The Fed’s new GFE Helping to Insure Consumers Get ‘It’?

[Editor’s Note: I’m excited to publish this guest post from Adam Stein on changing role of good faith estimates. He’s a long-time local mortgage professional with Cascade Pacific Mortgage. ]

ftc screengrabThe FTC study reported on the proposed new Good Faith Estimates early on in 2005. Armed with a very thorough and unbiased study the FTC went on record, early and often, and clearly stated the FTC’s position on (then) HUD’s proposed revised Good Faith Estimate:’ DON’T DO IT!’ It seems the FTC’s findings clearly showed that consumers failed to be able to choose what loan was in their best interest when comparing rates and fees. [here’s the FTC’s Facts for Consumers: Looking for the Best Mortgage: Shop, Compare, Negotiate] So much was the confusion caused by the new Good Faith Estimate that over sixty percent of the consumers could not identify the best loan for them when comparing Good Faith Estimates generated by mortgage brokers and mortgage bankers. HUD, not to be outdone, quickly came to their own rescue with their own ‘not-so-unbiased’ study. HUD, supporting their own, quickly produced a study stating that the consumer really does understand the new disclosure (Really?).

And so the battle over RESPA reform has been waged for the better part of the last ten years. At one point the Secretary of HUD attempted to ‘slip RESPA reform under the mat’ by submitting the proposed rule just hours before Congress went on recess. Those who would have been impacted by the rule change clearly and accurately viewed this effort as ‘under handed’ as much of the required ‘commentary period’ passed by without any representative government in session to discuss the proposed RESPA reform. That effort failed in the end. The banking special interests, however, have finally figured out how to get a Good Faith Estimate through the rule making process under the guise of ‘what you can’t buy in an administration you’ll just have to do yourself’. Enter the Federal Reserve Board.

While the FRB sounds like a branch of the Federal Government it really isn’t. The Federal Reserve is a codified, private sector, coalition of the nation’s largest banks and finance companies who collaborate and advise government on key financial issues. The Federal Reserve Board also is empowered to regulate the Truth-in-Lending Act (TILA) and promulgate rules as required. Is it any wonder that the new Good Faith Estimate, vilified by the FTC for creating consumer confusion, creates a bias towards Good Faith Estimates that are generated by banks over those prepared by mortgage brokers?

My concerns are twofold: if the consumer can’t properly identify the best loan they will pay more; if mortgage brokers appear less competitive due to the disclosure of indirect compensation the mortgage broker channel will be reduced if not eliminated.

Mortgage brokers were initially the scapegoats of the ‘mortgage meltdown’. More recently, however, the broader aspects of derivatives and the role played by Wall Street and the nation’s largest investment banks have come to light. I find it ironic that now, after the creators of toxic assets have been exposed, that the FRB will promulgate rules that make their disclosures deceivingly more appealing to consumers. In the end the rule will hasten the consolidation that is already occurring in this battered real estate economy. There will be fewer choices for the consumer to choose from, moreover; when the consumers do choose their mortgage over sixty percent will choose higher rates and fees thanks to the new disclosures. Way to go FRB – You have successfully reduced, if not eliminated, competition in the mortgage marketplace and virtually guaranteed the mortgage shopping consumer will get it ‘in the end’.

The Real Estate Consumer Bill of Rights

Inman News announced this morning, that the industry is being asked to consider and support the following “Real Estate Consumer Bill of Rights”.

1. Choose the services you pay for: Laws in more than a dozen states forbid brokers from refunding commissions to you, or require brokers to provide services you may not want to pay for. These laws protect the industry, not the consumer.

2. Know how your agent makes his money: In real estate, the seller pays both his own agent and the buyer’s agent a percentage of the sale; the agent earns more when his client pays more. If a house seems difficult to sell, the seller may even offer buyers’ agents an especially high percentage. Buyers’ agents should be required to explain to their clients how they are paid.

3. Know when you are committed to an agent: Often just showing a property entitles an agent to the commission for representing you, regardless of whether you intended to work with someone else or even preferred to represent yourself. The relationship between an agent and a consumer should always be explicit, so that both parties know when they’re committed to one another.

