Home builders tapped their feet on the brakes in March following an upwardly revised February housing starts number that was the highest in 32 years and the highest-ever recorded figure for single-family housing starts, according to Commerce Department data released today.

“It’s been a phenomenal first quarter for home building, marked by robust buyer demand and the best production pace in decades,” said Dave Wilson, a custom home builder from Ketchum, Idaho and president of the National Association of Home Builders (NAHB). “The March slowdown is a good sign that builders are exercising caution to keep the market healthy and inventories at a reasonable level, and many companies are taking steps to limit sales to speculators. Meanwhile, builders remain very upbeat about their prospects in the months ahead.”

“The March decline in housing starts was, to some degree, weather-related,” added NAHB Chief Economist David Seiders. “A sizeable decline in the South region (the nation’s largest housing market) followed a surge that was related to rebuilding in the wake of last fall’s hurricanes, and late-winter storms apparently held back starts in other areas as well.”

Seiders noted that, “Looking at today’s permit numbers, which are a better indication of the market’s current condition than starts, the picture seems much brighter. Also, if you look at the backlog of units that have been permitted but not yet started, and the latest downshift in long-term mortgage rates, the upside potential for housing starts appears good for the immediate future.”

Starts were down 17.6 percent to a still-solid seasonally adjusted annual rate of 1.84 million units in March. Single-family starts declined 14.4 percent to a 1.54 million-unit rate. Meanwhile, multifamily starts, which tend to fluctuate more significantly from month to month, declined 31 percent in the latest report following exceptionally high activity in both January and February.

Three out of four regions recorded double-digit declines in housing starts this March following big numbers in the previous months. Starts fell 29.3 percent in the Midwest, 18 percent in the South, 12.7 percent in the West and 3.6 percent in the Northeast.

Building permits recorded a more modest decline of 4.0 percent, remaining above the two-million unit mark for the ninth consecutive month. Single-family permits were down 5.4 percent while multifamily permits eked out a 1.1 percent gain in March. All but one region posted declines, with the Northeast showing no change in the level of permit activity and the Midwest, South and West reporting 11 percent, 1.8 percent and 4.2 percent slowdowns, respectively.

NAHB forecasts show 1.92 million housing starts for 2005 as a whole, down 1.4 percent from 2004’s total. “That 2005 performance could be even better if the interest rate structure moves up less than anticipated,” said NAHB’s Seiders.

If you’re buying a home, shop for a loan first. Once you put an offer on a house, you may have little more than a week to get a loan. You’ll want more time than that to decide which product you want, get an estimate on how much you’d qualify to borrow, and locate the four or five cheapest lenders. Do these things ahead of time. Then when you locate the house you want, you can update the quotes and apply for the loan.

Get the right loan: A poor choice of fixed versus variable, long versus short, etc., can cost you more than the extra fees or percentage points you might pay to get the right loan.

Do your homework: With so much of your money at stake, you should leave no stone unturned in your hunt for a new or replacement loan. You can get mortgages from banks, savings and loans (thrifts), mortgage brokers, mortgage banks, mortgage-finance companies, local mortgage brokers and credit unions. There’s no easy rule for which one will be better, so check them all.

Go online: The Internet is home to any number of mortgage calculators and shopping services. You can tally exactly what you’ll qualify for, compare various loans, and even apply online at some sites. Some useful sites are: Encompass Mortgage.com, EncompassRealty.com, E-LOAN, GetSmart, HSH Associates, Lending Tree and Quicken Loans.

Limit add-on costs: Lenders must give you a good-faith estimate of your loan’s cost when you first apply for it, but they might not include all the fees they may charge. These fees can add up. Try to get a copy of your closing statement one day before settlement, so you have time to dispute annoyances such as photocopying charges and long-distance telephone fees.

