Class action suit could change real-estate commissions Kenneth R. Harney on Mar 22, 2019 WASHINGTON – In what could be the most far-reaching antitrust lawsuit for the real estate market in decades, the National Association of Realtors and four of the largest realty companies have been accused of a conspiracy to systematically overcharge home sellers by forcing them to pay commissions to the agents who represent the buyers of their homes. The class-action suit, filed in federal district court in Chicago, focuses on a rule it says has been imposed by the NAR. The rule requires brokers who list sellers’ properties on local multiple listing services (MLSs) to include a “non-negotiable offer” of compensation to buyer agents. That is, once a home seller agrees in a listing to a specific split of the commission, buyers cannot later negotiate their agents’ split to a lower rate. That requirement, the suit alleges, “saddle(s) home sellers with a cost that would be borne by the buyer in a competitive market,” where buyers pay directly for the services rendered by their agents. In overseas markets where there is no such mandatory compensation rule for buyer agents, total commission costs tend to be lower – averaging 1 percent to 3 percent in the United Kingdom, for example – versus the 5 percent to 6 percent commonplace here. The suit alleges that if buyers in the U.S. could negotiate fees directly with the agents they choose to represent them, fees would be more competitive and lower. Today many American buyers are unaware of their agent’s commission split. Sellers typically know the percentage because they agree to it in the listing contract. But they may wonder- Why am I required to pay the fee of the buyer’s agent, who may be negotiating against my interests in the transaction? Also, at a time when buyers often search for and find the house they want to buy online, shouldn’t compensation for a buyer’s agents be decreasing, rather than stuck in the 2.5 percent to 3.0 percent range? Besides NAR, the suit names RE/MAX Holdings Inc., Keller Williams Realty Inc., HomeServices of America Inc. and Realogy Holdings Corp. as co-defendants. NAR, with 1.3 million members, is the largest trade group in the industry. The four realty companies named as defendants are behemoths- franchisor Keller Williams has approximately 180,000 agents in the U.S. and Canada; RE/MAX has 120,000 agents; Realogy includes among its brands Better Homes and Gardens, Century 21, Coldwell Banker Real Estate and ERA; HomeServices of America is a Berkshire Hathaway affiliate and includes among its companies regional powers such as Long and Foster Real Estate and Edina Realty. The plaintiff in the case is Christopher Moehrl, who sold a home in 2017 using a RE/MAX broker to list the property; the buyer was represented by Keller Williams. Moehrl paid a total commission of 6 percent. Just under half of that, 2.7 percent, went to the buyer’s agent. If Moehrl’s case is certified as a class action, the potential number of sellers affected would be massive. It includes sellers who have paid a broker commission during the past four years in connection with a home listed by an MLS in these metropolitan areas- Washington D.C.; Baltimore; Cleveland; Dallas; Denver; Detroit; Houston; Las Vegas; Miami; Philadelphia; Phoenix; Salt Lake City; Richmond, Virginia; Tampa, Orlando, Sarasota and Ft. Myers, Florida; Charlotte and Raleigh, North Carolina; Austin and San Antonio, Texas; Columbus, Ohio; and Colorado Springs, Colorado. NAR Vice President Mantill Williams called the suit “baseless” and said it “contains an abundance of false claims,” but he provided no specifics. Representatives of the four realty companies declined comment. But some Realtors say the suit could dismantle the compensation system as it now exists. Anthony Lamacchia, broker-owner of Lamacchia Realty in Waltham, Massachusetts, says if the suit is successful “it would basically destroy buyer agency, which would not be in the best interests of buyers or sellers.” Lamacchia argues that even in an era where buyers frequently find homes online, buyer agents have important functions in managing contract negotiations, providing strategic advice and guiding clients through the process to closing. Some brokers challenged allegations in the suit, such as buyer agents refusing to show homes with low commission splits. Alexis Eldorrado, managing broker of Eldorrado Chicago Real Estate, told me that “in reality, if the buyers have found the place they want and are interested in seeing it, NAR’s code of ethics requires the agent to show it.” [Disclosure- Having sold a house in 2017, I am a potential class member if a class action is certified. To avoid any perceived conflict of interest, I will opt out of the class.]

