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Lawsuit attacks developer/lender cartel! February 8, 2008

Posted by shaferfinancial in Uncategorized.
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Two California home buyers are suing KB Homes and Countrywide Mortgage because they claim the appraisers inflated their home value causing them to overpay for their homes.  I was waiting for this to happen, because for a long time there has been an unholy alliance between developers, lenders, and appraisers.  Here is how it works.  Large developers and large lenders will form a third company (ABA) that allows for the developers to share in the profits from lending.  The developers will encourage folks to use their lender usually by offering incentives.  Friendly appraisers will be lined up that will give maximum value for these new homes.  My experience is that because there are now two companies expecting profits from the loan that the loans are usually loaded with fees and have a above market rate.  The bottom line for customers is that they usually end up giving back those incentives in the terms of the loan.  Ok, so far its legal.  But here is what the lawsuit is about.  After construction is finished an appraisal is required to make sure the value is there for the loan and to determine what the final price will be.  This appraisal is also suppose to protect the buyer from overpaying for the property.  Normally lenders would scrutinize the appraisal to make sure it follows its appraisal guidelines.  But because developers and lenders were in cahoots with each other (in this case KB Homes and Countrywide) the lender did not question the appraisal.  End result is that consumers end up overpaying for their homes and KB and Countrywide end up with large amounts of profits.  In an rapidly increasing market this malfeasance goes unnoticed, but in a stagnant or down market it is a different story.  If this lawsuit is successful I believe it will open up floodgates for other folks. 

Here is the truth.  In real estate deals there should always be independence between the various parties (ie seller, lender, appraiser).

If there isn’t then the temptation for malfeasance is just to high.  If you buy from a developer, always use an independant lender.  Do not…I repeat do not use their lender no matter what they say.  Demand the same concessions they offered to use their lender or walk away.

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