Most lenders charge:

Appraisal fees averaging $350
Credit-reporting fees averaging $25
Document-preparation fees averaging $595
Application fees, when they’re charged, averaging $399

The winner is usually the most qualified buyer who offers the best price with the fewest strings attached. A clean offer is one that is not loaded with contingencies (conditions that must be satisfied to complete the sale). One way to put yourself ahead of the pack is to satisfy as many conditions as possible before presenting your offer. For example, you may not be able to receive complete approval for financing, but you can get pre-approved for a loan. Find out as much as you can about the sellers and their situation. If you meet the sellers, let them know how much you admire their home. (When you are in competition with other buyers, there is no point in putting up a poker face.) Sellers can be swayed by emotional appeal, particularly if they are weighing several similar offers. Try to stand out from the pack. Have your agent include a written biographical and financial sketch of yourself with your offer.

Johnny Bell had a new deck and other home improvements in mind when he refinanced his home in Oxford, Miss., last summer.

Make that almost refinanced.

Bell spotted attractive terms on a television ad, contacted the lender and locked in a cash-out refi at 5.125% with $350 upfront as a processing fee toward a 45-day closing.

Then trouble began. First, the company delayed the closing, saying it was behind on the paperwork. Then it asked for proof of reserve funds and Bell complied. After 90 days, the company informed Bell that his “locked” rate had gone up to 6.2%.

“I got angry,” Bell recalls. “I told them I was definitely not paying more interest. They started making excuses for why it had taken so long, putting the blame on Fannie Mae for requiring the reserves. But the interest rate didn’t have anything to do with the reserves.”

After two more months of futile telephone calls, Bell walked away from the deal, received his $350 back and built his deck out of pocket

It was bait and switch,” he said. “It took me five months to not refinance.”

Signs of a bad loan
Bell’s experience isn’t isolated. For the last couple of years, low interest rates, aggressive marketing tactics, scant industry oversight and investors who want to put their money into real estate instead of the stock market have contributed to the ideal operating environment for predatory lenders.

In many cases, it’s all too easy for a trusting homeowner anxious to leverage a home’s value or lock up a low rate to fall prey to less-than-upfront lenders. W.C. Fields maintained that you can’t cheat an honest man. But when it seems that everyone is getting a loan and you’ve been promised rock-bottom interest rates and negligible fees, it’s hard to resist.

Some deals, however, are indeed too good to be true.

According to the Federal Trade Commission, you may be signing on for trouble if a lender:

Encourages you to falsify your application information to get the loan.
Urges you to borrow more than you need.
Pushes you to accept payment terms that you can’t realistically meet.
Fails to give you the required disclosures (e.g., APR, rescission rights, etc.).
Shows up at closing with a totally different loan product than you agreed to.
Asks you to sign blank forms. ("It’ll speed things up. We’ll fill in the blanks later, trust me.")
Denies you copies of documents you signed.
And if you miss a warning sign early in the process, a bad loan often resembles the Tar Baby from an Uncle Remus story: The further in you get, the harder it can be to get out. Bad lenders are counting on the likelihood that the farther you travel down the loan-process road, the more you will have invested in earnest money, deposits, inspection fees, design plans and contingencies that accelerate your momentum to close.

Chicago real estate attorney Tom Polinski recalls a recent closing where the buyers found out that their lock had expired four days earlier and their interest rate would be 1.5% higher.

“We were at the closing table, and they didn’t want to walk away. Had they done that, they would have been in breach of contract and the seller would have had to decide if he wanted to sue them for specific performance because he, in turn, was buying another house. You always get that domino effect. It would have been a mess,” he says.

With little recourse, the buyers settled for a $750 reduction in fees and closed, vowing to refi at the earliest opportunity.

“I see a lot of it,” Polinski admits. “I can’t tell you the last time I went to a closing where the buyer has known a reasonable time in advance, even 24 hours or more, what their bottom-line closing costs were going to be. The lenders are notoriously slow in getting those figures to the closing, so we have to try to estimate what the buyer is going to need. And estimate on the high side, because if it’s short, they won’t let you close.”

Preying on the powerless
Predatory lending practices are most visible in the subprime market, which serves lower-income individuals with credit problems.

