The Nation's Housing
Reporting and analysis of tax laws, mortgages and markets make for indispensable real estate coverage. Once a week.
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THE NATION'S HOUSING COLUMN

(Advance for Friday, May 17, 2019, and thereafter. Web release Thursday, May 16, 2019, at 8 p.m. Eastern time.)

(For Harney clients only)

By KENNETH R. HARNEY

WASHINGTON -- The long knives are out again for one of American real estate's oldest and most controversial traditions: requiring home sellers to pay the agents who represent the buyers of their properties.

A landmark suit filed in March alleged that the 1.3-million-member National Association of Realtors has conspired with local multiple listing services (MLSs) and with major realty brokerage companies to force sellers who list their homes on an MLS to pay a contractually specified percentage of the commissions to the broker/agent who brings in the ultimate buyer. Now two new class-action lawsuits have been filed with allegations along the same lines.

According to all the suits, an NAR rule prevents buyers from unilaterally altering the "split" stated in the listing contract. Say, for instance, you are a seller of a $500,000 home and agree at the listing to pay a total 5.5% commission, allocating 3% to the listing agent and 2.5% to the buyer's agent. If the house sells for the full asking price of $500,000, that would mean the buyer's agent would be due $12,500 at closing. If you thought this was more than you wanted to pay -- especially given the fact that you knew part of the buyer's agent's job was to help your buyer obtain a lower price for your house -- you might not be happy about having to shell out the $12,500. Shouldn't the buyer pay this fee?

In March, the seller of a home in Shorewood, Minnesota, filed suit to challenge this NAR rule, arguing that, among other problems, this system of mandating compensation to the buyers' agent raises total transaction costs. The rule "saddle[s] home sellers with a cost that would be borne by the buyer in a competitive market," where buyers can opt to pay directly for their agents' services. The U.S. market's total transaction costs tend to be much higher than in most other industrial economies.

The original suit, which already ranks as the most significant antitrust litigation against Realtors in decades, is now pending in U.S. district court in Chicago, with NAR's reply to the complaint expected shortly.

The two most recent class actions, filed in April, have different plaintiffs than the original suit but have nearly identical allegations. They come with proposed giant classes of alleged victims who have sold and paid millions of dollars in commissions via major MLSs to buyers' agents across the country. NAR, which is the largest lobby in the real estate field, rejects the premises of the suits and pledges to fight them vigorously. The sheer costs for any single law firm to mount a credible antitrust case against a major lobby and the largest realty enterprises in the U.S. -- plus no doubt the prospect of large payoffs and settlements -- has apparently attracted the new actions. Sources tell me that it's not unusual in wide-ranging cases like these for other law firms to jump in with nearly identical copy-cat filings.

Defendants in all three include NAR along with the giants of the brokerage industry: Home Services of America, Keller Williams Realty Inc., Realogy Holdings Corp. and RE/MAX Holdings Corp. Realtors tell me that an adverse decision in the cases would produce transformative changes in home-sale transactions nationwide. Some brokers say that it could create situations where first-time and other cash-short buyers might not be able to afford to pay for their agents' services -- creating a whole new obstacle to home ownership. Rather than buyers having their commissions paid for by the seller, they would now need to come up with that money themselves. Today, however, buyers don't give it a thought, and in fact they often do not even know what commission split the buyer agent expects to receive.

In places like the United Kingdom and much of Europe, home sellers typically pay total realty fees of 1% to 3% versus the 5% to 6% average commonplace in the U.S. Critics of the American system have long argued that if home buyers paid the fees for the services rendered for them -- and negotiated them with the buyers' agents directly -- total fees would be lower. On the other hand, sellers' agents say that if the buyers-side commission is low under the current system, many buyers' agents will not show houses because the compensation is not sufficient. In fact, discount realty firms have reported that sometimes they cannot get any of their listings presented to willing and able purchasers because buyers' agents will not cooperate with them.

Ken Harney's email address is Harneycolumn@gmail.com.

(c) 2019, Washington Post Writers Group

THE NATION'S HOUSING COLUMN

(Advance for Friday, May 10, 2019, and thereafter. Web release Thursday, May 9, 2019, at 8 p.m. Eastern time.)

(For Harney clients only)

By KENNETH R. HARNEY

WASHINGTON -- Zillow is back in hot water: A class-action suit against the online realty giant is moving forward after insider whistleblowers alleged that the company designed its controversial "co-marketing" program to violate federal anti-kickback laws.

