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The National Association of Realtors (NAR) settlement of commission lawsuits nationwide is expected to force mortgage lenders and loan officers to find new ways of approaching listing agents and borrowers, give LOs a more significant role in the home-buying process, and encourage housing professionals to pursue dual-licensing, industry experts told HousingWire.
Mortgage pros have closely monitored the commission lawsuit developments since a Kansas City, Missouri jury determined that NAR, HomeServices of America, and Keller Williams conspired to inflate or maintain high commission rates through NAR’s so-called Participation Rule. These housing professionals have been gaming out the potential impact on buyers’ agents – a significant source of referrals.
Loan officers and mortgage executives expect home sellers and homebuyers to negotiate more aggressively on commission paid to buyer agents, potentially bringing costs down. At this early stage, it’s unclear how such commissions would be paid since buyers could pay their agents out of their pockets or negotiate commissions as a seller concession in the closing costs.
Meanwhile, trade groups representing lenders believe that more details on the settlement are needed to understand its coming impact on the housing market. However, they already worry about some groups of considered vulnerable borrowers who could not pay for the buyers’ agent commission due to affordability challenges.
On Friday, NAR announced a settlement that includes a $418 million payment for damages and a ban on any rules allowing a seller’s agent to set compensation for a buyer’s agent. Also, fields displaying broker compensation on MLSs must be eliminated, there is a blanket ban on the requirement that agents subscribe to MLSs to offer or accept compensation and buyers’ agents must have written agreements.
NAR said that the changes, if approved by the court, will go into effect in mid-July 2024.
Getting referrals and cozying up to the sell side
Mike Kortas, CEO at NEXA Mortgage, sent a clear message to the over 2,300 mortgage LOs at his mortgage brokerage: “Keep your eyes open, keep your ears open, listen for opportunities that are going to present themselves, and be ready to assist more buyers. You should be finding buyers before real estate agents anyway.”
NEXA has always been focused on purchase loans, which means some of its LOs do significant business with buyers’ agents. Kortas believes that good buy-side agents will remain highly relevant and garner more business as competitors wash out. Thus, LOs will have to find ways to connect to listing agents or directly with buyers, who will need more guidance during the home-buying process.
These efforts include having open house programs to help seller agents and co-marketing home listings with these professionals, using social media to reach borrowers, and sometimes buying leads, according to Kortas. He said he’s also interested in seeing where homes will be listed since they will no longer be required to be in the MLS system.
Matthew VanFossen, CEO at New Jersey-based Absolute Home Mortgage Corporation, believes that the NAR’s settlement was probably the best outcome to the trade group as it focuses on consumer choice and disclosure. It also avoids new copycat lawsuits, uncertainties, and further potential showdowns with the Department of Justice (DOJ).
On average, about 50% of referrals to a retail LO come from buyers’ agents, VanFossen said. However, with the NAR settlement, listing agents may start dealing directly with homebuyers. That’s a problem because mortgage LOs traditionally have not “forged as deep of inroads” with sellers’ agents.
“Originators may have to pivot by developing better relationships and ways to assist listing agents,” he said. “You may see buyers’ agents still be relevant, but LOs need to find vehicles to educate their buyers’ agents, educating them on how to use seller concessions, for example, to finance buyer-paid broker fees.”
Assisting homebuyers and their agents adds more to an LO’s plate.
Nick Caccia, a Greenville, Rhode Island-based producing sales manager at CrossCountry Mortgage, said that it’s hard enough getting a loan to the closing table, especially with the rates where they are. Having to be somebody’s confidant and advisor on the real estate part would be “tough.”
Caccia said that 80% of his business comes from buyers’ agents. He shows up for open houses and teaches courses at real estate brokerage firms, which allowed him to build relationships with agents throughout his career.
Because most of the agents he works with are full-time, dedicated professionals, he’s not expecting a decline in business as a result of the settlement.
The hybrid LO-agent?
On another front, VanFossen believes that due to the commission lawsuit, LOs may start getting real estate licenses and/or real estate buyer agents may become LOs. It would “bridge the gap in lower commission” by these professionals “starting to take both sides of the deal.”
According to VanFossen, that’s a “definite potential outcome that a lot of mortgage lenders are looking at, legally and in a compliant manner,” including Absolute Home Mortgage, which is doing tests with this dual-licensing structure. The company had 274 LOs and 38 active branches as of Friday, per the National Mortgage Licensing System (NMLS).
However, since real estate agents would transition to lenders, the dual-license trend would also have an “unintended consequence” for marketing servicing agreements (MSAs) between mortgage companies and real estate brokerage firms.
Another consequence could be the emergence of real estate agents creating their brokerages and forming joint ventures with lenders, he said.
It would also inevitably lead to even more dark grey areas in RESPA compliance.
More negotiations, lower commissions
Per the terms of the settlement, MLS participants working with buyers must enter into written representation agreements before touring a home.
