Construction Perm Loan Problems

Entered into a CP Loan with Bank 11 months ago.

The Agreement stated all disbursements were to be made to me and Builder jointly via check.

Disbursement were to be made after Bank received survey and Building Permits and were to be made based upon 100% of the improvements in place.

Found out 6 months after Construction was progressing that Builder never pulled a Building Permit.

Took Builder to Arbitration, he did not show, but 2 bank employees did.

We discovered Bank issued a Draw via wire directly to Builder without our knowledge for over $28K. It was issued on the day of Closing and not disclosed on the HUD 1.

Bank's inspector then certified certain aspects of the house had been completed when in fact they were not. Bank issued 2 more checks to us and Builder for an additional $112K.

We did not know what checks were for, we did not have copy of Inspection Report, but since we trusted Bank we countersigned checks and allowed the Builder to cash them.

When we confronted Builder he refused to obtain permit, filed for Bankruptcy and shortly afterwards put lien on house for $120K.

Bank claims house was 36% complete. An outside Inspector has certified it is only aout 20% complete.

Bank has disbursed funds not in accord the Construction Loan Agreement.

We no longer want the house since it has been exposed to weather since March. Plus the subdivision it was in has had 4 foreclosures. There are only 34 Lots in total in the subdivision.

Does anyone know of any similar cases?

Check the newspapers, particularly Banking/Financial/Real Estate sections. This is happening all over the country. Your best bet is to contact an attorney immediately in your area. It's against federal law to dispurse funds and not disclose on the RESPA (Hud 1.) It's also against federal law (probably your state law as well) to falsify an inspection report. The fact that the builder has since filed bankruptcy doesn't bode well for you, but the bank (or other lending instituion) appears to have at the very least, highly questionable lending procedures. You don't indicate which part of the country you reside in, but this is happening everywhere and appears to be a less than shining example of the circumstances leading up to the recent lending institution collapse. You should have recourse against the bank and the inspector him/herself but I wouldn't recommend you proceed without good legal counsel. Your city also may be able to lend a hand; most reputable inspectors are required to be licensed by the city or county of record and this certainly doesn't appear to meet any jurisdiction's standards.

A word of caution here: you signed a binding legal contract with the bank. New construction of a home normally takes at least 6-9 months to complete; that's industry standard. You can't "change your mind" at this late date simply due to the length of time, unless the time is in direct non-compliance with your contract. The fact that there are other foreclosures in your neighborhood is really irrelevant at this late date ... unless of course, your original appraisal clearly noted other foreclosures at the time and your lender issued financing based on a "declining neighborhood." If other foreclosures were apparent at the time, and the lender chose to ignore that, you may have additional recourse there. (Stretching it a bit, but again, a real estate attorney can help you with that.) Did you receive a copy of that original appraisal? Or copies of each of any reinspections during construction? Your bank would have copies on record for you.

Bottom line, if you're required to make any payments on your construct-to-perm loan, you need to maintain them or face foreclosure. At this point, you may not care, but that'll have serious consequences on your credit report, should you ever need any kind of financing in the future. That's your personal decision. At the very least, I think your next step (hopefully soon) is to get in contact with a reputable real estate attorney in your area.

Good luck. **I've forwarded a recent article you may find interesting via private message above. The circumstances sound VERY similar to your own.