Political Analysis: The Consumer Financial Protection Bureau Is Taking On the Mortgage Industry; Real Estate Agents, You May Be Next

by 13 Jul 2012

(TheNicheReport) - As housing professionals, we are accustomed to working in silos.  As Realtors, we focus on our channels of business and don’t give much thought to other members of the professional housing community.  There are many reasons for this, but the primary one is the typical adversarial relationship that exists between parties.  Since there are so many parties involved in the process of buying or selling a home, each of these parties tends to be the target of criticism by the Realtor as to any delays that arise.  Whether it is with the appraiser, the loan officer, the title agent, attorneys, buyers, sellers, buyer’s agent, etc., there are always reasons to call them your best friend and your worst enemy – often within the same transaction.

Real estate has been compared to Europe: a collection of nations whose fate is so closely tied together that they are dependent upon one another, and yet they are utterly distinct and autonomous with little empathy for their neighbors; as soon as one of the countries is invaded by an aggressor, there are other borders and nation-states to turn to.  During World War II, as the German aggression quickly spread through Europe, most countries ignored the plight of the fallen while praying they weren’t next.  In Real Estate, loyalties run thin and are tested with each deal so when regulators or the public turn against one of the members in that fulfillment chain, Realtors just shift focus to the next transaction with little focus or concern for the bigger picture. 

Remember Europe and the World War II analogy? Federal regulators are sweeping through the continent of the housing industry, and if the National Association of Realtors and every agent across the United States believe that these invasive changes will stop with mortgage loan officers and they can ignore what is happening around them, they are gravely wrong.  In this scenario they are Poland – or better yet, Holland – in 1940, where in just six days the main systems of the country were destroyed by the Germans bringing the Dutch to their knees.  When you destroy either the main economic drivers or their supporting infrastructure, the economy collapses.  Analogously, the Federal government is attacking the very heart of economics – the ability to provide a service, and given levels of service, charge a premium for this and even make a profit (gasp) on the exchange of goods or services.  There are several philosophical exceptions pertaining to the fact that buying a home is different than buying a shirt at Target (I love that store by the way), but the reality is such that actions are creating precedents that will have their own extensions in law and in respective markets. 

If you remember seventh grade English, there is a difference between an analogy and a simile.  A simile directly compares two different things, where an analogy is just that – an analogy may have similar illustrations but aren’t exactly the same.  The use of the European metaphor is important because the erosion of freedoms is gradual, subtle and can also be swift when one isn’t looking.  There is nothing more basic in our freedoms than to be able to buy a piece of cloth, stitch it together, and then charge a 30 percent premium for the cost of materials and time of labor.

Housing, although more complex, illustrates little difference in this comparison.  The experience of loan originators or Realtors for that matter can vary, and more senior sales representatives should be able to charge more for their service, knowledge and relationships than a less experienced one.  Certainly sales representatives from every other industry would agree with this.  So, why wouldn’t these Ivy League-educated staff members and employees of other Federal regulatory agencies who now work at the CFPB understand this same concept?  Well, that may very well be the problem.  With very little real-world experience in the buying and selling of goods, there is a void of the context in which transactions occur – and it doesn’t reside within the walls of a government bureaucracy or a course on economic theory. 

The CFPB has over 900 employees.  Based on the Bureau of Labor Statistics, in light of its private sector counterparts, this would make the CFPB greater than 99.97% of all employers in the United States – so much for the 1% - 99% argument. How about being in the top 0.03% with no other competition in the marketplace to hold you accountable for the services you provide, how you are compensated, and how much?  Anyhow, this is the regulated housing market we live in today.  Only in Washington DC can an organization grow this large in less than sixteen months.  The credit crisis was Obama’s 9/11, and rather than Al Qaeda being the culprit, it was the previous administration.  So, just as President Bush compromised personal freedoms based on national security rooted in the creation of the Department of Homeland Security, President Obama is setting out to curb economic freedoms with the creation of the Consumer Financial Protection Bureau (CFPB).   

