Court ruling could encourage realty payoff scheme revival

Court ruling could encourage realty payoff scheme revival

Kenneth R. Harney on Oct 21, 2016

WASHINGTON – A decision by a federal appellate court last week is casting new light on practices in the real estate field that buyers and sellers often know little about- Creative, under-the-table payoff schemes among realty brokers, mortgage lenders and title companies that can stifle market competition and raise settlement costs to consumers by hundreds or even thousands of dollars.

The court case involved a $109 million fine levied against mortgage lender PHH Corp. by the Consumer Financial Protection Bureau for allegedly violating the federal real estate anti-kickback statute through its mortgage insurance operations. PHH disputed the charges and filed suit, challenging not only the CFPB’s interpretation of the anti-kickback law, but the bureau’s constitutionality.

The constitutional challenge focused on the unusual structure of the bureau, which is headed by a single director who can only be terminated “for cause.” The court agreed with PHH on the statutory interpretation issue and ruled that henceforth the CFPB director would be like other executive branch agency heads – removable by the president at will.

Created by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the bureau has substantial oversight powers. During its short life, the CFPB has levied fines or provided financial relief to consumers totaling what it estimates to be in excess of $11 billion from banks and other entities accused of illegal activities.

Though the PHH case did not directly involve the types of fees-for-referrals practices that are widespread in the real estate industry, the ruling has called into question the legitimacy of the bureau’s regulatory interpretations on “marketing services agreements” and certain “affiliated business” relationships. In a typical marketing services agreement, a title company or lender agrees to pay a real estate broker or an individual agent fees for promotional assistance, say by prominently displaying a title company’s brochures or actively making recommendations about the benefits of using its services to home buyers.

The money involved can be significant – thousands of dollars a month in some cases. One title agency head who refuses to participate in such arrangements, Todd Ewing of Federal Title & Escrow, told me that the “going rate” quoted to him by a Washington D.C.-area real estate brokerage firm for marketing services was $15,000 per month. In exchange, the brokerage firm would steer new buyers to Ewing’s title firm.

Mark Greene, a loan originator for HomeBridge Financial Services in New Jersey, says that some large realty brokerage firms essentially “put it out for bid” – they ask lenders who’d like to receive referrals from their agents “what do you offer us?”

“It goes to the highest bidder,” he told me in an interview.

Late last year the CFPB issued a stern warning about marketing services agreements- Large numbers of them may violate the anti-kickback law, the Real Estate Settlement Procedures Act, known as RESPA. Based on the bureau’s investigative efforts, it said, “it appears that many [marketing services agreements] are designed to evade RESPA’s prohibitions against kickbacks and unearned fees.” As a result of the bureau’s statement, some major lenders said that they were terminating whatever marketing services arrangements they had to avoid the risk of being hit with penalties by the CFPB.

But now, in the wake of the PHH decision that calls into question the CFPB’s interpretations of RESPA, there are concerns in the industry that some companies no longer will feel constrained and could return to old referral scheme practices or invent new ones.

One legal expert on RESPA, Marx Sterbcow of New Orleans, told me “my fear is that we’re going to see [companies] think ‘OK, now there are no more rules,” leading to a resurgence of illegal payoff schemes. That, in turn, could “destabilize markets” – harming lenders and title companies who refuse to make referral payments – and expose consumers to needlessly higher settlement charges.

What can you do to avoid settlement cost rip-offs? Sterbcow recommends you ask this question of any realty agent who seems to be nudging you toward a specific title agency or lender- “Does your broker or do you have any type of business relationship with this company?” Ask for any written disclosure about the relationship, which may be tucked away with other boiler-plate documents you received, and easy to miss.

Most important of all- Always shop the market aggressively for your mortgage, title and settlement services. Compare quotes. When service providers aren’t paying for what may amount to referrals, they often can offer you better prices.

Court ruling could encourage realty payoff scheme revival

Court ruling could encourage realty payoff scheme revival

Kenneth R. Harney on Oct 21, 2016

WASHINGTON – A decision by a federal appellate court last week is casting new light on practices in the real estate field that buyers and sellers often know little about- Creative, under-the-table payoff schemes among realty brokers, mortgage lenders and title companies that can stifle market competition and raise settlement costs to consumers by hundreds or even thousands of dollars.

The court case involved a $109 million fine levied against mortgage lender PHH Corp. by the Consumer Financial Protection Bureau for allegedly violating the federal real estate anti-kickback statute through its mortgage insurance operations. PHH disputed the charges and filed suit, challenging not only the CFPB’s interpretation of the anti-kickback law, but the bureau’s constitutionality.

The constitutional challenge focused on the unusual structure of the bureau, which is headed by a single director who can only be terminated “for cause.” The court agreed with PHH on the statutory interpretation issue and ruled that henceforth the CFPB director would be like other executive branch agency heads – removable by the president at will.

Created by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the bureau has substantial oversight powers. During its short life, the CFPB has levied fines or provided financial relief to consumers totaling what it estimates to be in excess of $11 billion from banks and other entities accused of illegal activities.

Though the PHH case did not directly involve the types of fees-for-referrals practices that are widespread in the real estate industry, the ruling has called into question the legitimacy of the bureau’s regulatory interpretations on “marketing services agreements” and certain “affiliated business” relationships. In a typical marketing services agreement, a title company or lender agrees to pay a real estate broker or an individual agent fees for promotional assistance, say by prominently displaying a title company’s brochures or actively making recommendations about the benefits of using its services to home buyers.

The money involved can be significant – thousands of dollars a month in some cases. One title agency head who refuses to participate in such arrangements, Todd Ewing of Federal Title & Escrow, told me that the “going rate” quoted to him by a Washington D.C.-area real estate brokerage firm for marketing services was $15,000 per month. In exchange, the brokerage firm would steer new buyers to Ewing’s title firm.

