Bringing together ostensible outsiders with deep experience in the realm of housing policy and finance, the National Association of REALTORS® (NAR) billed the panel—taking place during the organization’s midyear legislative meetings in Washington D.C. yesterday—as an overview of “practical and policy solutions in a post-settlement environment.”
Really, however, the focus was on one policy—financing buyer commissions. With the potential for the NAR settlement to leave significant swaths of buyers to find a way to pay their own agent’s commission, rolling that fee into a home loan appears to be a simple and effective solution.
But facing a standing-room-only crowd at the Washington E. Carver Convention Center, Ted Tozer, former president of Ginnie Mae and current fellow at the Urban Institute’s Housing Finance Policy Center, warned that financing commissions might not be the quick fix agents hope it is.
“Housing finance it’s so complicated, you don’t want to change any more than you have to change,” Tozer said. “What looks simple on the outside could be disastrous if we make changes, and I am really fearful that people are simplifying what’s going to happen with this change.”
The discussion came at NAR’s legislative meetings, focused on the organization’s lobbying in Washington and around the country, as the real estate industry grapples with the still unknown consequences of a $418 million settlement, which removes buyer compensation from the MLS starting in August.
NAR has previously said it does not support financing buyer commissions—something that is not allowed under current regulations.
Faced with the prospect of many buyers forgoing representation altogether, though, or only being able to pay smaller flat fees, many agents are understandably eager to see NAR use its powerful lobbying arm to lessen the impact of the settlement and open up new ways for agents to get paid.
Matt Jones, associate vice president for Government Housing Finance at the Mortgage Bankers Association (MBA), was even more explicit in saying that he doesn’t believe financing commissions is the right path.
“The things MBA has been the most vocal about today—don’t finance the commission, and don’t forgo buyer representation,” he said.
An unresolved question at the center of the discussion was whether having buyers pay their own agent’s commission will actually bring home prices down, as sellers pass on the 2-3% they are saving in commission to the buyer.
“I don’t know that it’s necessarily true to assume that now the list price is going to come down 3% in a deal,” said Jones, worrying that sellers would essentially pocket the extra money while buyers shouldered an additional cost (whether out of pocket or as part of a loan).
Nuts and bolts
What is so dangerous about rolling agent commission into a home loan, though, especially when buyers can already shift other closing costs into their mortgages?
According to Jones, it is bad for the consumer, to start with.
“If you’re financing a 2.5% commission on the buyer side, that translates to about $75 a month additional payment just for adding to the sale price,” he said.
With the potential to also affect mortgage insurance and a buyer’s loan-to-value ratio (LTV), additional costs for financing a commission on the average home could grow to $200 a month, Jones claimed. This would potentially make it very difficult to argue that the change is pro-consumer or saves money, even if it would help cash-strapped buyers get their foot in the door.
But how about for the industry at a higher level? The tricky part is not the loan, but how to filter out the “noise” created by potential changes, which could be very “problematic” for investors and lenders assessing mortgages and homes, according to Vanessa Perry, professor of public policy at the George Washington University School of Business.
“The models that everyone uses, the standard models, are based on value calculations that sort of reflect the same perspective. The ‘V’ (in LTV) needs to be measured consistently,” Perry said.
Throwing off those calculations could affect everyone, and in the case of Fannie Mae and Freddie Mac, would likely require an act of congress to adjust the LTV limits for FHA loans.
Another cost that would almost certainly come along with changes to how commissions can be financed is compliance, according to Jones. Someone would have to take an oversight role ensuring that loans are moving forward in accordance with potential new rules around financing commissions, and Jones said that eventually that just increases the cost of the transaction overall—with lenders potentially “deputized” to ensure agents are following the rules.
“If now the lender has some sector of vicarious responsibility to make sure the sale contract is written correctly, that ultimately just gets baked into all the costs of doing this,” he said.
Implicit in the discussion of LTVs, though, was the assumption that home values will indeed be thrown off by the NAR settlement changes, something Tozer acknowledged. Talking specifically about FHA loans, he described a “doomsday scenario” if buyers are forced to pay their own agents.
“You’re basically going to increase LTVs by 2-3% across the board or you’re going to expect people to come up with another $5,000-$6,000 in down payment,” he said. “If all of a sudden the commission that’s baked into the value of homes is only 2-3% because the buyers aren’t paying it, then the ‘V’ has got to go down.”
Getting Fannie and Freddie to make changes to their LTV limits is not a short-term or even medium-term solution, according to both Perry and Tozer.
“There’s been some talk about potentially pressuring the enterprises to change their rules to accommodate these higher LTVs,” Perry said. “Well, let me just tell you that is not going to happen. It took—and I’m being generous—ten years to update the version of FICO that is embedded in their models.”
What is the solution? According to Tozer, mess with housing finance as little as possible, and make sure all the commission is included in the sales price.
He described a scenario where buyers and sellers negotiate commission as part of the offer process, where a buyer can ask the seller to pay some or all of their agent’s commission, and the seller can counter. Commission seemingly could be treated like title fees or attorney fees and rolled right into the loan, if the buyer is comfortable with that.
“Both the seller and the buyer (commission) are both on the table at that point,” he said.
Under the terms of the NAR settlement, buyer agents cannot accept a higher compensation from the seller than what they agree to with their buyer, somewhat limiting the effectiveness of this scenario.
Maybe what is most urgent, according to all of the panelists, is to “coalesce around something,” which Tozer said is vital to staving off another threat—the Department of Justice, which has the power to enact further changes to real estate transactions or even upend the many settlements agreed to in the seller commission lawsuits, re-opening the industry to liability.
“Lawyers and housing finance do not mix. They mix, but it’s more like TNT. They blow stuff up because they go for the political wins. They don’t go for the long-term wins,” said Tozer
“I think it really is important for industry professionals to come up with maybe a joint statement, (something like), ’This is what we would recommend.’ It will go a long way in clarifying some of the confusion (for consumers) because it’s already a confusing enough process,” said Tozer
