Incentives Add to Overinflated Loans

The Justice Department has opened an investigation into the mortgage incentive programs offered by many homebuilders.

By: James R. Lindamood

At the start of the economic slowdown, when house prices started falling slightly, and sales stagnated, developers began offering many incentives to prospective buyers. These incentives, it turns out, were not only in-lieu of lowering prices, but perhaps were a violation of the law, as well.

Federal investigations have announced that they are investigating several individuals and companies that are suspected of defrauding lenders, by adding incentives to home purchases that, in some cases, topped $100,000. There were many different types of incentives, and they included for instance cars, paid-tuition, and even paying credit card balances. These items artificially inflated home prices as, in many cases, developers rolled much of the cost of the incentives into the price of the home.

With the housing crunch appearing to level out in many areas, federal regulators are seeking not only to prevent such actions in the future, but perhaps to punish those that may very well have contributed to the problem. While the process is completely legal, as long as it is properly disclosed and regulated, many of the incentives and loan-amount increases were never disclosed, or subjected to oversight.

While it’s admitted that lenders could have avoided the problem by doing proper due diligence when making the loan, the lending climate at the time wasn’t conducive to it; huge numbers of people were applying for, and receiving home loans.