Zillow termed the charges "without merit" and says it intends to "vigorously defend" itself.

Best known to the general public for its Zestimates property-valuation feature, Zillow is a multibillion dollar, publicly traded behemoth whose principal revenues come from advertising placed by realty agents. So-called "premier" agents and brokers, who receive prominent placement on Zillow-listed home sites, pay hundreds or thousands of dollars a month in advertising fees to the company. Premier agents need not be the highest volume or most successful agents in their area; they simply need to pay for the label. According to the company's latest SEC filing, it earned nearly $900 million -- two-thirds of its corporate revenue -- in fees from agents paying for ads last year.

In 2013, Zillow rolled out a program whereby realty agents could have large portions of their advertising fees paid for by lenders who share advertising costs with them. Buyers interested in a particular property could then contact not only an agent but a lender to shepherd them through the financing process. The idea proved wildly popular among agents and lenders. For paying part of an agent's Zillow advertising fees -- initially up to a maximum of 90 percent, later revised to 50 percent -- a lender could get hot leads directly to active buyers. For realty agents, the attraction was obvious. Hey, why not? Lenders will subsidize my costs.

However, a federal law known as RESPA -- the Real Estate Settlement Procedures Act -- prohibits payment of fees for business referrals among realty, mortgage and title industry providers that are not for services actually rendered. In April 2017, the Consumer Financial Protection Bureau informed Zillow that it was investigating whether its co-marketing program violated the law's prohibition against kickbacks. Zillow negotiated with the CFPB, but last year, after the Trump administration appointed a new CFPB director, the agency abruptly dropped the case.

Meanwhile, investors who said they purchased Zillow stock at inflated prices relying on company executives' statements that its co-marketing concept did not violate federal law filed a class-action suit alleging securities fraud. A district court judge later dismissed portions of the suit but allowed the plaintiffs to file an amended complaint if they presented conclusive evidence that the co-marketing scheme violated RESPA.

They appear to have done so successfully -- at least enough to convince a federal district court judge to put the case back on track. Last November, the plaintiffs filed their amended complaint, bolstered by testimony from two unnamed Zillow insiders. The first: a regional sales manager for the company who alleged that lenders participated in the program because they "expected real estate agents to refer business." The second: a sales and operations trainer who alleged that "every agent and lender knew that the co-marketing program was for the lender to get leads and referrals. ... It was understood that lenders were paying for referrals." Whenever the second insider "spoke to Zillow about potential concerns with the co-marketing program," she was told "not to ask questions," according to the court. She also alleged that she knew of a lender who had been paying 100 percent of a realty agent's fees for 2 ½ years. Both whistleblowers provided "consistent testimony regarding how agents and lenders used the [program] to provide mortgage referrals in exchange for advertising payments," according to the court.

In his decision, which was handed down April 19, Judge John C. Coughenour of the U.S. district court in Seattle said "the court can draw a reasonable inference that Zillow designed the co-marketing program to allow agents to provide referrals to lenders in violation of RESPA."

Asked for his take on the case, Marx Sterbcow, a nationally known RESPA lawyer based in New Orleans, told me "the court certainly seems to suggest there is a lot of smoke involving the legality of Zillow's" program. If the whistleblowers' allegations are correct, he said, "it could cause [mortgage companies] and banks to pull completely out" of the program, for fear of violating RESPA themselves, and being exposed to major legal jeopardy.

The significance for buyers, sellers and owners? The case is still out on the alleged federal law violations, but now when you see "premier" agents linked up in marketing efforts with lenders, you have a better idea about what's really going on.

Ken Harney's email address is Harneycolumn@gmail.com.

(c) 2019, Washington Post Writers Group

THE NATION'S HOUSING COLUMN

(Advance for Friday, May 3, 2019, and thereafter. Web release Thursday, May 2, 2019, at 8 p.m. Eastern time.)

(For Harney clients only)

By KENNETH R. HARNEY

WASHINGTON -- Do you want to buy a house but worry that your credit profile will disqualify you for a mortgage? Take another look: A new study suggests that you might find lenders a little friendlier and more flexible than you thought. According to the Urban Institute Housing Finance Policy Center's latest quarterly credit availability report, mortgage lenders are reaching out to borrowers who might have been marginal -- or rejectees -- in the past. Lenders are increasing their appetite for at least slightly riskier applicants -- people with lower credit scores, higher debt-to-income ratios, smaller down payments and other issues.

