Banks selling real estate: a bad idea

Is it my imagination or did I hear someone complain about real estate commissions?

Anyone complaining about real estate commissions now won’t be thrilled if banks get away with it and are allowed to sell real estate, something the American Bankers Association (ABA) has tried to do. lobbying, pressuring Congress and paying millions of dollars in the process through special contributions – over the past seven years. And it doesn’t matter if banks aren’t allowed to share commissions. All the banks have to do, once they’re allowed to go into real estate, is buy brokerage firms and they can share all the commissions in the world without ever 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 a little math 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 is a commission. So, therefore, the user fee that a bank charges a borrower in percentage for the use of a given 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 the index, which gives them more control than using other indexes. To determine the interest rate on a mortgage, bankers add a few percentage points to the index rate, cumulatively called “margin.” The margin amount 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 markup and then offer a “special” 1 percent 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 markup charged by banks is by year! So if it is true that the average consumer retains ownership of it for seven years, the ‘fee’ charged by the banks is really 14 percent. The only difference is that the margin is applied to the principal of the mortgage, that is, the amount borrowed against the real estate brokerage commission, which is applied to the total sale price. But this doesn’t help much when you consider that almost fifty percent of all mortgage transactions involve 95 percent financing.

Banks have realized that the US real estate brokerage market amounts to about $61 billion, a sum that, if tied to a single company, would rank 19th in the Fortune 500, ahead Boeing, Microsoft, Morgan Stanley and JPMorgan Chase. Paraphrasing Scarlet O’Hara in gone With the Wind, this is a market that is ‘worth fighting for and worth dying for’. Without a doubt, the tactic adopted by ABA is that of indifference. The ABA is trying to convince Congress that banks aren’t really interested in pursuing this line of business, even if they could do so legally, but would like to be able to pursue it… just in case.

The truth, of course, is very different and is deeply ingrained in the economics of real estate. Brokerage houses charge commissions to Sellers, the recipients of the proceeds of money in a real estate transaction, and only when the Sellers have received that proceeds. Banks, on the other hand, charge interest rates to Buyers. What ABA intends and tries to do now is collect both Buyers and Sellers. Kind of like eating from two plates at the same time, so to speak. Give the money to the Buyer to complete the transaction and charge the Seller for completing it.

So, again, how much would you like your members to charge the ABA real estate commission, if they were allowed to go into real estate? Let’s see: there’s the Buyer’s 14 percent for seven years, there’s the Seller’s 6 percent at closing, and then of course there are ‘minor’ commissions like appraisal fees, installation fees, administrative fees, loan origination, loan cancellation fees, initial fees and then, of course, there is the 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 independent, nonprofit information and testing organization serving only consumers, is lobbying Congress hard to to conduct more studies on this subject.

But aside from the additional cost to consumers, letting banks go into real estate would not only be bad for the industry and consumers, it would also be bad for the economy as a whole. Indeed, the notion of a ‘free market’ in which all economic decisions regarding transfers of money, goods and services are made voluntarily, 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 homes, 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 bankers’ responses, ranging from the friendly “no..no..no”, to the tap on the shoulder and the nod, to the smile sarcastic, even the glacial gaze 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?

Are banks entering the real estate sector? Don’t let that happen to you.

Louis Frascati