CFPB shifts gears on policing Zillow’s co-marketing schemes

Kenneth R. Harney on Jul 6, 2018

WASHINGTON – In a move with potentially significant implications for consumers, realty agents and lenders, the Trump administration has decided not to take legal action against online realty giant Zillow for alleged violations of federal anti-kickback and deceptive-practices rules.

The decision represents a departure from the direction the Consumer Financial Protection Bureau appeared to be headed under its previous director, Richard Cordray, an Obama appointee who resigned last November to run for governor of Ohio.

Rick Mulvaney, the CFBP’s acting director appointed by President Trump, simultaneously serves as director of the White House Office of Management and Budget. Mulvaney has promised to bring a more business-friendly approach to the bureau’s enforcement activities in the financial arena. Cordray, by contrast, aggressively sued or obtained settlements from banks, mortgage companies, title companies and other businesses and obtained an estimated $12 billion in fines and consumer restitutions.

Though the consumer bureau made no announcement of its decision and declines to discuss the case, Zillow said in a statement that “we are pleased the CFPB has concluded their inquiry into our co-marketing program.” Early last year Zillow was informed by the CFPB that the bureau was considering legal action because of alleged violations of the Real Estate Settlement Procedures Act (RESPA) and federal unfair and deceptive practices rules. Zillow has steadfastly denied that its program violates any federal law.

The focus of the bureau’s concerns was Zillow’s “co-marketing” plan, under which “premium” realty agents have portions of their advertising bills on Zillow sites paid for by mortgage lenders. Some quick background here- When buyers visit Zillow’s website, which includes millions of home listings, they frequently see “premium” agents featured prominently, along with a photo and contact information.

“Premium” agents often are not the listing agent for the property nor are they necessarily among the most active or successful in the neighborhood. Instead they are advertisers, paying Zillow hundreds – sometimes thousands – of dollars per month for the placement, hoping that shoppers will contact them. Given these high costs for leads, Zillow instituted a “co-marketing” plan that allows mortgage lenders to be featured on the same page as the agent along with contact information. In exchange for the placement, lenders pay as much as one-half of the realty agent’s Zillow bill. As with premium agents, “premium” lenders do not necessarily offer the best financial deal or the lowest interest rates to the shopper; they pay money to reduce the realty agent’s monthly expenses and market their own mortgages.

Among the key issues in the CFPB’s investigation, according to legal experts familiar with the case, was whether the Zillow plan violates federal prohibitions against paying compensation for referrals of business – kickbacks. RESPA bans “giving or receiving” anything of value in exchange for referrals of business related to real estate settlements. The rationale is that referral payments are anti-consumer – they add to overall costs, frequently are unknown to the consumer, and discourage shopping for the best available services or prices. Zillow insists its co-marketing plan does not entail referrals or endorsements, but on its website in an area designated for realty agents it touts the program as a way to “Promote your favorite lenders to customers on Zillow.”

-In multiple cases, the bureau under Cordray targeted what it considered to be illegal and deceptive marketing arrangements. In one high-profile settlement last year, the bureau fined Prospect Mortgage, LLC, a national lender, $3.5 million for allegedly illegal referral-fee-marketing arrangements with more than 100 realty firms. The schemes were designed to “funnel payments to [realty] brokers and others in exchange” for referrals of loan business involving “thousands” of buyers, according to the CFPB. Among the allegations in the settlement were that Prospect paid portions of realty agents’ marketing costs on an unidentified “third-party website” – widely understood to be Zillow. Prospect neither admitted nor denied wrongdoing as part of the settlement.

Following the Prospect settlement, some lawyers active in the financial regulatory field expected that the CFPB would sue Zillow or seek a settlement. By dropping the case, the bureau under its new leadership appears to be signaling that Cordray’s tough approach to policing co-marketing schemes between realty agents, lenders and title companies is dead, said Marx Sterbcow, a nationally known RESPA expert.

