Consumer Federation of America Releases Harsh Report on Industry The Consumer Federation of America (CFA) released a scathing report recently on how many traditional real estate brokers, and their associations, it believes stifles competition, what reforms are needed to protect home buyers and sellers, and how these consumers can protect themselves.
“Many traditional real estate brokerage firms, and their organizations, function as a cartel that tries to set prices and restrict service options,” said Stephen Brobeck, CFA’s executive director. “But consumers can take steps to lower 6-7 percent commissions without jeopardizing the sale or purchase of a home,” he added.
According to the report, the desire of traditional brokers to maintain 6-7% commissions and the opportunity for a “double-dip”—one broker collecting the entire commission—lies behind almost all of their anti-competitive actions. In nearly all areas of the country, traditional brokers have tried to charge commissions of either 6% or 7%, although many sellers of higher-priced homes have been able to negotiate reductions of one percentage point or even more, the report says.
The report is based on information from dozens of real estate professionals and from hundreds of articles in journals, real estate publications, and the general press, CFA states.
How Consumers Are Harmed
The report explains three ways in which consumers are disadvantaged by traditional real estate brokerage practices. According to the report:
Traditional brokers try to charge high, uniform prices regardless of the training and experience of the broker, the specific services offered, the number of brokers involved, and the function of the broker—as fiduciary agent or facilitator.
Traditional brokers who work with both seller and buyer in a home sale almost always function as facilitators even though consumers, especially sellers, have been led to believe the brokers are functioning as fiduciary agents.
To increase chances of a “double-dip,” many traditional brokers promote their own listings to sellers and, if these are not attractive, the listings of their firm.
How Traditional Brokers Stifle Competition
There are five factors that allow traditional brokers to restrict price and service competition, according to the report:
Seller-Paid Commissions: Sellers and seller brokers are reluctant to lower commission splits to brokers working with buyers for fear that properties will not be shown. If sellers and buyers each negotiated compensation separately with brokers, brokerage services and prices would quickly become unbundled.
Discrimination Against Nontraditional Brokers: The anti-rebate and minimum service laws, which traditional brokers have persuaded many state legislatures to pass, are designed to restrict service and pricing options. So are more subtle forms of discrimination by traditional brokers who do not show listings of discount or fee-only brokers or who make access to property listings difficult for exclusive buyer brokers or rebaters.
Listing Services: The domination of unregulated multiple listing services by traditional brokers allows them to restrict full access to broker clients, to hide commission splits from consumers, and to restrict nontraditional brokers from access or full information.
Lack of Consumer Knowledge: First-time home buyers typically know very little about brokerage services and their pricing. Those selling one home and buying another tend to be preoccupied with matching these sales. As a result, many consumers do not shop and negotiate for brokerage services as carefully as they would purchase a car or other expensive products.
Regulatory Capture: Practicing real estate brokers make up a large majority of all state real estate commissioners who are supposed to regulate the industry. Not surprisingly, they take few or no steps to foster price competition, protect nontraditional brokers from discrimination, educate consumers about how the marketplace works, or enforce required disclosures.
How Consumers Can Protect Themselves
The report also urges home sellers and buyers to protect themselves by supporting needed reforms and by negotiating more forcefully with brokers.
The authors state that key reforms start with conscientious, independent regulation by those who are not practicing brokers. These regulators must require effective consumer disclosures and protect nontraditional brokers against discrimination.
Consumers themselves can also take steps to protect themselves. According to the report:
All consumers should ask for oral and written disclosures of whom their broker represents, if anyone. Brokers functioning as “facilitators,” “transactional brokers,” or “dual agents” cannot represent the financial interests of clients.
Sellers should ask brokers who are fiduciary agents to reduce the standard 6-7% commission by one percentage point and brokers who are facilitators to knock off at least two percentage points since they are usually “double-dipping.” Buyers should ask brokers if they are willing to rebate one percentage point of the commission back to them.
Consumers should ask about potential broker conflicts of interest, such as pushing their own listings or those of their firm.
“Real estate brokers know their industry is changing and are increasingly willing to negotiate both price and service,” said Brobeck. “Most importantly, consumers should insist that double-dipping brokers receive no more than 4% commissions,” he added.
