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FBI Probe into New Homebuilders Incentive Programs

Some of the most common sale pitches of today from new homebuilders goes something like this: “You buy in we buy down 4.125% APR * A New Car * Huge Buyer Incentive * Special Financing “ or “$10% Agent Bonus”

New homebuilders incentive programs are across the board, all over the country. Customarily incentives include artificial price reductions, an agreement to pay closing costs and upgrades on floors/interiors, or a combination of the three. Nowadays, builders are using more attractive bait to aggressively shrink their inventories. They are offering incentives ranging from Harley-Davidson motorcycles to swimming pools to cash handouts. In Boca Raton, Gordon Homes has offered to pay two years of property taxes and insurance worth as much as $150,000 on a $2.5 million home at its upscale Azura development.

Many builders claim to have reduced home prices by as much as 20 to 30% for their original asking prices. However, the buyer cannot be sure if this is actually accurate if the price was inflated to begin with.  With any outlandish claim, the buyer should beware.  New Homebuilders are serving up programs with rates hovering around 4% for a 30-year mortgage. But the deal has a catch: The buyer must use the builder’s preferred lender in order to cash in. Critics say the lower prices and “too good to be true” incentives demonstrate just how much builders were over-charging for new homes during the boom.

According to the Department of Housing and Urban Development, the downward trend in the housing market has provided the ideal climate for mortgage fraud. Analysis of data collected by federal law enforcement and industry resources determined the states that were most affected include Nevada, California, Michigan, Texas, Ohio, New York, Georgia, and Florida. The schemes include builder-bailouts, seller assistance, short sales, foreclosure rescues and identity thefts exploiting home equity lines of credit. Now the FBI has launched an investigation into allegations that homebuilders, brokers and appraisers defrauded lenders by failing to disclose unusually large incentives to buyers, which could increase the price of a home by $100,000.

According to a Wall Street Journal Article, recently, Brian Sullivan, a spokesman for the Department of Housing and Urban Development said this about excessive builders incentives, “It’s a phantom incentive to mask it in an excessive loan.”

Granted, there aren’t any strict limits on incentives, but they could conflict with federal regulations if they cause the mortgage to increase by more than the cost of the incentive and, if buyers are getting cash kickbacks. The FBI warns buyers to deal only with reputable individuals and/or companies they know they can trust. One count of mortgage fraud offense carries a penalty of up to 30 years.

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