Is it my imagination or did I hear someone complain about real estate commissions?
Anyone complaining about real estate fees now won’t be thrilled if banks get away with allowing them to sell real estate, something the American Bankers Association (ABA) has tried to do. lobbying, lobbying Congress and paying millions of dollars in the process through special contributions – over the past seven years. And it doesn’t matter if banks are not allowed to share commissions. All the banks have to do, once they’re allowed into real estate, is buy brokerage firms and they can share all the commissions in the world without once breaking the law. They don’t even need real estate licenses.
In fact, while we’re on the subject of shared fees, let’s do some crunching to find out the ‘fees’ that banks are charging consumers today. They don’t call them ‘commissions’, they call them ‘interest charges’, but the fact is that a fee calculated as a percentage of the payment for a service it’s a commission. So, therefore, the user fee that a bank charges a borrower in percentage for the use of a certain sum of capital is nothing other than… in commission.
Banks base mortgage rates on a variety of indices. Among the most common indices are rates on one-, three-, or five-year Treasury securities. Another common index is the national or regional average cost of funds for savings and loan associations. Some lenders use their own cost of funds as a ratio, which gives them more control than using other ratios. To determine the interest rate on a mortgage, bankers add a few percentage points, cumulatively called the “margin,” to the index rate. The amount of the margin may differ from lender to lender, but is generally constant over the life of the loan. The formula therefore is: Index Rate + Margin = Mortgage Interest Rate. Most banks use a minimum margin of 2 percent. When they offer “special packages” to consumers, they typically apply a 3 percent margin and then offer a 1 percent “special” discount or rebate.
But let’s take the typical 2 percent margin. For all those readers who think that 2 percent sounds better than the 6 percent commission commonly charged by real estate brokerage firms, let me point out that the 2 percent margin charged by banks is by year! So if it is true that the average consumer retains ownership of it for seven years, the ‘commission’ charged by banks is really 14 percent. The only difference is that the margin is applied to the principal of the mortgage, that is, the amount lent against the real estate brokerage commission, which is applied to the total sale price. But this doesn’t help much when you consider that nearly fifty percent of all mortgage transactions involve 95 percent financing.
Banks have realized that the US real estate brokerage market is worth about $61 billion, a sum that, if tied to a single company, would rank 19th in the Fortune 500, ahead of from Boeing, Microsoft, Morgan Stanley and JPMorgan Chase. Paraphrasing Scarlet O’Hara in gone With the Wind, this is a market ‘worth fighting for and worth dying for’. Undoubtedly, the tactic adopted by ABA is one of indifference. ABA is trying to convince Congress that banks aren’t really interested in pursuing this line of business, even if they could legally, but that they would like to be able to pursue it… just in case.
The truth, of course, is very different and is deeply embedded in the real estate economy. Brokerage firms charge commissions to Sellers, the recipients of the proceeds of a real estate transaction, and only when the Sellers have received that proceeds. Banks, on the other hand, charge Buyers interest rates. What ABA intends and tries to do now is collect both Buyers and Sellers. Sort of like eating from two plates at the same time, so to speak. Give money to Buyer to complete the transaction and charge Seller for completing it.
So again, how much would you like your members to charge the ABA real estate commission, if they were allowed into real estate? Let’s see: there’s 14 percent Buyer for seven years, there’s 6 percent Seller at closing, and then of course there are ‘minor’ fees like appraisal fees, setup fees, administrative fees, loan origination, loan cancellation fees, initial fees, and then, of course, there is loan insurance.
Wow, that’s a lot of commissions!
It’s no wonder that Consumers Union (http://www.consumersunion.org/), publisher of Consumer Reports, the nonprofit, independent testing and information organization that serves only consumers, is lobbying Congress hard to to carry out more studies on this topic.
But in addition to the added cost to consumers, allowing banks into real estate would not only be bad for the industry and consumers, it would also be bad for the economy as a whole. In fact, the notion of a ‘free market’ in which all economic decisions regarding the transfer of money, goods and services take place on a voluntary basis, free from coercive influence, is commonly regarded as an essential feature of capitalism. But in the event that banks dominate the real estate industry, how free would consumers really be to choose, for example, how to sell their houses, or negotiate a commission, or counter an offer to buy, or change agents? if they don’t like one, or even try to sell their properties themselves?
Has anyone ever tried to negotiate something, anything, with a bank? I have several times. And I have personally witnessed and can report firsthand a variety of responses from bankers, ranging from the friendly “no..no..no,” to the tap on the shoulder and nod, to the smile. sarcastic, right down to the icy look and the silence from beyond the grave. However, I still cannot report a single ‘Yes’ from a bank, after nineteen years in business. Banks understand trading not as a two-way give-and-take process, but rather as a one-way street: go their way, that is, only their way. And this is today, when consumers still have the option to leave. What will happen to consumers when that choice is taken away?
Do banks venture into the real estate sector? Don’t let that happen to you.
louis frascati