Buying a home just got easier for many in the gig economy Kenneth R. Harney on Mar 15, 2019 WASHINGTON – If you’re one of the millions of Americans who are self-employed or earn money on the side through freelance, contract or “gig” work, you may know the drill firsthand- Applying for a mortgage can be an intrusive ordeal. Compared with people who have W-2 forms or pay stubs to verify their income, you encounter a much more time-consuming process. Lenders want to see your full tax returns for a couple of years – the whole box of stuff, not just an electronic transcript from the IRS. They need hard documentation of any income you’re claiming to qualify for the loan. And even if you can document your sideline pay, it might not be steady enough or ongoing long enough to be eligible under mortgage-industry rules. You’re likely to get hit with a lot of questions- How come you reported less on your tax returns than what you’re claiming as your income on your loan application? You may also get charged more in fees, take longer to get approved, and end up with a slightly higher interest rate on your loan. Lenders do this because self-employed earnings for mortgage eligibility purposes can be squishy, and there’s a lot riding on accuracy. If they approve a loan that turns out to be based on inflated or ineligible self-employment income, they can be hit with severe penalties. If they sold your mortgage to an investor, which is commonplace, they could be forced to buy it back. But major improvements are underway- As of last week, the two largest sources of mortgage money in the U.S. – investors Freddie Mac and Fannie Mae – have deployed remarkable new technology that automates underwriting for applicants who are self-employed or have significant side income. Applications that previously would have taken days to analyze and verify may now take just minutes, thanks to the use of “optical character recognition” (OCR) technology that reads tax returns, identifies what qualifies as eligible income, and integrates it into both companies’ electronic underwriting systems. Dallas-based tech company LoanBeam supplies the OCR solution in both cases. Freddie Mac notified its thousands of lenders of the change March 6; Fannie Mae introduced its program in December. Instead of an underwriter having to plow through wads of tax documents, lenders can now upload the paperwork directly to LoanBeam, where it will be scanned and analyzed within minutes, saving time and money for borrowers and lenders alike. Andy Higginbotham, a Freddie Mac senior vice president, told me the new system “takes three to five days out of the process,” can cut hundreds of dollars in costs, and slashes risk for the lender. If Freddie’s automated underwriting system approves the application with the LoanBeam-verified income, Freddie will not hold the lender responsible for inaccuracies that pop up later. Fannie Mae’s system does the same. The move to automation could have wide impacts. In 2016, the Bureau of Labor Statistics reported that there were approximately 15 million self-employed individuals in 2015, one of every 10 people in the workforce. A tax-preparation industry estimate indicated that more than one-third of workers earned income from “gig-economy” sources in 2015 – such as driving for Lyft or renting out a house via Airbnb – and that the total will exceed 40 percent by 2020. Lenders say Freddie’s and Fannie’s improvements could have benefits for home buyers, sellers and realty agents that may not be immediately obvious. Josh Moffitt, president of Silverton Mortgage, headquartered in Atlanta, says that having absolute certainty about income eligibility up front should give buyers greater confidence as they shop for a home. And it could help dramatically in meeting contingency-clause financing deadlines in contracts, eliminating situations where underwriters are still struggling with verifying income days or hours before a contingency expires. John Meussner, executive loan officer for Mason-McDuffie Mortgage in San Ramon, California, says streamlined underwriting should also eliminate a lot of confusion – and conflict – between applicants and lenders. Currently there is often “a huge disconnect [between] what self-employed borrowers THINK they make versus what they actually make” under mortgage-industry rules, he said in an email. “Many people still fail to realize they can’t write off income in tax returns and then use that written-off income as qualifying income for a mortgage.” Bottom line- If you’re self-employed or have gig income, be aware of the changes. Since the programs are new, not all lenders may offer streamlined income verification yet, but if they’re on the ball, they soon will.

Zillow sued over hacked listing of California mansion Kenneth R. Harney on Mar 8, 2019 WASHINGTON – What may be the first-ever hijacking of an active real-estate listing online – a palatial mansion overlooking the Pacific Ocean in Bel Air, California – has led to a lawsuit seeking $60 million in damages against home-sale marketing company Zillow. One or more hackers seized control of the mansion’s listing page on Zillow’s popular Zestimates site in February, causing it to display a series of bogus sales that were tens of millions of dollars below the $150 million asking price, according to the complaint filed in federal district court in Los Angeles. The net effect was to inflict financial damage on the seller by “corrupt[ing] the listing price dramatically,” according to the complaint, making it more difficult to obtain anywhere near the price the seller is seeking. The newly constructed hilltop house is a knockout, even by Hollywood standards- 12 bedrooms, 21 baths, 38,000 square feet of interior space, 17,000 square feet of “entertainment decks,” three kitchens, five bars, fitness spa, four-lane bowling alley, basketball and tennis courts, wine cellars and an 85-foot “glass-tile infinity pool,” to cite just some of the amenities. It is owned by a limited liability company controlled by Los Angeles luxury