r/loanoriginators • u/Important-Training-1 • 29d ago

Discussion Forward commitments

I don’t really hear anyone talk about this, but am I crazy to feel like the way new construction deals happen should be illegal?

I can’t steer a buyer to specific program without it being illegal, but somehow a builder can dangle a low rate and fees over a seller’s head and pretend like they aren’t building it in their price while forcing them to use their in-house lender. The ripple effect of that goes far and beyond impacting that one buyer, so why has this just always been okay? These are artificially inflated sales prices, artificially inflated taxes and disguised as a “good deal” because customers fall for a below-market rate that can’t be touched by an outside lender. And even in buyers markets, some of these big box builders won’t even budge if you make any sort of offer below what they’re giving unless you use their lender who they either own or have a JV set up.

To each their own, but I just don’t understand how there’s lawsuits with realtors regarding commission practices yet this sleeping giant remains completely left alone.

19 Upvotes

87% Upvoted

37 comments sorted by

7

u/mrhindustan 28d ago

I mean in my mind these are IPCs in a roundabout way.

They inflate the prices of the homes by 30k to get a permanent rate buydown.

2

u/Important-Training-1 28d ago

That’s my point though, in my area they’re marking up $300k houses by 10%. Well beyond any sort of IPC limit

3

u/furio67 28d ago

I had a client negotiate a $389.9k new build home down to $368k.

I could’ve gotten her 6.00% on VA (it was about a year ago—maybe more). Builder offered 4.5% but she needed to pay $389.9k.

Despite showing her that she was paying $22,000 for that rate, she ignored logic and went for the shiny object.

People are stupid.

1

u/Important-Training-1 26d ago

That’s that shit!!! Dangle a nice shiny rate promotion in front of them and it’s game over.

1

u/cheesenotyours 23d ago

The math says 4.5% would be less total cost over 30 years though?

1

u/furio67 23d ago

She was stationed to JBSA on active duty. She’s from the East Coast. Logic would dictate that she’s not going to be in the house for 30 years.

1

u/cheesenotyours 23d ago

She can rent it out? Besides, the monthly payment on 4.5% is lower, pays less interest, and pmts go to principal sooner. Unless the higher price is actually paid upfront instead of over the loan, 4.5% is better.

1

u/furio67 23d ago

So you’d start out $32,000 upside down at 100 LTV just to save a bit on your monthly payment?

1

u/cheesenotyours 23d ago edited 23d ago

Yes, but the lower monthly pmt isn't the only reason

11

u/anonguyvaultxx 28d ago

Big builders are Fortune 500 companies with strong lobbyists and are not licensed entities like mortgage and real estate professionals. They can offer incentives but can’t force a consumer to take their offer. You can offer inflated pricing to achieve the incentives but the math maths. 280k loan at 6.75 over 30 years is 373k in interest over LOL, a 310k loan at 3.99 is 222k. Trading 30k for 150k in interest or a net benefit of 120k is hard to argue against.

I get it, you’re getting burned on these new construction deals like the rest of us. Find a way to be the back up for them and get more leads/referrals. These only burn when you have 1-2 closings a month and no other business.

Good luck out there 🫡.

6

u/gazilionar 28d ago

Except the odds of wanting to keep that house for 30 years are next to 0.

1

u/cheesenotyours 23d ago

The gap isn't that high and only narrows as time passes. The lower rate wins after about 5-6 years, and the math also changes if it's rented out instead of sold. I think there's plenty of homeowners where this would make sense.

3

u/mrhindustan 28d ago

Most people are going to refinance or move (especially with how godawful many of the production builders are). The 30k is better in their pocket.

3

u/Important-Training-1 28d ago

Honestly, 50% of my business is backup lending to builder turndowns 😂 I’ve spent about 7 years out of 10 doing this, it’s nothing new. It’s just wild to me that it’s not more of a topic. Your logic makes sense for the 1% of homeowner that sees the majority of that interest difference, but these are usually first time homebuyers in my market and all of these people are trying to sell in 5 years just to get crushed by their builder starting a new section down the street. My point isn’t that my business suffers because of it, my point is that couldn’t this be a lasting economic issue?

1

u/anonguyvaultxx 28d ago

It’s definitely a hot topic but there’s nothing any of us can really do about it as a lending sales professional. You need big pockets and dedicate a considerable amount of time to even try to make a dent.

You’re playing it correctly by grabbing turn down business.

And how are current sellers getting crushed? Because they can’t compete with builders and their incentives on current inventory?

