Group says litigation hurts minorities, veterans, first-time homebuyers
The Community Home Lenders of America on Thursday sent a letter to federal housing agencies expressing concern over the impact of litigation targeting real estate agent commissions, claiming a likely detriment on mortgage lending to underserved borrowers.
The letter focuses on Sitzer/Burnett v. NAR – one of several lawsuits challenging the long-held practice of commission-sharing by National Association of Realtors members. Along with HomeServices of America and Keller Williams Realty, NAR in October was found liable in the federal trial challenging MLS rules and the real estate compensation model.
In its letter, Community Home Lenders of America (CHLA) urged federal agencies - Federal Housing Finance Agency (FHFA); US Department of Housing and Urban Development (HUD); Rural Housing Service (RHS); and the US Department of Veterans Affairs (VA) - to take steps to mitigate potential adverse effects to minorities, veterans and other underserved populations.
Mortgage Professional America spoke to the executive director of CHLA, Scott Olson (pictured), for further insight. CHLA is a national nonprofit association of small- and mid-size community-based mortgage lenders aimed at promoting fair treatment in the way of federal mortgage programs, rules and regulations. The group estimates the lenders it represents originate three-quarters of all mortgage loans.
Asked how the litigation might be detrimental to underserved populations, he began with close to home hypothetical scenarios to illustrate the CHLA’s premise.
“Now if my son or daughter who I hope someday want to buy a home – and they’re scraping together the money for a down payment, to qualify under the loan programs where they have LTV and down payment requirements - now instead of the sales price reflecting 6% brokerage, the broker’s fee is going to have to be paid for by the buyer,” Olson said during a telephone interview. “Where are they coming up with that? It’s tight enough to begin with. Another 3% on a $500,000 house is not an insignificant amount of money.”
He correlated the hypothetical example to the premise of the CHLA’s letter to federal agencies: “It’s first-time homebuyers – people getting high LTV loans – that this is going to make a difference for. That’s why we singled out underserved borrowers. Veterans, because the VA program is 100% down. But it does seem that under the existing rules, this is particularly going to be a problem. This is why we singled out these categories.”
Calling for federal agencies to close the gap
To mitigate that potential scenario, the CHLA proposed federal agencies take action to protect homeownership affordability as more buyer-commission litigation develops across the country. The CHLA-suggested actions urged by federal agencies:
- Fund the buyer’s real estate commission.
- Provide appraisal guidance and examination.
- Encourage and support down payment assistance programs.
“As the homebuyer commission structure is potentially re-shaped by Sitzer, CHLA urges federal regulators to review and address how this change impacts a borrower’s ability to fund and finance their buyer’s real estate commission,” Olson said. “CHLA stands ready to work with federal mortgage program regulators to develop solutions that may be necessary to ensure that the ability of minorities, veterans, and other underserved borrowers to buy a home is not diminished.”
While much of the Sitzer commentary has revolved around how it could reshape real estate commissions, he noted, the CHLA letter focuses on the implications for mortgage lending – particularly the impact on low-down-payment borrowers who could be most affected by such changes.
The CHLA letter is addressed to Sandra Thompson, director of the FHFA; Julia R. Gordon, assistant secretary for Housing and Federal Housing Commission at HUD; Joaquin Altoro, administrator for RHS at the Department of Agriculture; and Denis R. McDonough, secretary of the VA.
“A shift of the payment of real estate brokerage commissions from home sellers to home buyers could have a profound negative impact on the ability of homebuyers to pay for or finance those commissions and on loan appraisal loan to value (LTV) calculations and requirements,” the letter reads in part.
“Therefore, we urge a coordinated major review of all federal mortgage programs to ensure that every possible step is taken to maintain homebuyers’ ability to fund and finance the buyer’s real estate commission. We also encourage policies which clearly permit down payment assistance programs to pay the cost of the buyer real estate commission if there is a problem.”
Buyers already on the hook to cover agents’ commissions
While the Sitzer case is currently on appeal, the CHLA noted in its letter, there are other court cases raising similar issues with potential outcomes that might differ. Regardless of other outcomes, the CHLA said its members are already finding that many real estate agents are writing sales contracts requiring the buyer to pay the commission.
Traditionally, the CHLA noted in its correspondence, lenders financed buyer’s agent commissions as part of the mortgage financing process – resulting in 100% of brokerage commissions being incorporated into the sale price.
“This shift poses significant challenges, especially for veterans using Department of Veterans Affairs (VA) loans, where it is our understanding that VA loan rules both prohibit the borrower from paying the buyer’s agent commission and do not allow financing of that commission.”
While it’s too early to tell how the federal agencies might respond, Olson expressed confidence they would make allowances for the changed commission structure. “We are extremely optimistic that these programs will provide flexibility,” he told MPA. “What we’re talking about is these certain limitations – like the loan-to-value and some of these down payment requirements – are designed to meet certain risk profiles. All we’re trying to do is keep the status quo so people aren’t hurt.”
Want to make your inbox flourish with mortgage-focused news content? Get exclusive interviews, breaking news, industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