“This is going to drive up consumers’ costs” in real estate transactions, said Sterbcow, because the extra expense paid by participants in co-marketing schemes – whether they violate RESPA or not – inevitably gets passed on to consumers.

Booming home equity- Financial opportunity or warning sign?

Kenneth R. Harney on Jun 29, 2018

WASHINGTON – If you’ve got it, don’t piggybank it – borrow against it.

That seems to be the prevailing sentiment among tens of thousands of American homeowners who’ve seen their property values surge and then decided- Hey, we’ve got a ton of equity sitting here, let’s do something with it.

According to the latest estimates from real estate analytics firm ATTOM Data Solutions, 347,875 new home-equity lines of credit (HELOCs) were taken out during the first quarter of this year – up a surprising 18 percent from the final quarter of 2017 and 14 percent higher than the same time last year.

The increase is eye-opening in part because last year’s federal tax law changes were seen as a major negative for home-equity borrowing. The law removed interest deductibility for home-equity loan balances – new and existing – that are not used to renovate, build or acquire a home. The loss of deductibility made tapping home equity more expensive on an after-tax basis for many borrowers.

But owners apparently haven’t been deterred. Not only have new borrowings for HELOCs risen sharply this year, but another form of equity-tapping – cash-out refinancings – has hit its highest level since the housing boom. In a cash-out refi, a homeowner pays off an existing mortgage and replaces it with a new, larger loan. The owner can pocket the difference, tax-free, and spend the money on whatever he or she chooses.

In the first quarter of this year, 68 percent of all refinancings at investor Freddie Mac involved cash-outs. Though total volumes of refinancings are down significantly, cash-outs are at their highest percentage since the fourth quarter of 2007, just before the crash.

Are the sizable jumps in equity-tapping portents that we shouldn’t ignore? In the years immediately preceding the financial crisis, many homeowners used HELOCs like credit cards or ATMs – hocking their inflated property values to finance boats, autos, even daily living expenses – until the game ended. Home prices sagged and crashed; owners’ equity holdings turned to vapor.

Some economists have worries, but most point out that today’s market and regulatory conditions are markedly different. Most banks now require borrowers to have relatively high credit scores and a cushion of equity – generally 20 percent of the estimated home value – and to document everything. Back in the funny-money heydays of the boom, some lenders essentially required no equity and no documentation – even negative equity was occasionally OK. Today’s credit scores, by contrast, according to Amy Crews Cutts, chief economist for Equifax, are high- A median 770 Vantage score for HELOCs and 713 for home equity loans or second mortgages.

But there are concerns. Frank Nothaft, chief economist for CoreLogic, a real estate valuation and data analytics firm, notes that one-third of the largest metropolitan markets are now “overvalued” – there’s a mismatch between the frothy growth rate in median home prices compared with growth in per capita incomes. During the lead-up years to the crash, two-thirds of all metro markets were overvalued.

Nothaft suggests that although the U.S. is not in a “valuation bubble,” there are “many urban areas where prices appear to have become de-linked to the long-term relationship with income” and thus affordability. That “raises the specter of a new bubble forming within the next few years,” he warns.

Sam Khater, chief economist for Freddie Mac, argues that fears about the fast growth in cash-out refinancings are misplaced. Though rising cash-out levels coincided with the boom years, he said in an interview, today they’re less meaningful because the number of refinancings has fallen dramatically in the past year as interest rates have increased. Most owners who have refinanced this year, he said, have not been seeking lower interest rates but rather equity extraction, raising the cash-out percentage.

Today’s owners appear to be making more responsible use of their home-equity borrowings. In a study of equity-loan requests on its network of banks and mortgage companies so far this year, Lending Tree, the online shopping comparison platform, found that 81.2 percent of owners said they plan to use the loan proceeds either for home improvements or debt consolidation. The latter can be a smart move because it allows the owner to pay off credit card bills and other high-cost debts with relatively low-cost home-equity dollars.

But remember this about home equity- It’s not money in the bank. It’s wealth that depends on market movements, and can melt if the market turns.