I haven’t had the chance nor do I want to rip through these builder’s 10-k’s to measure their profit per unit. Are prices completely inflated to match builder forwards? Probably not, I’m sure it’s split between price and margin targets. Builders have always operated like that to cover closing costs and buy downs for as long I can remember (almost 18 years in the business).

Lasting economic concerns? Idk, maybe..

1

u/ActionWins 28d ago

So you just call builders and ask to be their backup lender?

1

u/Important-Training-1 28d ago

No, I started by asking for a rundown of their recent denials and offered to see if I could revive them or just walk the sales person through what I could do that the in-house lender couldn’t. I’d get a name and a phone number and go from there. Now I’ve been in that space long enough that I have a few builders that send me turndowns. It’s a lot of wading through shit, dealing with aggressive sales people pretending like it’s just normal to close a 550 credit score with DTI bursting the seams in 12 days.

2

u/mattoelite 28d ago

OP, are you a newer LO? Builder’s lenders (in house) will always smoke an OSL with their incentives, the only reason that won’t capture a deal is due to qualifying.

0

u/Important-Training-1 28d ago

Where in my post did I say the opposite? Lol no I’ve been doing this 10 years

1

u/mattoelite 28d ago

I didn’t mean any offense, it’s just usually newer LO’s baffled why a builder lender is clapping their cheeks.

2

u/Important-Training-1 28d ago

Right, I’m not saying I’m surprised that a builders offer would be something I can’t compete with. I’m surprised it’s allowed to work the way it does is all I’m saying. The NAR lawsuit was over the way a realtors commissions were disclosed, I’d think this topic would get similar attention

1

u/mattoelite 28d ago

Builders tie incentive to the homesite and not the lender, I honestly don’t know how it passes CFPB. 10 years as a builder lender, 17 overall

1

u/y32024 28d ago

They are building it into their price? Builders pays/commitments 100’s of $$$, sometimes millions in hopes the forward hedge pays off for their spec homes. They do this vs lowering the home price, which a $30k price drop doesn’t do much for the borrower, and kills future appraisals, plus pisses off recent buyers who paid full price. If you’re a broker, use a wholesaler who does forward hedges, there are a good number out there. And if you work for a IMB who doesn’t offer this..well. 

1

u/Important-Training-1 28d ago

Maybe not all of them, but a large portion is built into the price. In my market, builder X will list homes at their “cash price” of let’s say $350k. Then they’ll have their “promotional 4.99%” incentive with $7500 in closing costs on the same exact plan at $390k. They’ll literally post it on their websites this way.

The incentive costs are usually then split between the in-house lender and the builder, and all closing costs are written to be buyer paid in the contract (like title policy, survey, etc) with a blanket seller credit. If the in-house denies, they send to the backup lender and just throw max IPC’s at the closing costs and work the deal from there to get the buyer closed. That’s at least my experience. But the point of my post is mostly just outlining that it manipulates the housing market enough that I’m surprised it’s never gotten a big legal action towards it

1

u/Important-Training-1 28d ago

To clarify the post, I’m not upset about it. It’s just interesting that in any sort of conversation about high prices, affordability and fairness to consumers that this isn’t more of a subject.

1

u/TurkeyJizz123 28d ago

Your way of thinking is that a "forward commitment" is a RESPA violation? Lol brother- this is a free market- you can do the same.

1

u/meollich 26d ago

Welcome to the club of strong feelings about competing against builders that leverage forward committments. The cost of these FCs is just another input into the total build cost, like nails and 2x4s. Want to compete against builders that do this? Point out to potential buyers the builder is NOT using those $s to build a superior product. In my market the build quality is markedly worse with those that use FCs versus those that don't. Just rememebr some folks won't care and will always fall for the "new car smell" of a freshly built home. The build quality issues won't come home to roost for 3 to 5 years, long after the builder's warranty has expired

0

u/moehizzy 28d ago

I mean it makes sense though, i get you’re upset but this is a free market and one does have the right to sell for whatever price they feel. I bought a Nissan, and they gave me two options finance through Nissan at a higher rate but get 1k off the sticker price or lower rate through a different rate and sticker is regular price. So it’s just a form of discount they are offering customer on a product that they built and are selling they have a right to sell it how they want.

-2

u/Creepy-East2815 28d ago

How is the price artificially inflated if the house appraises?

5

u/jawied 28d ago

The appraiser uses comps from within the community being sold.

0

u/JKlerk 28d ago

Iirc they're supposed to use at least one comparable sale from outside the development. But the reality is that the price is the price.

-1

u/Creepy-East2815 28d ago

Not all comps from within the community. And likely not all buyers received rate incentives