4. Know what services your agent will provide: Much of the work of a buyer’s agent begins after the buyer has agreed to buy a house. This work includes coordinating inspections, repairs, mortgages, title reviews and escrow services. But agents today are paid only to bring a buyer to a transaction. Once that happens, it is virtually impossible to fire your agent. In most cases, this is appropriate, as the agent who puts a deal together deserves the commission. But in becoming committed to an agent, you should know what services the agent will provide as part of that commitment and what recourse you have if the agent doesn’t perform those services. An open agreement between you and the agent protects the agent from being unfairly dismissed, and ensures you get the service you expect through closing.

5. Have an agent that represents only your interests: Most states allow an agent to represent the buyer and seller in one transaction, and get both sides of a commission. As a result, some sellers’ agents are on the prowl for unrepresented buyers to bring to the seller. It’s a solicitation neither side can easily refuse because the seller wants the buyer and the buyer wants the house. But an agent can’t fairly represent the interests of two parties to the same transaction. An agent should represent only one party, and take commissions for only one party.

6. Know the commission refund you can get before you buy a house: Depending on the service provided by the buyer’s agent, some sellers vary the commission offered to buyers’ agents. This flexibility is good in theory, but in practice it’s often used to thwart commission refunds: buyers expecting a refund of $10,000 or more from their agent discover on making an offer that the amount has been radically reduced in favor of the seller’s agent. Buyers should know in advance what circumstances let the seller’s agent keep more of a commission for himself. It’s fine to change the price but not at the cash register.

7. See all the houses for sale: Many of the multiple listing services set up to share listings between brokerages forbid participating websites from displaying for-sale-by-owner houses alongside broker-listed houses. As a result, home buyers usually don’t see all the houses for sale, and home sellers have to hire brokers just to get their house on mainstream sites. MLSs should not require exclusive display of listings.

8. Have an open discussion about a house for sale: On the web, you can openly discuss almost any product for sale except a house. That’s because sellers’ agents “own the listing,” controlling where and how it’s posted for their benefit. The rules of some MLSs discourage real estate websites from publishing independent reviews and preclude owners from distributing MLS marketing materials outside MLS-sanctioned websites. Once a house is for sale, everyone in the market should be able to discuss it.

9. See all the information available about a house for sale: Many MLSs make it difficult for buyers to see recent past sales data, how long a house has been for sale, or whether its price has been reduced. Once a house is for sale, you should be able to see all the information available about it on your own, without becoming anyone’s client. The only exception to this rule is information whose publication jeopardizes the seller’s safety, such as when the presence of children precludes a showing.

10. Be sure your agent will show your house to everyone: Some sellers’ agents selectively refuse to show houses to a buyer represented by an alternative brokerage, which hurts the seller and the buyer. If, as part of his service, a seller’s agent doesn’t show houses to all buyers, the seller should know it, and the buyer should be able to contact the seller directly. When agents don’t facilitate showing a house, they should at least stand aside and let buyers see the house on their own.

Greg Swann of BloodHoundBlog in Arizona, Kevin Boer of 3 Oceans in the CA Bay Area, Kris Berg and I were contacted by Glenn Kelman of Redfin prior to the Inman anouncement and asked to support The Consumer Bill of Rights on Redfin’s site. The email we received is posted in Greg’s article today.

There are portions of the Bill of Rights that appeared contradictory, and a bit self serving of Redfin, such as:

#5 which preclude’s the buyer consumer’s right to represent themself with NO agent, while still holding the listing agent somewhat accountable.

From what I’ve seen in the marketplace, there are many buyers who want the same advantage as a For Sale By Owner. They want the right to be totally commission free, and represent themselves without an agent at all. I don’t see that right highlighted adequately in this Redfin penned “Consumer Bill of Rights”. I have provided this option free of charge to buyers this year on a couple of occasions, and so know it is an option that is possible for buyer consumers. Clearly omitting this option is an error that needs to be corrected by Redfin before I would jump on this bandwagon of supposed “consumer rights”.

#4 which suggest that assisting the buyer consumer with property selection, and giving advices regarding properties with inherent market weaknesses BEFORE an offer is made, is of no never mind, since they don’t do that.