builder Bruce Makowsky. The hijacking occurred when someone using a Chinese IP address and a made-up U.S. phone number managed to successfully claim “ownership” of the mansion on Zillow’s Zestimates page. Zillow, which displays pages on 110 million American homes – properties listed for sale and off the market – offers a feature that allows owners to amend descriptions of their homes on the site. The feature is heavily used by legitimate owners to modify information posted about their house – numbers of bedrooms and baths, for example, or a recent remodeling that affects the property’s market value. To successfully make such a claim, owners must answer questions designed to verify their identity. In this case, according to the suit, hackers figured out how to get past Zillow’s security questions and began manipulating information on the site. They erroneously reported that the house sold for $110 million on Feb. 4, then for $90.5 million on Feb. 9 and $94.3 million Feb. 10. They also listed an open house for the property on Feb. 8, something that would be unusual in the rarified world of super luxury homes, where showings tend to be exclusively by appointment. The suit alleges that Zillow was negligent in allowing false and harmful information to be posted on the mansion’s page, despite repeated requests for “over a week” from the seller’s lawyers to pull the plug on the hackers. Zillow does not have adequate “safeguards in place to prevent Internet trolls, criminals” and others “to commit illegal acts” by “logging into their system to post the false information,” the suit alleges. Asked for comment, Kate Downen, a Zillow spokesperson, said that “while we don’t discuss pending litigation, I can tell you that [the company] goes to great lengths to display current and accurate data.” Downen added that Zillow is “in the process of updating” the verification system for access to owner pages on the Zestimate site. In an exhibit accompanying the complaint, attorneys for the owner included a copy of an email from Kim Nielsen, senior lead counsel for Zillow Group Inc., in which she says, “Unfortunately if someone is able to provide responses to the verification questions, they are able to claim the home … we do not manually check each time someone attempts to claim a home.” The complaint also quotes Nielsen as saying that “any home on our website can be claimed by the homeowner. There are a series of questions … but if someone attempts to claim [the property] enough times, they will know the questions asked and be able to figure out what information they need to verify their identity.” Ronald Richards, the seller’s attorney, asked “How is it that someone with a fake phone number (bad area code) and Chinese IP address and email can hijack [a] $150 million house?” In an interview, Richards said “it’s impossible to have a site” like the Zestimate owner-claim page if effectively there are “no security protections.” So what should homeowners whose house is listed on Zillow make of this suit? Even if your home is not a dazzling palazzo on a hill, the secret is out- Though it’s highly unlikely, your Zillow page can be hacked and stolen by online troublemakers. Until Zillow announces verification reforms, it’s probably worth checking your Zestimate page now and then. (To view the Bel Air property, here is a link- http-//tinyurl.com/ycx8nyz3)

More Americans are paying mortgages on time Kenneth R. Harney on Mar 1, 2019 WASHINGTON — It’s a real estate and social barometer that doesn’t get a lot of publicity, but it’s important: More Americans are paying their mortgages on time today than they have in nearly two decades — maybe even longer. That’s a big deal, because when large numbers of owners do the opposite — stop paying on their home loans for months at a time — the entire economy feels the effects. Spiking delinquencies in 2007-2008 ushered in the global financial crisis and spawned tidal waves of foreclosures that devastated borrowers and their communities. Some of the wounds are still fresh. Delinquency rates may sound like a yawn, but they are a key economic bellwether that shouldn’t be ignored by anyone serious about real estate. So here’s the good news: The national delinquency rate on home loans hit the lowest level it’s been in 18 years as of the final quarter of 2018, according to data compiled by the Mortgage Bankers Association. Borrowers with conventional mortgages, those eligible for sale to investors Fannie Mae and Freddie Mac, are the best performers; roughly 97 percent of them are paying on time. Borrowers with Federal Housing Administration-insured (FHA) mortgages pay late nearly three times more frequently; even so, more than 91 percent of them are on time. The big gap between homeowners with conventional loans and FHA borrowers shouldn’t be surprising, because FHA borrowers have lower credit scores, higher debt-to-income ratios and lower down payments on average. All three factors multiply the risk that borrowers will pay late. Yet even at 8.65 percent, the current FHA delinquency rate is much better than it was a decade ago, when it hovered around 14 percent. Overall, says Freddie Mac Chief Economist Sam Khater, U.S. homeowners are performing better today in terms of on-time payments and foreclosure avoidance than they have in 30 years. What’s contributing to this good behavior? It’s no secret: Since 2010, stricter federal underwriting rules imposed on the mortgage industry have banned some of the lending industry’s previous worst habits, and required them to screen out high-risk borrowers — essentially limiting their customer base to people who can truly afford the mortgages they’re seeking. In the conventional market, that’s why Fannie Mae and Freddie Mac — the country’s two largest sources of mortgage money — have kept their average FICO credit scores near a relatively pristine 750, well above levels typical before the financial crisis. (FICO scores run from 300 to 850, with low scores indicating a high probability of future delinquencies and