The institute's study, released last week, suggests that Fannie Mae and Freddie Mac, the dominant players in the market, both have been taking on more risk "steadily since the financial crisis." The Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and the Department of Agriculture's rural home loans program have pushed risk to "the highest level since 2009." Portfolio and "private label" lenders -- a category that ranges from giant banks to independent mortgage companies -- have also been reaching deeper into the credit pool, but risk for them remains near record lows.

If you're a credit-strained buyer, this may sound just fine. But there's potentially a darker side: If you're a taxpayer worried about more billion-dollar bailouts, this can look ominous. Could this steady increase in risk put us on course to another toxic-loan crisis? Laurie Goodman, vice president of the Housing Finance Policy Center, says not to worry. She told me that current lender risk levels are still well below historical norms, specifically the "reasonable lending standards" that prevailed in 2001 through 2003, before the boom. "Significant space remains to safely expand the credit box," according to Goodman's analysis in the latest report.

Great. But not everybody in the mortgage industry is convinced by such assurances. John Meussner, executive loan officer with Mason-McDuffie Mortgage Corp. in San Ramon, California, sees hints of trouble ahead. "I have definitely noticed a fast uptick in 'creative' [loan] products coming out," he told me. "Recently we saw one investor roll out a product offering up to $2 million in financing for FICO scores down to 600." The loan allows borrowers to have made a late payment on a mortgage within the past 12 months and have multiple credit incidents (such as a bankruptcy or foreclosure). The loan also requires the borrower to have just three months of reserves for loan amounts to $1 million. "This is something we haven't seen since before the crash," said Meussner.

He said some lenders are dumbing down on FICO scores as well, soliciting applications with scores in the mid-500s in combination with relatively skimpy down payments and "varying degrees of risk layering." FICO scores, which are used in most home-loan financings, run from 300 to 850, with the highest risks of future default associated with low scores. Scores below 620 indicate noteworthy credit issues in the borrower's past. Average FICOs for home-purchase loans acquired by Fannie and Freddie hover close to 750.

Within the past 18 months, Meussner said he has seen a sizable jump in loan offerings that contain layers of risk piled on top of one another, plus "increasingly 'creative' documentation standards." He emailed me one example of how documentation rules -- the bedrock of sound underwriting practices in the post-crash era -- can be compromised. In an online lenders' chatroom, a sales representative of a wholesale mortgage company said his firm would approve a loan to borrowers who can't or won't document their earnings -- essentially a "stated income" loan harking back to the Wild West days of 2005 and 2006 when they were commonplace but later led to massive defaults and foreclosures. "Stated income" back then meant: You tell the lender what you earn and the lender accepts it, no verification needed.

"Typically," said Meussner, "this is how the trouble begins."

Other lenders see things starkly differently. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Maryland, says documentation is still a big deal for most lenders reaching out to home buyers who are marginal credit risks. "They continue to scrutinize applicants and their documents in unbelievable detail," said Skeens.

That may be why they're generally not seeing a lot of defaults. Angel Oak Mortgage Solutions, the largest volume company specializing in "non-qualified mortgage" loans that allow borrowers more generous terms than permissible at Fannie or Freddie, says its default rate is exceptionally low, but it did not provide a specific figure.

Ken Harney's email address is Harneycolumn@gmail.com.

(c) 2019, Washington Post Writers Group

About
Newspaper readers have a trusted friend in Kenneth Harney's award-winning real estate column, "The Nation's Housing." That's because week after week he focuses on the real issues faced by today's record number of homeowners -- complicated tax problems, the settlement fee thicket, credit scores and credit files – and guides readers to smart solutions.
Millions of readers have saved – and will save – money because of Harney's undeviating attention to the American housing consumer's best interests.
Over the years, Harney's columns have contributed to key pieces of housing reform on Capitol Hill and in federal agencies, including cancellation of private mortgage insurance premiums, better disclosures on refinancings, restrictions on private transfer fees, and prohibitions against loan transfer abuses and predatory mortgage servicing practices.
Personal
Harney lives in Chevy Chase, Maryland, with his wife Andrea. The couple has four grown children who live in Shanghai, San Francisco, New York, and Silver Spring, Maryland.
Professional Experience
Member of the Federal Reserve Board's Consumer Advisory Council
Member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination
President and chairman of the board of the National Association of Real Estate Editors
Continues to be a member of NAREE's board of directors