#8 seems to forget that the Seller is a “consumer” as well, and so maybe this “Consumer Bill of Rights” should say “Buyer Consumer’s Bill of Rights” and we should counter balance with a “Seller Consumer’s Bill of Rights“. I may just have to pen that one myself, showing that Seller’s have the right for the buyer to be fully and well represented, to protect the seller from after-sale consequences of the buyer being inadequately advised and represented by the buyer’s agent”.

I’m heading over to Greg and Kevin’s sites to comment on their take on this. In the meantime, enjoy the “breaking news”. I expect most of the major brokerages will simply choose to ignore it, hoping it will just “go away”.

10 Great Interview Questions for Agents

The Dumb Little Man (who is anything but…) just listed 10 questions he asked real estate agents along with the answers he got and the answers he wanted to hear.

How are you going to advertise my home?
Why are you saying my home is worth $400K when I think its worth $325K?
Is your realty company placing pictures on your website and other listing services?
Will you be at the closing or will you send a lackey?
Show me your municipal reporting on the area?
What are your stats?
How accessible are you?
What is your commission?
How can I prepare to show my home?
Can I have the names and phone numbers of the last 3 people that listed with you?

Note that this blog post got picked up by lifehacker and there are some interesting conversations going on over there as well…

Update: Just noticed I was a little behind on this story as it was already covered by both Jonathan and Erik. 🙂

Zillow's new way to spite your neighbor

Mix Zillow’s amazing capacity to quietly market itself and its new feature (list your home on Zillow, FSBO or FSBAgent) and you have a great new service for driving traffic… to your annoying neighbor’s house. List their house at 25% below Zillow’s estimated value and invite people to come by to see the place anytime after 8 on weekdays. You could alternately ‘claim’ their house and hold it until they decide to sell, at which point you get to choose the price, at least on Zillow. To be fair, listing someone’s house has always been possible on Craigslist, but you never had to send in proof of ownership to be able to reclaim your house from them.

More seriously, I’ve been expecting Zillow to launch a service like this for quite a while, but frankly I thought it would take them a little bit longer to get their act together and figure out exactly how it would work.

A few thoughts:

1. Zilllow is making it a pain to bulk upload listings, which gives FSBOs exactly the same capacity to list as the biggest companies. They’re doing this for two reasons: Individuals are more likely to list (and look at ads and puruse the site) if their agent doesn’t say “we automatically list so you don’t have to worry” AND because it makes it harder for competitors to get the same information. If they allowed bulk submit, third party websites would do most of the work posting listings to all the free listings sites on the web. (So Greg, I disagree with you here) Expect an API for listing if people aren’t listing in high numbers (see number 3).

2. Many consumers already believed that Zillow had houses for sale, so this revelation won’t surprise the real estate-casual public.

3. Zillow has the best shot at getting the chicken or the egg (you need one to get the other). Most non-MLS sites (Trulia, Propsmart, ForSaleByOwner, etc.) have had the nasty problem of beginning with no listings and no searchers (no chickens or eggs). Each has tried a novel and somewhat successful way of getting searchers or listings – crawling sites for listings, offering free listings, pay-per click ads to lure searchers, etc. None of them seem to have hit the point of no return: the point at which searchers start using the site exclusively, causing any remaining listers to clamor for inclusion. Based on the marketing buzz alone, Zillow may be the first to hit this point. Once (if?) they hit some critical number (70%? 80%? 90% of listings?), the tide will turn and nearly all holdouts will list themselves. They can always include an API to increase inclusion, but I think they’d rather have agents and consumers list manually and add more information to their Zillow listings.

4. Zillow almost has enough buzz to get the holy grail of online real estate listings – actual people listing their own homes en masse and actual searchers using a non-MLS based site. Uninformed home buyers will probably use it to search for homes until they realize that, at least in the short run, Zillow doesn’t have a bunch of the houses that are for sale.

5. Many local MLS systems will probably fall by the wayside as the primary places that agents and consumers go to search for houses. This is because most of them have too many rules and regulations for using their data, which binds the hands of innovators.

6. Is ‘Make Me Move’ basically a slow motion auction with no end date? You state a “buy it now” price and wait for bidders to inch up to that price? It seems like a surefire way to see get a bunch of homes, but you never know if you’ll find that gem in the rough. It certainly won’t work for commodity-like homes in suburban developments or condos unless the “buy it now” price is really close to the market price.

