NATIONAL NEWS

Tongues are wagging with news that Bank of America is buying Countrywide Financial. The question is: If banks enter into the Real Estate brokerage business, what does this mean for Real Estate agents and brokerages?

Bank of America has agreed to buy Countrywide Financial in an all-stock deal, valued at $4 billion. This merger will make Bank of America the largest mortgage lender and loan service company in the United States, and extend the bank’s reach in the mortgage business. Some see this as a gamble for Bank of America, perceiving the bank as bailing out Countrywide, one of the lenders hit hardest by the housing crunch. Yet others see this as a power play in the ongoing battle to allow banks to encroach on the Real Estate industry.

The Real Estate industry has been struggling to keep lenders from entering the Real Estate business. In 1999, with the passage of the Gramm-Leach-Bliley Act (GLBA), restrictions on the activities of federally chartered banks were eliminated. With these barriers lifted, banks are free to create financial holding companies to provide services that are complementary to financial services. To date, banks have been taking advantage of this by moving into the securities and insurance markets. Now banks are looking to expand into Real Estate brokerage to drive more business to their mortgage loan operations.

The National Association of REALTORS® (NAR) strongly opposes large banks entering the Real Estate services market, and is doing everything in its power to prevent Real Estate activities from being added to the list of services that banks are allowed to provide. At NAR's request, Senate Bill 98 and House Bill 111 were introduced as the Community Choice in Real Estate Act. The bills would amend the Bank Holding Company Act of 1956 to prevent the Fed and Treasury from finding Real Estate brokerage or property management to be legitimate activities for bank holding companies. However, until a decision is made, agents and bankers are continuing to duke it out in the battle over banks entering the Real Estate business.

So what does this mean for Real Estate professionals? Many Real Estate experts agree that if bankers enter the brokerage business, the industry will change dramatically. “As an agent, my clients look to me for guidance in choosing a loan,” says Jennifer Dawkins, a San Diego Real Estate agent. “If I worked for a bank as an agent, I’d be under pressure to promote loans from that particular bank, even though the loan may not be the best loan for my client. Kickbacks are already common in this business and it seems that this would just get worse if banks could both close a sale and secure a loan.”

While the Real Estate Settlement Procedures Act (RESPA) prevents referrals in which the agent receives a kickback for sending customers to a particular lender, Jennifer says that it is very difficult to monitor these types of referrals.

Luigi Frascati, a Real Estate agent from Vancouver, agrees that banks would be the only ones benefiting from this industry shift. “Brokerage firms charge commissions to sellers—the recipients of the money proceeds in a Real Estate transaction—and only when sellers have received those proceeds,” he says. “Banks, conversely, charge interest rates to buyers. What the American Bankers Association is aiming and attempting to do now, is to charge both buyers and sellers. Sort of like eating from two dishes at the same time, so to speak. Give the money to the buyer to complete the transaction, and charge the seller for completing it.”

In addition, NAR argues that large banking conglomerates with federal backing could displace smaller Real Estate agencies, creating fewer choices for consumers. There are currently 1.3 million REALTORS® in the United States who specialize in local communities and economies. “It is likely that many agents could be out of a job if the corporate giants gain control of the industry,” adds Jennifer.

According to NAR, banks could enter the industry by either starting new brokerages or buying up small ones. If they choose the former, small companies could be driven out of the market trying to compete with the big guys that can offer a package of Real Estate and loan services, which would likely be aggressively marketed. If they choose the latter, this would reduce the number of competitors and could move the market from monopolistic competition to oligopoly—a market dominated by a few major corporations. The likely result of an oligopoly is higher prices and lower quality of service.

On June 11, 2007, the House Appropriations Committee approved a one-year provision prohibiting the Federal Reserve and Treasury Department from finalizing the rule allowing banks to engage in Real Estate brokerage. The full House is expected to consider the FY2008 Financial Services and General Government funding measure during the week of June 18, 2008. Until then, there’s no telling who will win this long-standing battle.