FBI probing builder incentives

Concerned that some incentive programs masked the true price paid by home buyers when pitching lenders to write mortgage loans, the FBI has began its own investigation. From a Wall Street Journal article:

When home sales began to slow at the start of the downturn, home builders offered buyers incentives -- instead of reducing prices -- to stimulate demand. The incentives included cars, tuition and credit-card payments, and even cash. Now, federal investigators are questioning whether some of those incentives misled lenders and caused them to write mortgages that were artificially inflated, contributing to today's home-price crash... Housing analysts say incentive schemes prolonged the housing boom in hot markets like Las Vegas and, consequently, have made the downturn all the more severe.

The FBI wouldn't name individuals or companies under scrutiny, but confirmed that it is looking at cases where the disclosures of incentives "haven't made it all the way to the ultimate lender," says William Stern, financial crimes supervisor for the FBI in Palm Beach County, Fla., and the bureau's former national mortgage-fraud coordinator.

Interviews with real-estate agents, home buyers and former employees at home builders describe an industry where competitive pressures fueled unusually creative giveaways in a last-ditch attempt to prevent price cuts. Home builders hate to cut prices, not only because it reduces profit, but also because their customers who paid full price complain...

There aren't any strict limits on incentives, but they could run afoul of federal regulations if they cause the mortgage to increase by more than the cost of the incentive. "It's a phantom incentive to mask it in an excessive loan," says Brian Sullivan, a Department of Housing and Urban Development spokesman.

Stronger due diligence by banks might have caught some of these problems. Banks, however, say they relied on professional appraisal companies to insure property pricing. Mortgage-fraud experts say appraisers sometimes cooperated with builders because it was the only way to get business. Appraisers say that determining the value of new homes is more difficult because comparable sales figures are provided by builders.

In some cases, developers gave outsized commissions to real-estate agents who then gave that money back to the buyer. The average commission on a home sale nationally was 5.2% last year, up from 5% in 2005, according to a survey by Real Trends, an industry newsletter.

At the height of the real-estate boom, commissions in Las Vegas regularly reached double digits, real-estate agents say. Kurt DeWinter, a Henderson, Nev., agent, received a $70,000 commission on a $550,000 home from Beazer Homes USA Inc. two years ago. He says he gave half of that to the buyer.

The story of builder incentives

My most recent article for the Los Angeles Times focuses on home builder incentives, to be published on July 6, 2008, which you can find online here. For vetting purposes, the Times asked me to verify that I had no builder clients when the story was being researched, written or published, which is true. These days, such clients are few and far between!

When I first pitched it after learning that even builders are confused by what their competitors are doing and referring to other company's tactics as 'gimmicks,' the Times already had a buyer in Orange County willing to be interviewed about his own experience and photographed in front of his new home (which is always by far the toughest part of writing a story) so I thought it'd be easy.

Nope!

Since this was a feature article, I couldn't bring any of my past expertise or opinions to it, but only rely on the facts and statements made by those I interviewed.

To make it as fair and balanced as possible, I contacted almost 10 entities besides the home buyer I interviewed, including the two builders in question, the Building Industry Association of Southern California, a real estate agent who represents buyers and has placed clients in new homes, a design center manager for a third builder, the research companies JD Power & Associates and MarketPointe Realty Advisors and, finally, the Dept. of Housing and Urban Development plus the County of Orange.

However, I've been a bit concerned about this story lately, because it didn't quite turn out to be what I wanted, which was a more balanced story on the pros & cons of how and why builders use incentives to move unsold homes (which can be great things when used prudently), but ended up questioning their very validity.

And why is that? Because I couldn't get either of the builders I contacted, nor the trade group which is supposed to represent them -- the BIA of Southern California -- to comment and, I had hoped, tell their side and explain how incentives benefit the buyer.

For one builder, after being forwarded to several people, I eventually submitted detailed questions in writing to their VP of Media Relations in the hopes of getting a similarly detailed response. For the other, I was referred to their Division President for Orange County after talking to the CEO's office.

And the response from both? NOTHING.

And why was the BIA also MIA on this? Is anyone home?!