7. Agents, you’re kidding yourself if you believe that Zillow isn’t going to make your life harder. When anyone can list their home on the web without paying $500 to some brokerage, it’s time to offer real services or get out of the game. Also, if people know someone who has successfully done a FSBO, it’ll seem a lot easier for them to do the same.

Agents and brokers of the future, you’re also kidding yourself if you believe that Zillow is responsible for shrinking commissions (they’re coming) and a changing industry because it’s not: Zillow is just the product of the web’s relentless market and information opening power. We are leaving the time of the agent-leads-consumer model in the real estate industry and we are entering the time of the agent-coaches-consumer model. More on how I hope to participate in this change in the coming weeks and months.

Update: I suspect Zillow will allow for bulk uploads in the future no matter what, but it makes sense to take things like this slowly. They will need to be especially vigilant to keep out listing spammers who could use an API to upload dozens of false homes.

Should You Leverage Your Home or Pay it Down Rapidly?

There is a great debate within the inner-mortgage circles these days. Should we, as loan professionals, encourage clients to borrow as much money as possible? Or would consumers benefit more if we helped them to understand the advantages of 15-year amortization schedules and pre-paying principal? Let’s examine the pros and cons of both strategies.

Leveraging Your Property. In order to understand why you’d want to borrow as much as possible for your home purchase, you must first grasp the concept that equity has a zero rate of return. Here’s an example:

If Consumer “A” buys a home for $300,000, and puts 20% down, then they have $60,000 in equity. Over the next 5 years, the property appreciates $100,000 in value. Consumer “A” now has $160,000 in equity.

Consumer “B” buys a home for $300,000, and puts no money down. At the end of 5 years, that same home is now worth $400,000. Consumer “B” has $100,000 in equity, which is the same appreciation as Consumer “A”, a net $100,000.

As you can see, your down payment has nothing to do with your rate of return. What becomes important is how you choose to manage the $60,000 you didn’t use as a down payment. If you use it for frivolous activities, such as buying toys or going to Las Vegas, it would be more prudent for you to use that money as a down payment. Especially since this will enable you to obtain a lower interest rate.

However, if you were to invest the $60,000 in a vehicle that can out-earn the cost of that debt, then this could be a formula for success. This is why some lending professionals suggest putting as little down as you possibly can, maximizing your tax write-off, and investing the rest. This principle has been applied for many years in the life insurance game. The old saying goes, “Buy term and invest the rest.” The key component is taking the money you would have used as a down payment and creating an asset accumulation account. This account should earn a significant enough rate of return to enable you to pay your mortgage off entirely and achieve the ultimate goal of being debt-free.

Paying Your Home Down Rapidly. There are very few times over the course of my career that I have seen a client with zero debt and no financial difficulties. Choosing to pay off all of your debt can reduce stress and help you to gain freedom of cash flow for investment opportunities. A 15-year mortgage or a bi-weekly payment strategy provides structure. It can also put you on track to have your mortgage paid off within a set timeframe. Simply put, it contains built-in discipline.

It’s important, however, to understand that regardless of how rapidly you pay your home off, you’re not getting any greater rate of return on your investment than if you paid it off slowly.

Conclusion. So how does one determine which scenario is best? The choice depends entirely upon the individual. Savvy consumers who are disciplined, and are comfortable taking chances from an investment perspective, would do well with the first scenario. Over the course of time, it’s been proven that your rate of return over the long-haul will be far greater than the rate you’d pay for a mortgage in today’s rate environment. It’s important to seek the advice of a skilled investment advisor to ensure success with this strategy.

The second scenario is best for those who have a difficult time managing their money or who’ll sleep easier at night knowing they have a plan in place to pay their loan off more rapidly. Be sure that your budget can handle accelerated payments. When consumers “bite off more than they can chew” with a 15-year mortgage, they frequently end up having to refinance back into a 30-year schedule.

If you find this subject intriguing and would like to know more, I recommend that you read a book titled, Missed Fortune 101, by Douglas Andrew. It’s an outstanding read that is very simplistic and goes into far greater detail than I can cover in this column. Douglas is a financial planner who advises safe-structured investments such as whole life policies and tax-free fixed income instruments.