The CFPB is the judge, jury and executioner when it comes to financial matters and consumers.  CFPB Director Richard Cordray said in a statement, “We want to bring greater transparency to the market so consumers can clearly see their options and choose the loan that is right for them.”  This is a noble endeavor with few in banking to disagree, but making things transparent isn’t the agenda; leveling the playing field with the Federal Government calling the shots as to what is fair and not fair is.  So, industries that focus on credit cards, student and auto loans, residential lending and real estate, or just about any event that touches a consumer around money, is their mandate; so tell me, what doesn’t fall into this category?  The bureau operates under the jurisdiction of the Dodd-Frank Act which calls for measures to address financial practices that have been judged unfair or deceptive.  Other than Congress, who does the CFPB report to?  It isn’t clearly defined, and if it is the financial subcommittee in Congress, this will be a crisis of power riddled with political interests if you leave it up to politicians to determine what the limits are and how the CFPB is regulated. 

The first series of statements and a principal area of focus are the amount and manner in which a loan officer is paid on a mortgage.  The implications of this on Realtors are explicit.  The CFPB has proposed a flat fee structure designed to consolidate or eliminate discount point fees and origination fees.  This way there would be a flat fee regardless of the size or complexity of the mortgage being worked on.  The CFPB has assembled yet another committee of business and industry representatives to explore and comment on the impact of the proposed rules.  But with no accountability and little reason to believe such hearings, which are positioned as an opportunity to discuss and review such rules, those hearings amount to little more than plea deals before judgment is exercised. 

In the next six months the CFPB will be very busy, as they must finalize many of the mandates stipulated by Dodd-Frank by January 2013.  We can expect the process of drafting rules, a comment period, and then the issuance of a final rule to be a relatively tight timeline governed not by sound policy insights, but a political timetable to act.  This tendency to simply do something is economically dangerous and is fundamentally why businesses are uncertain about the future.  This stagnates economic growth, hiring, improvement in unemployment trends, and simply setting a strategic direction for your company. 

Realtors should be deeply troubled by this.  Can you imagine what it would be like to earn a flat fee per deal regardless if the deal was a $2M property versus a $150,000 property?  Are there marketing expenses?  Yes.  Are there sales cycles depending upon the price and property type?  Yes.  Are there varying levels of paperwork and details pertaining to a 10,000ft2 home versus a 1700ft2 home?  Yes, of course.  But in the CFPB’s world, the consumer’s interest in making things simple reigns supreme over the back-end work involved to buy or sell a home or process a mortgage application.  The only people who benefit from this are the brokers and business owners, and not the agents or loan officers themselves.  It will kill small businesses and will consolidate and grow larger ones.  This is exactly what happened in the mortgage business where the smaller mortgage firm couldn’t survive and the larger, more capitalized one got larger.  Mortgage margins grew while loan officers made less.  This makes the rich “richer” and drives a culture of companies who later become literally too big to fail.  It is an unintended consequence that is quite predictable

When market and regulatory conditions drive the competition out of any particular market, even to those few companies who remain and benefit from such consolidation, they end up losing, because in the end, the government swings the other way and will eventually break them up. 

Therefore if you are a real estate agent, you should be concerned; gravely concerned.   With a healing economy and a recovering housing industry, there is tremendous opportunity in the market today – but amidst this, there is the sound of an army marching in the distance.  An army that will soon call into question your commission and the fairness of the amount you are paid, and before you know it, you’ll be the next villain of the housing market, making too much based upon the lack of transparency of what you are doing to deserve your earnings.  This course can be averted with the right political and policy leadership – but as of right now, this is America today, and this is the real estate industry tomorrow. 

Rick Roque

Any questions or feedback on this article, email Rick Roque, Managing Editor of The NicheReport Real Estate Edition at rroque@thenichereport.com or call him at 408.914.5895.


Is TILA-RESPA a good or bad thing long term?