Consequently, mortgage industry executives believe buyers will pay agents out of pocket or ask sellers to pay their agent fees through concessions. As negotiations are in place, the expectation is that the commission will be reduced. An average real estate transaction typically pays 5% to 6% in agent commissions, including 2% to 3% to the buyer’s agent. (LOs on average get about 1%.)
Kevin Leibowitz, CEO of broker shop Grayton Mortgage, expects that “commissions will get squeezed,” and some buyers’ agents will exit the industry. He has been focused on getting referrals from prior clients and online. Thus, he expects the settlement will impact his business far less than LOs who rely on buyer agents as referral partners.
Ryan Tomasello, managing director at Keefe, Bruyette & Woods, agrees that more negotiations may happen. Of course, the devil will be in the details, and there are a number of questions about how these written representation agreements will work.
“Key questions include whether these agreements must stipulate compensation terms, as well as if any permissible compensation offers from listing agents and sellers are prohibited from being higher than the original compensation terms already agreed to by the buyer and their agent,” Tomasello said in a report on Friday.
“In KBW’s view, the combination of mandated buyer representation agreements and the prohibition of blanket compensation offers made by listing agents and sellers should result in significant price competition for buyer agent commissions,” Tomasello added.
Disadvantaged borrowers?
According to mortgage trade groups, if the settlement can reduce buyer agent commissions, it can also make some underserved borrowers more vulnerable.
Borrowers trying to buy with a mortgage from the Department of Veterans Affairs appear to be at the biggest disadvantage.
Under current policy, fees or commissions charged by a real estate agent or broker in connection with a loan from the VA may not be charged to or paid by the veteran-purchaser. It’s unclear whether the VA or the Department of Housing and Urban Development (HUD) will be able to alter the policy by mid-July.
Seller concessions for VA borrowers are also capped at 4% of the home’s purchase price or appraised value and can also cover some closing costs, including the VA funding fee and prepaid taxes. And under existing FHA rules, sellers can contribute up to 6% in concessions to FHA borrowers to cover closing costs, prepaid expenses and discount points.
This could be a key part of the equation for borrowers with VA or FHA loans, as they’re typically using discount points to lower their mortgage rate, paid by sellers.
“Agent commissions have never been a closing cost from a buyer perspective,” Ryan Grant, co-founder and division president of Neo Home Loans, told HousingWire in November. “We don’t even know if the buyer’s agent fee would be an allowable closing cost because they might not even be a material necessity to the transaction.”
If FHA borrowers, for instance, used all 6% of seller concessions towards paying their agent’s commission, “you’re taking away either temporary or permanent interest rate buy-down opportunities,” Brian Covey, EVP of Revolution Mortgage, said in November.
In a December letter to federal housing agencies, the Community Home Lenders of America, which represents small lenders, wrote that “traditionally, lenders financed buyer’s agent commissions as part of the mortgage financing process, reflecting the fact that 100% of brokerage commissions were incorporated into the sale price.”
But its members noticed “many real estate agents are already writing sales contracts that require the buyer to pay the buyer’s real estate commission.” CHLA said the new model could potentially leave buyers to cover the commission out of pocket or forego representation.
On Friday, the trade group said that the NAR settlement will impose challenges mainly to underserved, veteran, and minority borrowers with low down payment capabilities “who must be protected with respect to underwriting rules, so they are not disadvantaged by changes to commission structures.”
“CHLA continues to engage Congress and federal regulators to immediately draft solutions to ensure homebuyers are not adversely impacted – especially those with limited funds to apply to the mortgage purchase process,” Scott Olson, executive director at CHLA, said in a statement.
The Mortgage Bankers Association (MBA) added, “While full details of the apparent settlement are not yet public, MBA will monitor the outcome as well as the likelihood of new approaches to buyer agent commissions that develop as a result.”
“We will also continue our engagement with the Federal Housing Administration, Department of Veterans Affairs, and Fannie Mae and Freddie Mac about any possible guideline changes that may be needed in the future,” the trade group said in a prepared statement.
Caccia, the LO at CCM, expects homebuyers to request a closing cost credit to cover their agents’ commissions. He believes it could be more common among first-time homebuyers, “who don’t have the cash for a down payment plus commission payments on the purchase of their homes.” However, concessions are more challenging to get in competitive markets.
“In a market like ours, where there’s not a lot of inventory, it’s tough right now to buy a house, no matter what. A lot of my FHA buyers, the bond programs, don’t have enough for the down payment, to get through the guidelines, and to throw another 2% of the cash up front [for the agent commission],” Caccia said.
“I would think some of them would just go directly to the listing agent, but I don’t know if that’s a sustainable model,” he added.
VanFossen said there are talks about the “mortgage industry figuring out methods to finance the buyers’ real estate agent commission.”
“As lenders, we are avidly against that. We do not want to, as we already have a vehicle through the sellers’ concession. We should not be putting borrowers in a place to finance 2% to 3% additional of the transaction over the period of 15, 20 or 30 years in the terms of a mortgage. And we don’t feel that our regulators, such as FHA and FHFA, are too keen on that either.”
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