Paying the right commission is ultimately up to you

Kenneth R. Harney on Jun 22, 2018

WASHINGTON – So you think things don’t get rough in real estate and feathers don’t fly when agents’ commission money is at stake? Ha. Listen to what Joshua Hunt, founder and CEO of discount-fee realty brokerage Trelora recently said here at a meeting of the Federal Trade Commission and Justice Department.

Trelora, which is based in Denver, charges home sellers a flat $2,500 to list their home and allows them to pay agents another $2,500 for bringing in buyers, no matter the price of the house. Hunt told the meeting, which was organized to examine the present state of competition in the real-estate market, that competing brokers and agents loathe his firm’s business model because it reduces the total commissions they receive.

“We’ve had bricks thrown through car windows,” he said, “we’ve had our cars egged, we’ve had hate mail sent to our sellers” – all because Trelora clients don’t pay enough in commission dollars, split between the listing agent and the buyer’s agent.

Many competitors won’t even show Trelora-listed homes, said Hunt. “I’ve got a list here of 719 brokerages in Denver” that will not show Trelora properties unless the seller agrees to pay the buyer’s agent 2.8 percent to 3 percent of the sale price as commission. On a $500,000 house that’s a big difference – $2,500 versus $14,000 or $15,000.

Hunt has also fought pitched battles with local Multiple Listing Services insisting that they allow consumers – not just agents – to see the full commission splits on listings. That means disclosing the buyer’s agent’s cut of the pie – which many buyers don’t know and don’t ask about – as well as the listing agent’s.

Buyers often “have no clue where the money is coming from” in the transaction, which ultimately is out of their own pocket via the price they pay the seller for the house, according to Hunt. Plus “sellers are told that it’s illegal to offer less than 3 percent” for the buyer’s agent fee, and he “has dozens of emails logged” saying “it’s required.”

Hunt’s aggressive advocacy of lower and more transparent commission rates raises key questions for anyone considering selling or buying today- What is the “typical” commission rate on a home sale? Is it all negotiable? And do you know how commissions get divvied up?

Steve Murray president of RealTrends, which tracks brokerage commissions and is widely considered the authority on the subject, says actual rates nationwide are not necessarily what consumers assume. Last year, he told me, the average home-sale commission rate across the country in 2017 was 5.08 percent. That’s down from 6.1 percent in 1991 and 5.42 percent in 2010. The average rate hasn’t been north of 6 percent for decades.

On negotiating, the reality is this- All commission rates are negotiable. It’s never “illegal” to offer a discounted fee. There is no “standard” rate, though some highly experienced, full-service agents may not be willing – or need – to accept a discounted commission.

At the FTC-Justice meeting, a senior executive from national realty firm ERA described one of the company’s top-producing agents, who charges all clients 7 percent to list and sell their homes. When owners inevitably ask how she can charge that much when competing agents quote less, she answers- “They should.” In other words, she believes they don’t bring as much oomph to the table – she sells houses faster and at higher contract prices than competitors. Besides, she’s free to charge whatever she wants. Take it or leave it.

How much of the 7 percent she keeps for herself is up to her, but most likely she values the services of top local buyers’ agents enough to pay them a generous fee. Splits between listing and buyer’s agents are also fully negotiable, though as Hunt pointed out, that gets handled in a separate, typically undisclosed agreement between the agents involved.

Another reality on commission rates- You’ve got an unprecedented array of fee and service level options available to you today. If you want to do most of the heavy lifting in the marketing of your home – showing it, holding it open, writing contracts – you can go online and find a mind-bending menu of companies who’ll do so at far less than what you’d pay a traditional full-service agent. If you choose to pay a flat or deeply discounted fee, no problem, there are lots of competitors.

Bottom line- Bone up on your options. And your negotiating skills. Paying the right amount of commission ultimately is up to you.

