Posts Tagged Real estate broker

Mortgage Steering

Have you ever seen a real estate listing say something to the effect of:

Buyer must be approved for a mortgage loan through the or seller’s or agent’s lender.

Or a real estate agent may require that the buyer also be approved through their lender or loan officer for an offer to be placed on a home, even if the buyers are already preapproved through their lender.  They may even say something along the lines of:  “Just so we have a back-up in-case something goes wrong with your lender.”

When buying a newly constructed home from a builder the builder may offer upgrades or other incentives if the buyer uses their in-house lender.

All this sounds reasonable, but it’s not.  This is called Mortgage Steering and make no bones about it, these scenarios are illegal under the Real Estate Settlement Procedures Act (RESPA).

Mortgage steering occurs when an Realtor for the buyer or seller, or a builder’s agent strongly encourages the buyer to use the mortgage company of their choice, sometimes offering upgrade incentives on new homes or better terms such as extended closing dates, etc.  Many times the mortgage company the agent is steering the buyer towards is connected in one manner or another with the agent’s office.  In many cases the real estate agent or their office is receiving compensation in one manner or another for the referrals.

Sometimes the compensation or kick-backs for the Realtor’s or builder’s referrals are paid in cash (which is hard to trace), but more often or not they are paid through gray areas such as overpaying for space within the Realtor’s office.  Renting office space is legal, but paying over fair market value for that space is not.  For the real estate company this is a fantastic deal though, because their “in-house” lender is picking-up a good portion of the total lease on the space.

Sometimes these kick-backs to the Realtor or the agent’s office is in the manner of paying for their advertising, such as in those listing magazines you see as you walk into grocery stores.  Splitting advertising costs for co-marketing with a Realtor or real estate company is legal as long as the amount paid is equivalent to the square inches of the ad used by the loan officer.  But usually the loan officer or the lender is paying for the whole ad by over paying for the space they occupy, which is usually relegated to a lower corner in a “Financing available through…” and a picture of the loan officer.

At first glance, as a consumer you may say “So what? As long as I get the home I want than what does it matter to me what happens behind the scenes?”

Well, the reason this is illegal is that steering results in less favorable terms and interest rates for the borrower and less equity being passed-on to the seller.

A higher interest rate being sold to the borrower means the loan officer is receiving more compensation from the bank/lender, which they need in order to compensate the real estate agent or their office in one manner or another for the referral.

For the seller, they receive less money from the sell of their home since the agent’s lender will more than likely push the origination and lender fees to the maximum amount of concessions agreed upon on the Real Estate Purchase Contract (REPC) in order to compensate the real estate agent or their office in one manner or another.

Unfortunately mortgage steering isn’t strongly investigated because it is difficult to prove with the compensation falling into these gray areas.  Rather the powers that be seem to depend on the borrowers to do the policing for them by filing a complaint against the Realtor and the lender if they feel they are or have been steered to use a particular lender over another.  The offending Realtors and loan officers feel safe because very few, if any, buyers ever take the time and actually file the complaint.  They are just happy they got into the house they wanted so badly.   Most just don’t ever use that Realtor, loan officer or lender again.

However, steering is punishable under Section 8 of the Real Estate Settlement Procedures Act (RESPA).  Violations of the Section 8’s anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties.  In a criminal case a person who violates Section 8 may be fined up to $10,000 and serve up to a year in prison.  In a private law suit the real estate agent or loan officer (or both) who violates Section 8 may be liable to the person charged for the settlement services an amount equal to three times the amount of the charge paid for those services.

It is okay for a real estate agent to recommend a mortgage loan officer or company if the borrower has not been preapproved for a mortgage loan yet.  Many are legitimate referrals, and in most cases the loan officer has worked hard to provide a level of service that makes the Realtor confidant in referring clients to them.  But, if that recommendation turns to pressure, or incentives for using a certain mortgage company are offered, or you are told that your current preapproval letter isn’t sufficient and you need to apply through your agent or the seller’s agent’s loan officer “as a back-up”, than you are being steered, and chances are you are not going to get as good a deal as you would through some other mortgage company or loan officer.

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HVCC could be phased-out by year-end

Although H.R. 3044 which would put an 18-month moretorium on HVCC seems to have gotten stalled, but some members of the House Financial Services Committee were able to tack a repeal of HVCC onto H.R. 3126, the Consumer Financial Protection Act (CFPA) as an amendment. H.R. 3126 passed committee 39 t0 29 with most Committee Republicans voting against it.

H.R. 3126 has been fought furiously by banks and credit card companies because is severely limits how they can put the screws to you and I when getting or servicing loan or credit card.

If passed by the House of Representatives it will go on to the Senate. President Obama has requested that CFPA be on his desk for signing into law before the new year.

As a brief review, HVCC is the Housing Valuation Code of Conduct, which was the brainchild of New York State Attorney Andrew Cuomo. He was wrongfully assuming that A) appraisers are all pansies, and B) because they are pansies they could be easily bullied by mortgage loan officers and real estate agents into artificially inflating the value of a home.

Well, for the most part appraisers are a pretty honest bunch and housing bubble was much more than just inflated appraisals due to some unscrupulous loan officers, real estate agents and appraisers. All HVCC did was add an additional layer of cost and time to the process: Appraisal Management Companies, or AMC’s.

AMC’s are the go-between for loan officers, Realtors and the appraiser. A buffer if you will. The AMC’s run interference and isolate the appraiser from talking to the loan officer or Realtor, the idea being that if a loan officer or Realtor can’t talk to the appraiser they can’t pressure them into “hitting a target value” to make the deal work.

Well, the market decides the value, all the appraiser does is compare the subject property to comparable properties that sold within a given period and a given distance from the subject property. In short: it is what it is.

There are a number of problems with AMC’s though:

  1. AMC’s increased the price the consumer pays for an appraisal because it added a middleman into the process.
  2. Appraisals have to be paid by the borrower before the appraisal is done, it can no longer be rolled-up into the loan like before.
  3. AMC’s take up to 60% of the amount collected from the borrower as “administrative costs” and appraisers are making only 40% of what they did just last April.
  4. Because of this the good appraisers have exited the business, leaving green appraisers who will work for pennies on the dollar, and thus;
  5. We are getting shoddy appraisals using comparatives that are not comparable properties. And, because we can’t talk with the appraiser we can’t go to bat for our borrower by questioning why the appraiser used a short-sale or a bank foreclosure as a comparable as compared to a genuine sales transaction, which represents the true market value of a home.

All HVCC has done is add another layer of bureaucracy, increased costs to the borrower, and hindered refinances that can help a borrower by reducing their interest rate and putting more cash in their pocket each month, thus reducing the chance of defaulting on their mortgage.

You’d think this would be a good thing, huh?

So let’s hope H.R. 3126 passes the House and the Senate and we can start moving forward with real economic recovery and your home will start increasing in value again as real, honest and competent appraisers get back to work doing what they love to do.

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