CFA is a nonprofit association of approximately 300 consumer groups that has worked, since 1968, to advance consumer interest through research, education, and advocacy. RE
To read the full report, click here.
Mortgage Companies Lose FHA Approval
A branch of the country’s largest mortgage network was among five companies to lose approval to originate FHA-insured loans, according to MortgageDaily.com.
A Georgia branch of Allied Home Mortgage Capital Corp., which says it is “the largest branch network company in America,” as well as four Denver-area companies mentioned in the HUD notice, were subject to termination because loans they originated had excessive default rates.
But the TOTAL Scorecard used by HUD to evaluate lenders was recently blasted in a report to Congress.
The General Accountability Office, prompted by recent questions and concerns regarding the effectiveness of the scorecard, said in the report, “Data that FHA and its contractors used to develop TOTAL were 12 years old by the time FHA implemented the scorecard.”
But HUD responded that its TOTAL was working exactly as envisioned.
The agency recently told its lenders that down-payment gifts from charitable organizations that will lose or give up federal tax-exempt status from the IRS will no longer be acceptable.
FHA servicers were notified they will be required to report FHA-insured loans past due 30 days as of the last day of the month. HUD said mortgagees can continue to report only 90-day delinquent loans until the September 2006 cycle.
Fifth Third Bank settled HUD charges it denied a mortgage because of race.
HUD said its investigation revealed Fifth Third denied a mortgage to a Kentucky African-American woman even though the Cincinnati-based bank approved other applicants with worse credit.
The bank reportedly denied the allegations.
Columbia National Inc. agreed to pay HUD $800,000 to settle civil allegations of fraud.
In 1999, before being acquired by American Home Mortgage Investment Corp., Columbia employees were fired for allegedly using phony verifications.
In an SEC filing, American Home said approximately 60 questionable loans were created between 1997 and 1999, and the government was notified, the office was closed and the employees were fired. RE
Former Homestore CEO Found Guilty on All Counts
Jury convicts Stuart Wolff of insider trading, conspiracy to commit securities fraud and falsifying company records
A federal jury convicted former Homestore CEO Stuart Wolff of insider trading, conspiracy to commit securities fraud and falsifying the company’s records.
Wolff, who awaits sentencing, plans to appeal the verdict, according to news reports.
Wolff is one of 11 former Homestore Inc. executives to be convicted or plead guilty to participating in a major accounting scandal that involved inflating the company’s online advertising revenue.
Homestore underwent a management shakeup in early 2002 after the board of directors brought to light accounting irregularities and ordered an internal audit of the company’s accounting practices. After the announcement, NASDAQ briefly halted trading of Homestore shares. At the time, NAR leaders said that none of the accounting problems had anything to do with REALTOR.com.
Westlake Village, Calif.-based Homestore is now doing business as Move Inc. RE
No Statewide or National Recession on the Horizon: UCLA Anderson Forecast
Forecast calls for real estate slowdown in California
In its second quarterly report of 2006, the UCLA Anderson Forecast anticipates a slowdown in real estate across the United States and in California. But absent other factors that historically precede recessionary conditions nationally and in the state, no recession is foreseen.
In the latest report, released last month, UCLA Anderson Forecast Director Edward Leamer framed his forecast in an essential question: “[Will] housing difficulties be amplified by problems elsewhere in the economy, producing a nasty recession, or will the pathology be mostly contained in the real estate sector (including construction, real estate brokers and mortgage brokers)?”
He concludes that the problems will likely be confined to the real estate sector and will not produce a national recession.
Leamer, who does not expect real estate prices to fall significantly, notes that sales volume is what typically drops, and drops more precipitously than prices, as the price cycle lags behind the volume cycle. The number of homes sold will drop as owners decline to sell in a weak housing market.
Prices, however, should hold. The real decline in the housing market, Leamer says, will come in “residential investment,” which includes construction of new homes, repair and remodeling, and brokerage commissions on the sale of new and existing homes.
But according to Leamer, the decline in residential investment and the associated decline in construction employment will not be matched by a decline in manufacturing employment, as the latter has not yet recovered from the recession of 2001. Unless there is a decline in manufacturing employment, the national economy will avoid recession in what Leamer calls “a close call.”
