- The Washington Times - Wednesday, April 13, 2005

Potential home buyers lured by low costs and what appears to be a great deal could find they have been duped, enticed into agreements that compromise their best interests. In real estate, as in any competitive business with major profits on the line, there is always a possibility that an unsuspecting customer could become the victim of fraud or scams.

After a six-month U.S. Department of Housing and Urban Development investigation, HUD accused a group of Oklahoma Realtors, builders and title companies of using simple strategies to skirt the Real Estate Settlement Procedures Act (RESPA), a law meant to protect consumers, HUD officials announced late last month.

The groups joined together to form middle-man companies to cover up referral fees, paying Realtors and builders who steered customers to affiliated title companies, HUD officials claimed.

One of the businesses also padded charges to some clients for undefined services and recording fees, according to a HUD statement issued after the settlement, in which the parties agreed to pay $450,000 and cease any business practices in violation of RESPA.

Although no specific scams have been uncovered recently in the Washington region, experts say area buyers could be cheated if they don’t learn to look for the red flags and avoid questionable practices.

“Sure, there are going to be some people out there who are lying to you,” says Rick Dassler, loan consultant with Family Lender Inc. in Fairfax. “It’s easy to get misled.”

Realtor Cyrus Afshar of Prudential Carruthers in the District says he’s not surprised by the reported kickback scheme exposed by HUD. Although many brokers have similar agreements, known as affiliated business arrangements, Mr. Afshar says, they must be disclosed to the buyer in writing.

“The only difference between this business practice and the one in the HUD press release is transparency,” Mr. Afshar says.

Customers thought they were being referred to the settlement company that best met their needs, when in fact, “the only purpose of the referral was to generate additional revenue for the broker,” he says.

Realtors say buyers who want to understand what’s going on behind the scenes and avoid being victimized need to read the fine print and do their homework.

Mr. Dassler says buyers need to pay attention, ask lots of questions and realize that “nobody in the business does everything for free.”

For example, he says that it is common for builders to legitimately direct their customers to their affiliated mortgage company, enticing the customer by offering credits or upgrades. That doesn’t mean they are offering the best mortgage rate.

“They may incentivize you, but they will make their money,” Mr. Dassler says. “Be careful. Don’t be fooled. When someone captures you, you won’t necessarily get the best rate.”

Any offer that requires a fee to lock in a rate should also raise red flags.

“They can ask for it, but it’s not required,” Mr. Dassler says.

Other traps buyers should sidestep are loan officers who don’t verify financial data and don’t provide automated preapproval to ensure that the loan will be accepted.

Automated underwriting involves “scoring” a borrower using an objective, statistical risk evaluation to determine whether he or she is creditworthy.

“Some loan officers may pre-qualify you, but it’s a waste of time if the loan officer doesn’t meet with you and get the automated approval,” Mr. Dassler says. “It’s a costly mistake.”

(Realtors say pre-qualification means only that a buyer has spoken with a lender and has a ballpark price range. Preapproval means that a lender has certified a buyer’s borrowing power after conducting credit checks and verification, Realtors say.)

Elizabeth Hayes, associate broker and sales manager for W.C. & A.N. Miller Development in Gaithersburg, says another expensive error can come through using Internet mortgage companies.

Mrs. Hayes advises buyers to be cautious when working with Internet lenders offering tempting low rates because the product might also include miscellaneous lender fees, sometimes called “junk fees.”

Mrs. Hayes recommends that buyers work with the lender, inspector and settlement attorney recommended by their Realtor.

“Agents have that knowledge base, and they know who is reliable,” Mrs. Hayes says.

When interviewing a Realtor, buyers should focus on the number of transactions a year the Realtor works on to get an idea of his or her level of experience, says Realtor Ron Sitrin with Long & Foster in the District.

“By choosing experience, you are choosing someone who can see the yellow flags and steer you away from them,” Mr. Sitrin says. “You get the benefit of all of their judgment calls.”

In 10 years as a Realtor, Mr. Sitrin says, he has learned that working with out-of-state lenders can lead to major headaches and extra charges for buyers. Out-of-state lenders may request a transfer-and-recordation tax, which could add up to as much as $10,000.

“It’s best to go with local lenders who are familiar with the local laws and customs,” Mr. Sitrin says.

HUD spokesman Brian Sullivan says that although the agency has ramped up enforcement of laws protecting housing consumers, it is still critical that buyers be self-advocates.

“There is a big ‘buyer beware’ situation out there,” Mr. Sullivan says.

He says buyers often end up paying difficult-to-decipher costs buried deep in legal documents.

Many don’t realize that brokers are compensated indirectly and that payment may not be fully disclosed, he says.

Yield-spread premiums are one way brokers get compensation, Mr. Sullivan says. For selling a more expensive loan, the broker gets a payment of a couple of thousand dollars from the lender. The buyer will make larger or additional payments.

It’s legal, and it sometimes can work in favor of the consumer — if the extra expense is used as a discount or to defray the costs of the transaction, as in a “zero-cost” loan or refinancing. The borrower will have to determine whether it makes sense over the life of the loan to pay a higher percentage rate or to pay the costs of the transaction upfront.

Mr. Sullivan says one way the buyer will know about the charge is the cryptic note “YSP-POC,” listed in Form HUD-1, the settlement statement.

“This is a payment outside of closing, and it is derived from the interest rate the consumer pays,” Mr. Sullivan says.

Mr. Sullivan says another pitfall that buyers often fall into is believing that a good-faith estimate is authoritative, when in reality, lenders do not have to stick to the estimated fees.

He says that to avoid this confusion, buyers should insist on seeing the HUD-1 settlement statement 24 hours before going to closing and should scrutinize it, comparing it with the good-faith estimate.

“It’s your right — exercise it,” Mr. Sullivan says.

Buyers should also know the indirect relationship between the mortgage rate they will pay and the total closing costs, Mr. Sullivan says.

If the buyer is still uncomfortable or uncertain about specific costs when going to closing, Mr. Sullivan suggests, he or she should consult an attorney.

“Nobody has a fiduciary responsibility to you at the closing table,” Mr. Sullivan says. “Hire a settlement attorney — or just say ‘RESPA’ at the closing table and see their eyes get big.”

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