Respectable subprime lenders serve an important social function by offering credit on fair terms to individuals who otherwise might never be able to build home equity. Predatory lenders, however, are a scourge on these same neighborhoods, taking advantage of elderly, less-educated and non-English-speaking individuals by offering egregious loan terms that would drain equity and eventually lead to foreclosure on their homes.

Norma Garcia, senior attorney for the nonprofit Consumers Union, has been fighting for more than a decade to stop predatory lenders from preying on the powerless. In her March testimony before the House Committee on Financial Services, Garcia expressed concern at the tremendous growth of the subprime market in general and subprime refis in particular.

Nationally, subprime originations increased from less than 5% ($35 billion) in 1994 to nearly 13% ($160 billion) in 1999. The predatory hot spots, Texas and California, were even worse: Texas subprime refis grew from 6% of all refis in 1997 to 33% in 2000, California subprime lending grew from 4% in 1993 to 20% in 2000.

“Not all subprime loans are predatory,” Garcia points out, “but virtually every predatory loan we have seen is a subprime loan.”

That’s because shady lenders, like predators everywhere, tend to target the easiest prey, people with poor credit who have few other options. But Garcia notes that individuals with spotless credit also fall victim to bad loans.

“Loans that are good subprime loans might in another sense be predatory for someone who has good credit. We see this a lot among the elderly and in communities of color – people with perfectly good credit who don’t have a sense of what’s happening out there in the lending world,” she says.

Garcia says that to simply spout “buyer beware” isn’t enough.

“There are definitely people who are ripping others off. To the extent that there are individuals who are being placed in loans with interest rates and fixed fees that are much higher compared to that person’s credit-risk profile, that should be a crime,” she says.

“Some states require lenders to put borrowers into the best loans for which that buyer may qualify. We would love to have that be extended to all loans, but it isn’t and there is a lot of resistance and pushback from the lending lobby to protect against new laws aimed at regulating the industry.”

California is currently in the midst of a test case to see if a weaker state anti-predator statute should supersede a tougher ordinance passed by the city of Oakland that fills in the gaps left by the state law. Garcia has similar concerns about any minimum industry standards that could one day be forthcoming at the federal level.

“We can see that minimum standards might be a good thing, but we don’t want to prevent states that have serious problems from closing the gap,” she says.

Firing the ‘bad actors’
The mortgage industry has dug in its heels against government regulation at any level that would restrict access to credit.

A.W. Pickel, president of the National Association of Mortgage Brokers, says a few “bad actors” shouldn’t spoil it for an industry that is committed to providing as many financing options to as many customers as possible. In addition to calling for more pre- and post-license training, NAMB has put forth its own solution to the predator problem.

“We promote the ability to do a national registry that would basically keep bad guys out of the business,” he says. “For instance, we now actually register every loan officer. Unfortunately, we don’t register loan officers inside a bank. So you could have a bad actor who would be working for a licensed broker or mortgage broker but then they go to a bank and they don’t have to be licensed.”

Although Pickel admits he would never use an online lender, he defends their right to peddle their products. The problem, he says, is not the shady deals, but the public’s inability to accept what mortgage brokers take for granted: If it seems too good to be true, it probably is.

“What amazes me is that people don’t use their common sense. Somehow people think that this person who is giving them 5% is telling the truth when everybody else in town doesn’t have it. You ought to call guys in your local community and check their references. Even in your own community, you want them to put it in writing. You want them to stand by their word.”

Given how easy it is to get skinned on a mortgage deal, it’s amazing anyone ever buys a home.

But buy we do – and then refinance, and refinance again. Our ignorance of how the mortgage process works and the many ways mortgage pros rig the system in their favor lead many of us to pay far more than we should.

