Kick the kickback habit
By Kenneth R. Harney, Special to the Times
Published December 1, 2007
WASHINGTON - Rigged appraisals, lax underwriting and toxic loan products may dominate the headlines, but they are hardly the only issues causing problems in residential real estate.
The federal government and state regulators are targeting other housing-related misdeeds that can cost consumers big money, especially involving under-the-table kickbacks among builders, real estate brokers, loan officers, mortgage bankers and title insurers. Buyers and sellers are rarely aware of the cash changing hands, and as a result they are paying needlessly higher prices for services.
In a little-publicized series of legal moves during the last five weeks, regulators have reached settlements with six major home builders and one of the largest title insurers in the country. Under the settlement terms, the firms are scheduled to pay the government a total of $6.4-million, while denying they committed any illegal acts.
The largest settlement was announced the week before Thanksgiving. First American Title Insurance Co. agreed to shut down 84 "affiliated partnerships" formed in Florida with real estate brokers, mortgage brokers, banks and home builders. Federal and state investigators charged that while the affiliates claimed to be title companies, they were actually referral conduits that performed few, if any, title services. Officials said they existed primarily to steer lucrative title insurance business to First American, which split consumers' insurance premiums with participating "partners."
In effect, according to the investigators, home builders, lenders and realty firms could pocket part of home buyers' closing costs without their customers' knowledge. On paper, the partnership affiliates appeared to be ordinary title agencies, carrying names such as Security First Title, USA Title Partners, Discount Title Services LLC and the like.
But investigators from the federal Department of Housing and Urban Development HUD and Florida insurance regulatory agencies found that "all regular title services required to effect title insurance were performed by First American, not the limited partnership agency," which was essentially a shell entity constructed "to compensate (participants) for the referral of the business."
Payments for referrals of home real estate business when few or no services are performed violate the federal Real Estate Settlement Procedures Act, which is enforced by HUD.
Though no example was provided in the settlement agreement, title company referral conduits often work like this: Say you, the homebuyer, are charged $2,000 for lender and owner title insurance policies. Your real estate agent or broker has partnered with a title company and agreed to steer all his or her business to the affiliate. All the work is performed by the title insurance underwriter, which receives a steady and highly profitable flow of business from the referring "partners." The affiliate may not even have employees or office space.
Revenues may be split according to the size of individual partners' stakes in the affiliate. If the stake is 25 percent, the realty agent or mortgage broker might get $500 out of your $2,000 title insurance premium. If the stake is half, the split might be $1,000.
Buyers typically are provided a disclosure - along with all the paperwork that accompanies a mortgage closing - that an "affiliated business" relationship exists between the realty firm or mortgage broker and the title partnership. But the boilerplate language of the disclosure form does not reveal the magnitude of the financial compensation involved. Otherwise, customers might take their title and settlement business elsewhere and get a better deal, which is their legal right.
The settlements with the six home builders - Pulte Homes, KB Home, Beazer Homes USA, Ryland Group, Meritage Homes and Technical Olympic USA - also involved alleged kickbacks from title insurers. HUD investigators charged that the builders' participation in so-called "captive reinsurance" schemes amounted to illegal splits of homebuyers' insurance premiums rather than actual sharing of risks with the underwriters.
Bottom line: Before agreeing to direct your title and settlement business to an "affiliate" of your realty agent, mortgage lender or builder, shop around for potentially lower fees from independent, nonaffiliated competitors.
Ask the person trying to steer your business to an affiliate: What financial split will you - or your firm - receive from my title insurance premium and other settlement fees? What proof can you offer to me that the fees received by you or your firm will result in savings to me? Or better services?
Participants in legitimate affiliated business partnerships should have no trouble making the case. But it's important to ask the questions.
E-mail Kenneth R. Harney at firstname.lastname@example.org.