On the House: Builder, buyer, lender, law

It's time to get technical, only because it will explain something the federal government wants to do, and why it's riling home builders.

I'll start by explaining RESPA, the Real Estate Settlement Procedures Act of 1974. RESPA was the government's effort to protect consumers by regulating the disclosure of all costs and business arrangements in the settlement process.

Though it has been tinkered with over the last 34 years, to clarify the definition of "business arrangements" as the industry evolved, RESPA is stuck in a time warp.

The law is enforced (or ignored) by the Department of Housing and Urban Development. Every time a new HUD secretary takes office, he or she promises to reform RESPA. When the reforms are proposed, the real estate, home building and lending industries all raise objections to just about everything - even though they also oppose the status quo - and we end up with, substantially, the Real Estate Settlement Procedures Act of 1974.

Before we disclose whom HUD is riling these days, we need to mention that megabuilders and real estate giants don't make much money on the plain-vanilla home sale, even when sales volume reaches boom levels. They make their money from ancillary businesses - primarily mortgages and title insurance.

HUD, which is being pressured by Congress to rein in mortgage lending, wants to prevent home builders from offering incentives in exchange for a buyer's use of the builder's affiliated mortgage or title companies, or any other affiliated business for that matter.

This proposed change isn't coming out of the blue. As far back as 2006, HUD began receiving consumer complaints that some builders were increasing their prices when buyers declined to use their mortgage companies.

HUD also heard talk that those "incentives" for using the mortgage or title company would have been part of the deal otherwise. In addition, the department was told that the bill for those incentives was actually paid by the buyer in higher fees and interest rates.

The National Association of Home Builders counters that HUD "has failed to provide any empirical studies or other statistical information to validate its position that consumers are harmed by using builder-affiliated service providers."

Builders can document hundreds of sales that were to have been financed by outside lenders, but that failed to take place as promised and "were subsequently 'saved' by the builder's affiliated mortgage and title company at the 11th hour," Debra Still, president and CEO of Pulte Mortgage L.L.C. in Englewood, Colo., testified last month before a House subcommittee.

"Under market conditions that have prevailed during the past year, where financing has become unstable and uncertain, these relationships have taken on greater importance," Still said.

It's good to see HUD finally moved to action. But without proof of builder abuse and in an economic downturn, it just looks like a bunch of meanies.