However, the more you know about common mortgage rip-offs, the better armed you’ll be to negotiate a good deal. Here are some of the most common ways that mortgage lenders and brokers dupe their customers, and what you can do to avoid being taken:

I’m not going to honor your rate lock.
When interest rates are volatile (and when are they not?), it can be smart to “lock in” a rate so you don’t face a higher payment if rates rise during the time it takes to process your loan paperwork. A lock is a commitment by a lender to provide a specific rate for a specific time, often in exchange for a fee.

lending officer or broker may imply, or even state, that you’ve got a lock. But a verbal promise is worthless.

“Get it in writing from the lender,” advised mortgage expert Diane St. James, a consultant and underwriter who runs ABC Mortgage Consulting. “If you end up going to an attorney, you’ll want to have something on paper.”

Even if you get a written commitment, though, you’re not out of the woods

You know how the cops on “Law & Order” sometimes “lose” suspects’ paperwork to keep them jailed a little bit longer? Unethical lenders do something similar if they don’t want to honor their commitments. It’s called “running out the lock,” or delaying the loan’s closing until the lock expires and you’re faced with accepting a higher rate.

“If rates go up, they run out the lock,” explained Michael Moskowitz, president of Equity Now, a New York-based mortgage lender. “If rates fall, they honor the lock.”

How can you protect yourself? Some suggestions:
Get referrals. Find out which companies your friends used and whether they were happy with the service they got. Picking a broker or lender at random, using phone books or advertisements alone is just asking for trouble.

Check them out. Look up their complaint records with the Better Business Bureau and your state regulators. (Brokers and lenders are typically regulated by state departments of real estate.)

Get your paperwork in on time. Don’t give them excuses to stall. For more details on what you’ll need to have ready, see “7 secrets to refinancing on the fast track.”

Raise Cain. If it looks like your lock will expire before your loan is funded, demand to speak to a supervisor and mention you’re going to complain to state regulators if your lock isn’t honored. You also might suggest your attorney is going to get involved. Kicking up a real fuss may be enough to convince them to stop playing games, at least with you, Moskowitz said. “Why pick on you,” Moskowitz said, “when there are a lot of other people to pick on?”

I’m getting a bonus for putting you in a more-expensive loan.
This little scheme can work a lot of different ways, but here’s one of the more common ways it plays out:

You call a broker and are quoted a rate of 6.5% with no points on a 30-year fixed rate mortgage. By the time you’re ready to lock in, the lender’s rate has dropped to 6.25%. But the broker doesn’t tell you that, and instead locks you in at 6.5%. As a ‘thank you’ for selling the more-expensive loan, the broker gets a payment of a couple thousand dollars from the lender, and you get stuck with higher payments.

Amazingly, this is usually legal as long as it’s disclosed in your paperwork – but you typically don’t get the notice until your loan is about to close, and the disclosure is usually buried deep in the legalese.

Lender payments to brokers for selling higher-cost loans are known as “yield spread premiums,” and they’re incredibly widespread. One Harvard University professor who has studied the issue, Howell E. Jackson, estimated that these premiums affect 85% to 90% of borrowers and average $1,850.

Brokers insist this is a legitimate way to do business and cover their costs. But consumer advocates say, at the very least, that they should be better disclosed.

The best way to protect yourself from the most egregious overpayments is to do lots of footwork:
Know what a competitive offer looks like. The loan savings calculator at MyFico.com can give you a rough idea of what rates to expect, given your credit scores, while quotes from online sites like ELoan and LendingTree can give you detailed information on the going rates and fees.

Get all your quotes on the same day. Rates change constantly, and a quote that’s good today probably won’t be comparable tomorrow. Also, rate-shopping over an extended period can hurt your credit score.

Ask lots of questions. If you’re working with a broker, the National Consumer Law Center recommends you demand to know how much the broker is making from the lender as well as from any fees you might be paying. It’s best to get this information upfront and in writing. Avoid a broker who’s double-dipping: getting a fat premium from the lender as well as fees from you.

You’ll never get the low rate I advertise.
If you’ve done your footwork, you should be able to tell when a rate is too good to be true. If a lender is offering a rate considerably below the competition, there’s going to be a catch like high hidden fees, a teaser rate that quickly expires or super-high credit standards that few borrowers will meet.

