Homebuilders and Communities

Home builders say they are the victims of the housing crisis. But the reality is that many of the large corporate home builders played a leading role in creating this current mess. Builders kept building, kept buying land, and kept pushing their mortgage products, even after it was clear that demand was slowing down. In the process, they did little to stop speculators and investors from snapping up property and driving up pricing for everyone.

Home builders should be in the business of building communities, not wrecking them. Unfortunately in a short-sighted pursuit of profits, many builders have taken the low road.

Excess Inventory

Builders continued to flood the market with new properties even after it became clear that demand for new homes was slowing down. According to the CEO of the National Association of Home Builders (NAHB), "There were some builders [who] were probably overly aggressive. There's no question about that." The NAHB CEO noted that during this time, “Economists were starting to say this is a cynical business and we are going to get into a downturn. But some guys were chasing the gold and pursuing the brass ring, and they didn’t heed the market warnings as quickly as they should have.”

Speculators

Homebuilders underestimated how speculative investors were inflating the market and didn’t do enough to keep them from leveraging inventory. NAHB’S CEO said, “For the first time that I can remember, you saw investors coming into the housing markets and trying to play it almost like a day stock.”

Mortgage Lending

There was a dramatic increase of large home builders use of their own mortgage subsidiaries. In order to qualify buyers for homes at the inflated prices, the builders’ mortgage companies became increasingly reliant on the types of predatory and risky mortgage products that have come under so much recent scrutiny, such as adjustable rates and stated income, or piggy-back loans with high cost second mortgages. For instance, 40 percent of the mortgages made by Richmond American’s lending affiliate HomeAmerican Mortgage were interest-only ARMs.

Not only did home builders and their mortgage subsidiaries act irresponsibly, at times they acted unlawfully. In 2005, KB Home paid a record $3.2 million to settle charges regarding its poor underwriting practices such as approving loans to borrowers who were not eligible, approving loans based on overstated or incorrect income and other issues. The FBI and SEC are currently conducting probes into dozens of other home builders and lenders.