The California Forecast
The California forecast, by economist Ryan Ratcliff, takes note of the state’s slowing real estate markets. Ratcliff concludes that the real estate slowdown will lead to a flat housing market and a slower economy.
“We do not predict a recession, nor do we predict a substantial decline in average nominal home prices,” Ratcliff says. “This forecast is based on two arguments. There is not enough vulnerability in the usual sources of employment loss to create a recession, and the historical record suggests that average home prices do not usually fall without this kind of job loss.”
As in the national forecast, Ratcliff is acknowledging declines in real estate and associated job losses in real estate-sensitive sectors. But absent job losses in manufacturing or other sectors, there will be no recession, he says.
Ratcliff does note the possibility of some downside risk to the forecast, however, due to the potential impact of exotic real estate financing and uncertainties about the effects of home prices on consumption. RE
Industry Survey Reveals Slowdown in Mortgage Industry
Study: spring much slower for loan officers than anticipated
BNTouch Mortgage, a CRM and marketing solutions provider for mortgage originators, released its quarterly survey results showing decline among originators across the nation.
“The latest survey is interesting because it shows that loan originators are doing as well as they believed they would at the beginning of the year,” says Mark Vukadinovich, BNTouch director of marketing. “In January, 75 percent of the originators polled were optimistic about 2006 and believed that they would do a greater volume of loans than they did in 2005.”
The latest survey results paint a different picture for 2006 with more than 60% of the respondents stating that business in 2006 has been slow and more than 50% of the respondents reported that their businesses were either losing personnel or staying the same.
“I think we’re seeing the market contraction separating less-experienced loan officers from the seasoned professionals who have been through this sort of thing before, and forcing those without a good adaptable marketing plan to suffer the consequences,” says Dan Itkis, CEO of BNTouch. “While there are a number of great expanding opportunities out there for ARM refinances, reverse mortgages and new 50-year loans, loan originators have to be nimble enough in their marketing and execution efforts to adapt to the changing marketplace.”
In response to a slower-than-expected start to the year, the survey indicates that loan originators are turning back to traditional marketing strategies to stay competitive. Of those who responded to the survey, over 60% reported that they were focusing their marketing budgets on direct mail and referral marketing as opposed to online marketing channels such as purchasing Internet leads.
“From a marketing perspective, the survey results make sense,” says Vukadinovich. “Over the past year, we’ve received a lot of complaints from our customers about the declining quality of Internet leads, and this is not surprising if you look at the advertising tactics these companies use to get leads. They advertise loan programs and rates that are simply unrealistic in today’s rising rate market.” RE
HUD Plans RESPA Advisories
Forthcoming proposal to revise the Real Estate Settlement Procedures Act is expected to focus on revamping the Good Faith Estimate
A forthcoming proposal to revise the Real Estate Settlement Procedures Act is expected to focus on revamping the Good Faith Estimate, a position that tracks the preference of the National Association of Realtors. Also, the U.S. Department of Housing and Urban Development, which administers RESPA, promises to give better industry guidance moving forward, an official says.
Keith Gottfried, HUD general counsel, told a recent conference that changes to the Good Faith Estimate are still in the works, so details could not be disclosed.
At the conference, Gottfried previewed a new approach to RESPA guidance that his office will soon unveil, acknowledging that RESPA guidance has been sparse. To correct this, Gottfried and his team are putting together a process by which HUD will give advisory opinions to those who present proposals to HUD seeking opinions with regard to RESPA compliance. HUD will issue “No Action” letters for proposals deemed to comply with RESPA. The announcement was greeted with near-universal approval.
Gottfried views the change as a positive step toward ensuring compliance and allowing for innovation.
Finally, Gottfried made a strong push for FHA modernization. He reiterated Secretary Alphonso Jackson’s and Deputy Secretary Roy Bernardi’s commitment to homeownership and HUD’s view that a modernized FHA will be a valuable tool to increase homeownership, especially among underserved populations. NAR is working with the industry and HUD on both RESPA and FHA modernization and is playing a key role on both issues.
Source: NAR |