Mark Greene, a loan originator for HomeBridge Financial Services in New Jersey, says that some large realty brokerage firms essentially “put it out for bid” – they ask lenders who’d like to receive referrals from their agents “what do you offer us?”

“It goes to the highest bidder,” he told me in an interview.

Late last year the CFPB issued a stern warning about marketing services agreements- Large numbers of them may violate the anti-kickback law, the Real Estate Settlement Procedures Act, known as RESPA. Based on the bureau’s investigative efforts, it said, “it appears that many [marketing services agreements] are designed to evade RESPA’s prohibitions against kickbacks and unearned fees.” As a result of the bureau’s statement, some major lenders said that they were terminating whatever marketing services arrangements they had to avoid the risk of being hit with penalties by the CFPB.

But now, in the wake of the PHH decision that calls into question the CFPB’s interpretations of RESPA, there are concerns in the industry that some companies no longer will feel constrained and could return to old referral scheme practices or invent new ones.

One legal expert on RESPA, Marx Sterbcow of New Orleans, told me “my fear is that we’re going to see [companies] think ‘OK, now there are no more rules,” leading to a resurgence of illegal payoff schemes. That, in turn, could “destabilize markets” – harming lenders and title companies who refuse to make referral payments – and expose consumers to needlessly higher settlement charges.

What can you do to avoid settlement cost rip-offs? Sterbcow recommends you ask this question of any realty agent who seems to be nudging you toward a specific title agency or lender- “Does your broker or do you have any type of business relationship with this company?” Ask for any written disclosure about the relationship, which may be tucked away with other boiler-plate documents you received, and easy to miss.

Most important of all- Always shop the market aggressively for your mortgage, title and settlement services. Compare quotes. When service providers aren’t paying for what may amount to referrals, they often can offer you better prices.

Low down payment FHA condo mortgages coming back?

Low down payment FHA condo mortgages coming back?

Kenneth R. Harney on Oct 7, 2016

WASHINGTON – For many condominium buyers and sellers across the country, the Obama administration delivered what seemed like encouraging news last week- The Federal Housing Administration, once the primary source of mortgage financing for moderate-income and first-time condo buyers, is coming back, big time.

But the real story was more complex.

Under new reform proposals, FHA plans to loosen some of its controversial and strict eligibility rules that have caused condo associations nationwide to abandon the program. It also wants to revive so-called “spot loans” – mortgages for individual units in condo buildings that haven’t received blanket certifications from the agency. That change alone could open up low-down-payment financing for millennials, minorities and others in many of the estimated 150,000-plus condo projects in the United States. The Community Associations Institute estimates that just 14,000 condo projects nationwide – less than 10 percent of the total – are now certified for FHA-insured mortgages.

The proposals would also throw a lifeline to senior owners of condo units who need a reverse mortgage to supplement their retirement income. Since FHA’s reverse mortgage program accounts for an estimated 90 percent-plus of all reverse mortgages, the recent inability of seniors living in uncertified condo buildings to obtain reverse mortgages has effectively denied them funds they’d otherwise be able to access.

To real estate professionals such as Norva Madden, an agent with Long & Foster Real Estate in the Maryland suburbs of Washington D.C., reopening FHA financing to more condo projects – after nearly eight years of rules that scared them away – can’t come soon enough. She’s had multiple, well-qualified buyers eager to buy condo units in the affordable $155,000-$160,000 range walk out the door when they discovered they couldn’t use FHA financing because the building where they hoped to live had left the federal program. Rather than selling quickly for close to list prices, units in non-certified buildings often languish on the market for 90 to 180 days, she said, and then sell below the asking price. In one recent case, an elderly owner was forced to sell her two-bedroom condo to a low-ball bidder for $13,000 less than she could have otherwise obtained from FHA-qualified buyers.

Lack of FHA certification “puts a hardship on the sellers” in middle-income buildings, Madden told me – it costs them real money.

But the new proposals may not be as favorable to sellers and buyers as they appear at first glance. A key test of eligibility for FHA is a building’s percentage of owner occupants versus renters. In recent years, FHA has required that at least 50 percent of a building be owner-occupied to qualify. Housing industry critics have said that’s too high and excludes too many financially sound, well-managed projects. This past summer, Congress passed a bill by unanimous votes in both chambers requiring FHA to drop the threshold to 35 percent within 90 days or provide justification for anything higher.

Here’s the sticky wicket- In its proposal Sept. 27, the agency didn’t address that mandate but offered a starkly different approach. It plans to select limits from an owner-occupancy range between 25 percent and 75 percent, and vary them whenever it chooses by issuing a “notice.” FHA said the current 50 percent limit “has worked” but did not explain what that meant. The congressional deadline for compliance with the 35 percent requirement is near the end of October. Whether the agency intends to stick with its current rule or accept Congress’s more lenient standard is unclear. But under FHA’s proposal, the mandatory owner occupancy percentage could be raised to more than double what Congress directed or it could be 10 percentage points less.

One long-time expert in the field, Chris Gardner, president of FHA Pros LLC, a Northridge, California-based national consulting firm that helps condo associations obtain certifications from FHA, had mixed feelings about what the agency is up to.

If it follows through on its spot loan proposal, he says, it will be a “landmark” decision because it “will make so many more purchases happen” in projects currently lacking certification.

But Gardner is concerned about FHA’s proposed range of 25 percent to 75 percent on owner occupancy. It might be “intended to give [FHA] flexibility without having to involve Congress,” he said. But it might also be “an attempt to bypass Congress.”

Bottom line- Don’t bank on any immediate changes until FHA announces final rules. If the agency is playing a runaround game, it’s up against the wrong opponent- a Congress that is determined to revive the affordable condo market.