Doomsday predictions over tax cuts have not come true -yet

Kenneth R. Harney on Jun 15, 2018

WASHINGTON -What if Congress passed a massive tax bill with scary cutbacks in deductions for homeowners -prompting dire predictions of mass property-value declines -but nothing much happened?

What if home prices in the market segments expected to be hurt the most by the tax changes actually rose significantly and showed no hints of decreasing? Six months after the passage of the Tax Cuts and Jobs Act of 2017, where are we?

The law slashed the maximum mortgage amount qualified for interest deductions to $750,000 from $1 million; capped write-offs for state and local taxes at $10,000, (previously there was no limit); and clamped new restrictions on home-equity loans and credit lines, stripping the section on “home equity” from the federal tax code altogether.

The net effects of the changes, which were designed to raise billions of dollars in new federal revenues, were widely predicted to be negative for owners, especially in high-cost, high-tax areas of the country. These include metropolitan areas along the West and East coasts, along with dozens of pockets of high-cost neighborhoods in the Midwest, South and Rocky Mountain states. Late last year, some independent economists and real estate industry advocates predicted declines in home values nationwide averaging 10 percent, with potentially much higher reductions in high-price, high-tax markets. One group forecast devaluations of up to 17 percent.

Back to the original question- Where are we now? Here’s a quick update.

-The latest data from the National Association of Realtors on existing home sales in the high-cost brackets -the most vulnerable to the federal tax hatchet -suggest that demand is actually up- Sales between $500,000 and $750,000 rose by 11.9 percent in April, compared with a year ago. Sales of $750,000 to $1 million homes jumped by 16.8 percent, and those above $1 million increased by 26.7 percent. That’s frothy.

-New research by analytics and data company CoreLogic found that overall demand for homes is stable or up slightly in the 500 highest cost, highest-tax ZIP codes compared with all other ZIP codes. During the first three months of 2018, loan-application demand in high-cost, high-tax areas actually exceeded levels of the previous four years.

-The dollar amounts of home equity line of credit (HELOC) authorizations by lenders during the first three months of 2018 are “running at the same pace” as 2017, according to Frank Nothaft, CoreLogic’s chief economist. This is despite the tax law’s elimination of interest write-offs on new home-equity borrowings that are not used to renovate, buy or build a house, effective Jan. 1, 2018.

-Home-equity growth and prices overall are soaring. Homeowners saw their equity holdings surge by $1.01 trillion from the first quarter of 2017 to the same period this year. Owners nationwide gained an average $16,300 in equity for the year and presumably far more in expensive, fast-appreciating neighborhoods. Zillow’s Real Estate Market Report issued in May found that median home values nationwide are up 8.7 percent for the year -the fastest pace in 12 years. In Seattle, values are up 13.6 percent; in Las Vegas, 16.5 percent; and in San Jose, 26 percent.

Realty agents in some of the highest-cost areas say the tax bill is a non-subject among affluent buyers and sellers. Jeff Dowler of Solutions Real Estate in Carlsbad, California, told me “I haven’t heard anything from clients or potential buyers. The market is actually very strong and demand hasn’t changed” since the tax law’s enactment. Anthony Lamacchia, broker-owner of Lamacchia Realty Inc. in the Boston area, agrees. His “gut” sense is there’s been “no difference” post-tax law. But Alexis Eldorrado of Eldorrado Chicago Real Estate LLC, believes the new law could be contributing to an increase of inventory in the upper brackets. Exceptionally high property and income taxes, capped as deductions at just $10,000 a year, are prompting owners to want to sell in rising numbers.

What to make of all this? It’s still early in the process to be definitive about the long-term impacts of the tax law. Other, possibly short-term macroeconomic factors may be overwhelming the real estate tax changes -record low unemployment, rising incomes, and record low inventories of homes for sale that are driving prices higher.

But next year, who knows? Meanwhile it’s safe to say the calamitous plunges in home values so boldly forecast by economists last December are nowhere in sight -not yet anyway.

