Interest Rate Roundup

Friday, May 23, 2008

WSJ and home builder incentives

The Wall Street Journal covers the aggressive, renewed use of incentives by new home builders. An excerpt:

"Highlighting their desperation to sell houses, builders are bringing back the gimmicks -- mortgage rates that start low, help with down payments, zero out-of-pocket expenses -- that helped fuel the housing bubble before it went bust.

"But this time, they say, history won't repeat itself.

"This weekend, Lennar Corp., the nation's largest builder by revenue, will start interest rates at 2.88% for the first year -- 3.88% for the second -- before a slightly higher rate locks "for life." In some markets, Ryland Group Inc. will cover the down payment and closing costs, while KB Home has zero-down deals. Hovnanian Enterprises Inc., meanwhile, also is helping buyers secure down payments, and its mortgage subsidiary eliminated loan closing fees.

"Builders, trying to survive the worst downturn since the Depression, must move inventory quickly to bring in cash: Stung by eroding land and house values that show no sign of stabilizing, the nation's top builders have racked up more than $24 billion in impairment charges, according to Standard & Poor's.

"Builders acknowledge things are tough, but they promise they are being responsible: To keep people out of houses they can't afford, they are scrutinizing income and credit scores and making sure loans don't reset with unbearable payments."

I would argue that the incentives never really went away. I've seen builders continue to offer all kinds of sweeteners to drive traffic. It's worth noting that the fine print (and sometimes, the big print) in advertisements has shifted. Many offers are dependent on the ability of the borrower to obtain FHA financing, rather than private mortgages. Some deals assume the involvement of down payment assistance programs, which are somewhat controversial in their own right.

For example, here is the disclaimer language from an offer being touted in my neck of the woods:

"$0 down offer assumes buyer will qualify to obtain down payment from a non-profit down payment assistance program. Funds to cover closing costs paid by seller as defined on your good faith estimate, are subject to seller contribution limits and do not include prepaids. Offers, incentives and seller contributions are subject to certain terms, conditions and restrictions and are available only to qualified buyers financing through Universal American Mortgage Company and closing with designated closing agents. Lennar reserves the right to change or withdraw any offer at any time. $0 down/$0 closing costs offer is only good on inventory homes that sell and close by 5/30/08 and can only be used with FHA loans."


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