Prior to 2008, obtaining a mortgage was far cheaper and far easier – and it was NOT just because everyone could get so-called “liar” loans.
It was because regulators stepped in after 2008 with far too little understanding and far too heavy of a hand – with the ostensible mission of helping consumers.
But – who they really helped was big banks and Fannie and Freddie – and consumers got crushed.
Prior to 2008, we could make 1/3 of what we need to make now on a loan to cover costs and make a profit. It costs lenders 3x more to “manufacture a mortgage” nowadays mostly because we need to comply with so many ridiculous and antiquated document and disclosure requirements that make mortgages vastly more labor intensive.
And, it is much worse for strong borrowers, who still have to document everything even though algorithmic data could underwrite such borrowers in 3 seconds with far more accuracy. It is ridiculous to require borrowers with 3% debt ratios, 800+ credit scores, millions in the bank, and 30% down to have to provide tax returns, bank statements, pay stubs, etc.
And worst of all are the “compensation rules” that the regulators imposed after 2008 where loan officers were no longer allowed to adjust their compensation up or DOWN! Yes, loan officers cannot offer to make LESS than their agreed-upon comp, preventing them from cutting or crediting their comp to make deals work – something we ALL did all the time prior to 2008. Hence, those compensation rules, meant to help consumers, have probably cost consumers billions in total by now.
A major reason banks and Fannie and Freddie pushed for these rules was because the broker channel was an enormous competitive threat to them prior to 2008. Honest and skilled brokers were able to close loans with very little overhead and paper-thin margins, and banks could not compete. In addition, fewer and fewer loans were going to Fannie and Freddie. So, they all lobbied for regulations. To be sure, there were many scumbag brokers who needed to be pushed out and bank CEOs loved sharing anecdotes to justify their push for regulations. But, the vast majority of brokers were honest and forthright, and many worked with very thin margins (benefitting consumers hugely). I know because I was one of those brokers and I had ample competition.
NAR & KW Got Crushed!
As most blog readers know, KW and NAR lost big time yesterday when a jury decided they were guilty of collusion, saddling them with $1.8 billion in damages. This HousingWire article explains the suit, and I blogged about this previously too: Why Mortgage Lenders Are Terrified.
TLDR: Brokerages and NAR are no longer allowed to force listing agents/sellers to offer commissions to buyer’s agents in order to access MLS.
A few observations:
- Nobody has to pay 6% – so I am so confused. One of the contentions of the plaintiffs was that brokerages force every seller to pay 6%. Heejin and I have sold 5 homes in recent years, and we have never paid 6% – and that was Gary Keller’s point when he testified. Sellers have been able to negotiate commissions for years.
- How dare KW try to maximize profits! One of my frustrations with both regulators and lawyers is that they don’t seem to understand that all companies try to maximize profit and/or commissions – as they must to survive. But KW was attacked for doing what is utterly rational. If KW was a monopoly, then some of the ire might be justified. But, the competition amongst agents and brokerages is brutal, as we all know. So… good gravy.
- Real estate agent commissions are much less in other countries. This is something the WSJ editors and the plaintiffs point out repeatedly. But – it is interesting that iBuyers here in the U.S. charge as much as 2% more in total fees than traditional brokerages, so it makes me wonder if the U.S. might just be different from other countries in ways that simply require more fees.
Winners
- Trial Lawyers are the obvious winners here, as everyone knows. They will likely collect tens or even hundreds of millions – but NOT billions. The verdict yesterday was for $1.8 BILLION, but nobody can afford to pay that and the case will be appealed, so the final settlement will likely be much less.
- iBuyers like Opendoor and Offerpad. As I mentioned above, there were several studies done a few years ago comparing iBuyer fees to traditional brokerage fees, and iBuyers effectively end up charging as much as 2% more. In any case, iBuyers will definitely benefit from this lawsuit and it makes me wonder if they were not the entities pushing for this lawsuit much like the banks pushed for regulations in my story above.
- Not Sellers. While future sellers may end up paying smaller commissions in the future (but I remain skeptical), individual past sellers will be lucky to get a few bucks from these settlements after attorneys’ fees and court costs are paid and the remaining pot is divvied up amongst all of them.
Losers
- Lenders. Lenders lose in several ways: (1) one of their primary sources for leads (buyers’ agents) is now threatened; (2) if buyers’ agents’ commissions are threatened, many buyers’ agents and brokerages might want to get into the mortgage industry themselves in an effort to tap into mortgage commissions as well as real estate commissions (more on that tomorrow); and (3) many lenders may have to set up concierge services to answer some of the hundreds of questions that buyers’ agents answer – if buyers’ agents are pushed out.
- Buyers. If sellers are not paying commissions, will cash-strapped buyers have to? A huge percentage of buyers simply cannot afford to. In addition, buyers will often be left in the dark without an advocate to answer questions and/or negotiate on their behalf.
- Sellers. As my iBuyer references above explain and as my mortgage regulation story at the top of this blog explains, these actions often end up leaving consumers worse off. This is not to say that sellers may not end up better off at some point, but I just see these things go in the opposite direction all too often.
- Brokerages. Trial lawyers everywhere are going to be circling every brokerage in the country like sharks looking for a kill. So, I expect to see a lot more lawsuits. In addition, a huge source of commission income is threatened.
- NAR. The National Association of Realtors is probably the biggest loser, as agents are fleeing the association in droves. With Redfin, RE/MAX, and Realogy telling their agents they no longer need to be members of NAR, NAR has already lost 300,000 dues-paying agents – and it is going to get worse.