Again, the best way to find a square-shooter – and a good deal – is with referrals and background checks. Also, make sure you’re upfront about your financial situation. Most lenders assume your deal will be fairly straightforward and that you meet the following criteria:
You have good credit.

You have stable employment.

You have a decent-sized down payment and enough cash to cover closing costs.

You can document your income and assets.

You’re a U.S. citizen or permanent resident.

You’re buying a home you plan to live in (rather than rent out).
If any of these aren’t true, you should let your lender or broker know in advance so you can get more accurate quotes.

You’re going to end up owing more, not less, on your loan in a few years.
Most loans require you to pay down your equity over time, so that your balance shrinks a bit each year.

There are a few exceptions. Interest-only loans typically don’t require principal payments for the first five to 10 years (for more details, see “Could you handle an interest-only loan?"). And some adjustable-rate mortgages allow what’s called “negative amortization,” where your balance can actually grow.

This is a feature of the newly popular “flexible payment” or “option” ARMs, which typically give you four choices of how much to pay each month.

One of the choices is usually a low minimum payment that may not cover all the interest that’s accumulating on the loan. That unpaid interest is instead tacked on to your principal, so that your balance is getting bigger over time. This process is called negative amortization.

“You borrow $200,000,” St. James said, “and five years later you owe $210,000.”

There are usually limits to how much negative amortization you’re allowed, however. Most loans that have this feature will automatically “reset” if your balance climbs to 110% to 125% of what you originally borrowed. That means your payments will suddenly spike, so that you’re required to start paying down your principal. Borrowers who aren’t prepared for this jump can wind up losing their homes.

Any time you get an adjustable mortgage, you should ask the lender for a schedule that shows how high your payments can go and how much you’ll owe after five, 10 and 15 years. If you have more than one repayment option, ask for a schedule for each one. You want to see the worst-case scenarios, not the best. And don’t listen to arguments that rates “won’t” or “can’t” hit their caps. Nobody can predict the future of interest rates.

I’m misleading you about your rate cap.
Here’s another problem with flexible-payment ARMs: People are getting confused about their caps.

The typical ARM allows your interest rate to rise no more than 2 percentage points a year, or 6 percentage points over the life of the loan. A 1-year ARM that starts at 5.5%, for example, could jump to 7.5% in 12 months or a maximum of 11.5% by the fourth year.

But many people with flexible-payment ARMS think they have lifetime interest-rate caps of 7.5%, Moskowitz said – either because they didn’t understand what they were being sold, or they were deliberately misled.

What they actually have is a 7.5% payment cap. That means if their monthly payment is $1,000, it can rise to $1,075 in the second year, $1,156 the third year and so on.

“Their actual interest-rate cap might be something like 12%,” St. James said. If the borrower’s interest rate is rising more rapidly than the payments, the unpaid interest is tacked on to the principal amount – creating the negative amortization discussed above.

Again, the best way to avoid surprises is to have the lender give you a schedule of payments that shows the worst-case scenarios. Then you can make an informed decision about whether this is the right loan for you.

Your ‘no-cost’ loan is going to cost you a bundle.
We’re back to the adage, “If it sounds too good to be true, it probably is.”

Every loan has costs: for appraisals, title insurance, underwriting, etc. The lender may be tacking the fees on to the loan principal, or charging you a higher interest rate than you would have paid had you covered the costs yourself.

In rare instances, St. James has seen lenders offer truly no-cost refinancings, where the borrower got a competitive rate and no fees were tacked onto the loan. But the deals were so-called “streamlined” refinancings for existing customers the lender didn’t want to lose. If you walk in off the street, you’re going to pay for the loan one way or another.

You might very well choose to pay a higher rate for a “no-cost” loan if you plan to be out of the home in a couple of years. But if you plan to stay longer, it’s often a better idea to pay the costs out of pocket.