For example, I'd imagine that had the builders responded, they would have said that the benefits of incentives for consumers include making homes more affordable through interest rate buy-downs or reduced closing costs, allowing buyers to upgrade to a larger model, move into a more upgraded home than they would otherwise, etc. I'd imagine that builders today treat buyers on a case-by-case basis and that one buyer's experience should not cast a pall over an entire organization. But because that's my assumption and not a fact in evidence, I couldn't write it.

Still, I couldn't simply kill the story because spokespeople were hiding under their desks, as that would then question my own objectivity as a published writer as well as my reputation in general. The story still had to be written, and simply state that they didn't return phone calls and emails to comment. From a PR perspective, I think that's always a mistake, but of course that's also their choice.

Frankly, I was very, very disappointed by the lack of response, and perhaps I was being naive by assuming that they'd be more willing to talk to me on the record versus a staff reporter without past experience in the industry.

Whether that's true or not, I had expected these public builders to explain their business practices regarding incentives during a very difficult time in the industry. They had a great opportunity to do so, but instead they passed.

Do builders need to re-learn PR 101?

A couple of months ago, I had what I thought was a great idea for a story for the real estate section of the Los Angeles Times: helping their readers negotiate the maze of builder incentives being offered at new home communities including upgrades at design centers, payment of closing costs, interest rate buy-downs or even pricing discounts. There's even a website, BuilderIncentives.com, that helps consumers pick their homes based on incentives (not a great idea, in my opinion, since that could mean buyers buy a home they hate but loved the incentive).

Having written a few book reviews and articles for the paper since January, the Times editor was already comfortable with my writing style and agreed that my background in the building industry would be an asset. She even assigned me a homebuyer to interview, who had recently used incentives to buy two new homes at communities in Orange County built by two large builders in Southern California.

"Great!" I thought. "Good, solid companies -- they'll love the chance to tell their side to someone from the industry who wants to write a balanced article."

The buyer told me his story (which ultimately turned out to be positive since he got what he wanted), and afterwards I contacted both homebuilders to comment, thinking I'd get to someone right away or at least a return phone call within a day or two.

I told them that if the story, once published, is re-purposed to other Tribune-owned properties such as the Chicago Tribune, Baltimore Sun and Newsday, that the story could ultimately be seen by up to 3.5 million readers, so this would be a great opportunity for them to explain to potential buyers how and why they use incentives, including sometimes tying incentives to using in-house lenders, how they figure out the total value of a home, what kind of mark-ups are typical at a design center, how a buyer's agent can participate in the process and get a commission, if the incentives make a new home a better deal than a resale, etc. -- in other words, all the things that I'd want to know when shopping for a new home and what questions to ask.

And what have they said so far?

NOTHING.

First, I got shuffled to one person, and then another, and then another. I'm still waiting for a call from a Division President -- perhaps he's busy, but c'mon, THAT busy?

So far, no returned phone calls, no returned emails, and I've been going at this for two weeks.

I can't imagine ever just ignoring a phone call from a reporter for a major daily or a business publication -- while giving a speech a couple of weeks ago, I forgot to shut my cellphone off, and it was a reporter from the Financial Times asking about -- surprise -- builder incentives, and I called him back as soon as I was done. Even if I can't answer the question, I still return the call in order to build the relationship so they'll call me in the future and view me as a reliable source.

My editor says builders are notoriously difficult about commenting to the press about anything (something that's been verified by reporters at other papers). That, of course, reminded me of the PR debacles of WorldCom and Enron, when refusing to comment ultimately meant that they were hiding something, such as billions in write-downs and falsified revenue statements.

While that's certainly not the case for this story, it does beg a question: do builders need to re-learn PR 101? Many of them hire PR agencies on retainer -- but isn't that simply wasted money if they ignore opportunities such as this? I feel sorry for PR people who are ordered to ignore phone calls, because I'm sure that's not what they thought their days would be like when they chose the vocation.

So, until I hear back from either of these large builders, the next time one complains to me about media coverage of new home sales, I think I'm going to tell them this story and ask them to consider just much of the PR damage has been self-inflicted due to simple lapses of common sense -- you know, the same kind that led to purchases of hyper-inflated land.

If I do hear back from either of them soon, I thank them in advance for helping me to write a well-rounded article. Either way, look for it to be published on Sunday, July 6th!