to 1 percentage point.
But McCullough received an interest rate of 7 percent, about the same as the market average.
BEWARE INCENTIVES
Builders often promise incentives to buyers who agree to use their mortgage arms. But buyers beware: The incentives may not be free. Inside, a closer look at two of the ways Beazer Homes USA recouped money from customers such as Leasa Wright without their knowledge.PAGE 4A.
What are closing costs?
Closing costs are the various fees paid in connection with purchasing a home. These are mostly payments to service providers, such as the mortgage broker, attorney and appraiser. The total also includes a wide variety of taxes and government fees.
The average home buyer in North Carolina in 2006 paid closing costs equal to about 2 percent of the loan amount, or $4,000 on a $200,000 loan, according to a survey by personal finance Web site Bankrate.com.