foreclosures.) An improving economy has helped significantly as well. Mortgage interest rates continue to be below historical averages. Unemployment has fallen steadily and is now at or near multi-decade lows. Plus many of today’s owners are sitting on sizable equity gains as they pay down mortgage balances on their homes while price inflation pushes their values up. The Federal Reserve estimates homeowner equity now totals a stunning $1.5 trillion, the highest ever. For some owners, that cushion functions as an insurance policy should anything threaten their ability to pay the mortgage. How long can the current impressive performance continue? No one can be certain, but here are a couple of observations. Mortgages originated in the past several years under strict federal rules constitute what lenders and investors call “the cleanest book of business” they’ve seen in many years. If the lending industry begins to relax underwriting standards in any significant way in order to dig deeper into the pool of riskier credit applicants to pump up their volume of home-purchase mortgages, it’s inevitable that delinquencies will rise. There’s some evidence that a modest loosening of standards got underway last year. Homeowners’ demand for refinancing dissipated with rising interest rates, and some lenders began easing standards to include a broader mix of applicants. FICO itself confirmed in a study that average credit scores were on the decline in the home-mortgage arena. Fannie Mae relaxed its policy on debt-to-income (DTI) ratios for buyers, allowing more applicants with DTIs up to 50 percent to pass muster for a loan. Previously, the cut-off was 45 percent. Meanwhile, the FHA has seen notable declines in average credit scores and is approving low-down-payment purchasers with DTI ratios well above 50 percent. Steps like these may appear — and be — helpful for marginally qualified first-time buyers. But what will they look like through hindsight during the next recession?

Should seniors take the rap for the gap in homeownership by millennials? Kenneth R. Harney on Feb 15, 2019 WASHINGTON – Are senior homeowners preventing millennials from buying houses? Could the decisions of millions of older owners to “age in place” rather than sell their homes explain why millennials are lagging behind in homeownership? A provocative new study (link- https-//tinyurl.com/y3why5mh) from federally chartered mortgage investor Freddie Mac suggests the answer may be yes. “Who is living in those homes that millennials might otherwise have bought?” ask the study’s authors. Their answer- baby boomers, war babies and people born in the 1930s. By hunkering down longer than would have been typical of earlier generations – who would have sold their homes in greater numbers by now -today’s seniors are effectively denying their houses to the real estate market. As a result, according to the study, roughly 1.6 million homes have been kept out of buyers’ reach in recent years, sharply reducing the availability of houses nationwide that millennials could buy. “The most important fundamental in today’s housing market is the lack of houses for sale,” says the Freddie Mac study, which was conducted by the company’s economic and housing research group. Does all this sound right? There’s no question that tight inventories exert upward price pressure on properties that are available, and they make it tougher for many buyers to afford homeownership. And there’s no question that millennials haven’t opted for ownership at rates comparable to earlier generations. When the Urban Institute’s Housing Finance Policy Center studied the matter last summer, it estimated that 3.4 million millennials are missing from the ranks of homeownership, based on the behaviors of boomers (born between 1946 – 1964) and gen X-ers (born between 1965-1980). Millennials are 8 percentage points behind earlier generations at the same age. But should seniors take the rap for the gap? Previous studies of millennial homebuying have pointed to multiple causes for differences in ownership rates. Last month, the Federal Reserve identified ballooning student-loan debt loads – now an estimated $1.5 trillion nationwide – as a key barrier to millennial home purchasing. It estimated that 20 percent of the decline in ownership among young adults since 2005 can be attributed to student debt, which doubled in real terms during the decade ending in 2015. Last year’s study by the Urban Institute highlighted other important factors in addition to student debt- – High rents that many millennials pay, which make it more difficult to save for a down payment. – Later ages for marriage and child-bearing, thereby postponing key traditional inflection points that stimulate homebuying. – Locational choices by millennials themselves, who often show a lifestyle preference for higher-cost urban centers. In an interview, Edward Golding, a nonresident fellow at the Urban Institute, also noted that there are financial constraints on senior owners beyond simply wanting to age in place and enjoy their homes. Some seniors choose not to sell because they don’t want to give up mortgages they have at favorable interest rates – the so-called “lock-in effect.” Another factor the Freddie Mac study doesn’t mention- Homes owned for many years often are not what millennials are shopping for anyway – they’re too big and may have too many bedrooms, plus they might have interiors that require extensive updating. They’re frequently priced for move-up buyers, not first-timers. Yet the study includes an example in which fictional older owners, Al and Rose, aren’t selling, thereby forcing younger buyers, Alex and Rita, “to wait longer – and pay more.” In an interview, Doug McManus, Freddie Mac’s director of financial research, conceded- “That’s a simplification.” So is the entire study. Millennials have lower homeownership rates for a complex of reasons – some of them financial, some of them simply reflective of changing personal preferences. You can’t blame it all on the old folks.