Homebuyers can reap bargains thanks to growing lender competition

Kenneth R. Harney on Jun 8, 2018

Washington – Could lenders’ pain be your gain if you’re shopping for a home mortgage? Maybe.

Though it hasn’t been in the headlines, mortgage companies are having a challenging year. Not only have total originations of new loans declined as the refinance market shrinks because of rising interest rates, but many lenders could be staring at red ink and staff layoffs, as well. Michael Fratantoni, chief economist for the Mortgage Bankers Association, the industry’s largest trade group, says the “typical” lender in the U.S. may “not be profitable” when the books are closed on the first quarter of 2018. Inside Mortgage Finance, a trade publication, reports originations “tanked” during the first three months of 2018, hitting their lowest level in three years.

Possibly as a result, competition for new home-purchase loan applications is on the upswing. One bellwether- Lending Tree, the popular online marketplace where banks and mortgage companies compete for borrowers’ business, tells me that shoppers for home loans are receiving significantly more offers on average through its lender network compared with a year ago. “It’s getting very competitive,” said Lending Tree chief economist Tendayi Kapfidze, and “lenders are expanding their credit box” to pull in more borrowers. Some may not even be fully passing along recent rate increases, he added.

Another indicator- Lenders appear to be offering slightly more attractive deals. The Mortgage Bankers Association’s mortgage credit availability index -which monitors credit-score requirements, down payments and other key underwriting terms at major lenders – improved by 1.9 percent for conventional (non-government) mortgages in April. This suggests posted mortgage terms were slightly more favorable to consumers than they had been previously.

Still another sign- The latest quarterly Default Risk Index, compiled by credit bureau TransUnion and credit score developer VantageScore Solutions, LLC and released last week, found that while lenders in the auto-loan, student-loan and bank credit-card sectors are tightening up on terms to applicants, mortgage lenders appear to be easing. Lenders seeking higher loan production are willing to take on slightly more risk.

So how does this translate for you in practical terms as a homebuyer thinking about applying for a mortgage this summer? More competition among lenders is always good for consumers, so you should definitely be shopping among multiple lenders and getting competing offers.

But don’t expect mortgage companies or banks to give away the store. The easing underway is modest, the capital market cost of money is broadly the same for most lenders, and the mortgages they close generally have to be acceptable under “ability to repay” and other standard federal rules adopted after the financial crisis. The easing more likely will be felt at the margins of the market – first-time purchasers and borrowers whose debt levels or lack of down-payment cash made them tough to approve in the past, as well as applicants for “jumbo” loan ($453,100 and up) with cream-puff credit.

Here’s what you might find currently-

- More flexibility on debt-to-income ratios (DTIs). Investors Fannie Mae and Freddie Mac are allowing lenders to say yes to credit-worthy buyers with DTIs as high as 50 percent – up from the previous 45-percent limit. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Maryland, says the flexibility “really helps” in qualifying buyers with high-debt burdens because of student loans, medical bills, alimony payments and similar burdens. FHA is allowing DTIs of 56 percent-plus.

- Heavier use of 3-percent-down loans through Fannie Mae and Freddie Mac programs aimed at qualifying more buyers with moderate incomes. Gene Mundt, regional manager for American Portfolio Mortgage Corp. south of Chicago, says first-time buyers who qualify on income and credit scores “are the real winners” this summer. Plus Freddie Mac is rolling out a new “Home One” program solely for first-time purchasers – 3 percent down, no income limits – in July.

- Greater availability of “non-QM” (non-Qualified Mortgage) loans for borrowers who don’t fit into the usual underwriting boxes – especially the millions of self-employed individuals whose income patterns are sporadic, depending heavily or solely on sales, commissions and bonuses. Non-QM loans, which must comply with federal “ability to repay” rules for borrower and lender safety, come with higher interest rates compared with standard loans, but the “spread” – the difference in rates – between them is narrowing, according to non-QM lender Angel Oak Companies Senior Vice President Tom Hutchens.

Bottom line- Shop aggressively or miss out on the opportunities for better deals.