Home inspection, appraisal, mortgage, title and legal services are all vital safeguards to the residential transaction. Step by step through the transaction process, independent, unbiased service providers each reach a determination as to the integrity of the transaction. Home inspectors are supposed to find physical defects. Appraisers are supposed to determine a value upon which investors rely to make a determination as whether to lend mortgage money. And title insurance and closing companies render an opinion of title to determine if the title is insurable. When they work independently from each other, they offer a tremendous benefit by validating the integrity of the transaction through a series of checks and balances. These safeguard services can quash bad transactions before they can become “melt downed” mortgages. And they are supposed to be able to do this regardless of how commissioned sales people may be affected.
In order to serve their function of providing protections to consumers and investors, these safeguard services must be separate and uninfluenced by other transaction participants (especially commissioned based participants). However in the current system, commissioned participants not only influence the safeguard services, they often own them. The effectiveness of these safeguards has all but been neutralized by these “partnerships” which have been termed, “Affiliated Business Arrangements” (“AfBAs”).
AfBA’s by design allow all the transaction partners to influence each other. That means that a commissioned Realtor in a position to refer business to a safeguard service provider actually may have some influence over the determinations the safeguard business makes. Although AfBA’s are spun as a way to increase efficiencies and bring down costs, the intended result is to streamline deals by stripping away safeguards so that deals close and commissions are paid. Take a look at the following examples.
Our executive director spoke before Congress about the corruption in the title insurance industry and affiliated business arrangements. Click here to read that Congressional testimony (pdf file).
Builders are a group that has heavy lobby representation and were recently successful in striking down a new law that would have limited their ability to steer buyers of their newly constructed homes to the builders’ own title companies. The National Association of Home Builders (NAHB) argued that there are certain efficiencies and price breaks that only their AfBA’s can impart to consumers. The truth was buried from legislators. Here is the letter we wrote.
Builders have a lot to hide and have a lot riding on whether or not a transaction closes. Giant blanket mortgages that can add up to tens of millions of dollars often underly entire developments. Mechanics liens from subcontractors who haven’t been paid often have priority over new mortgages and can severely and quickly devalue a property owner’s interest.
An independent title company is likely to quash a transaction that has unpaid mechanic liens or unsatisfied mortgages. Does that mean that the independent title company is less efficient? Absolutely not. What it means is that an independent title company offers protections that immediately dissolve once the builder’s title company has the opportunity to overlook these substantial title defects.
How can we allow a builder’s title company to even have control over these decisions? Builders call this efficiency. We call it mortgage fraud and we believe that research will show that mortgage fraud involving builders almost always involved a builder controlled title company or lender.
The other argument promoted by the industry is that by tying the commissioned based services with the safeguard services that somehow efficiencies are created that result in lower costs. If this were true, it might constitute the first time anti-competitive behavior caused prices to go down. When builders, mortgage companies or Realtors own underlying safeguard industries, they are doing so to utilize their knowledge and power over vulnerable consumers to steer them into their own companies – many times without the consumer knowledge. Consumers who are afraid to “rock the boat” and don’t understand the significance of the decision often capitulate to these pressures and blindly take the provider’s advice.
When a consumer blindly follows their provider’s advice, they are giving up their right to shop and compare and that means that they are also increasing the likelihood that they will overpay. Lower prices are created by competition when consumers shop and compare. Lower prices are not borne by anti-competitive blind steering of consumers who don’t know how to shop and compare.
When Realtors use their position of trust and use their clients’ reliance to guide their clients into their own firms, that’s called self dealing. And self dealing is normally illegal in this type of situation. However, federal laws have been strongly advocated by the Realtor trade organizations to allow this self serving behavior. And the result is that Realtors end up “advising” their clients to use their own title companies. Not surprisingly, these Realtors do not shop and compare services and the prices are often the highest in town.
History of AfBA’s
These AfBA’s used to be called “Controlled Business Arrangements” (CBA’s). The term “Controlled” was intentionally derogatory to help convey the inappropriateness of the relationship. However, through a powerful lobbying effort from the real estate industry (by a trade group called Real Estate Settlement Providers Council or “RESPRO”) forced HUD to change the name claiming that the negative connotations of the term Controlled Business Arrangements were misplaced. They couldn’t have been more wrong. The weak consumer warning that the “negative connotations” provided were perhaps the last protection to fall victim of the real estate lobby prior to the mortgage meltdown.
RESPRO claims on their website that their purpose is to promote, “A business and regulatory environment that better enables all of our members to efficiently offer affiliated services through subsidiaries, joint ventures, and strategic partnerships.” RESPRO and other industry trade groups have done “studies” that show that consumers want these arrangements and that they cost about the same as independent providers. However, when conducting their studies and surveys they use terms such as One Stop Shopping which creates a false impression that these arrangements have a consumer benefit. At no point are the dangers of these arrangements disclosed, rather they are covered up and denied.
There is simply too much money at stake for the trade groups to perform a scientific and unbiased study. In fact, we have analyzed most of the studies submitted to legislators and regulators by these groups and all of them are so tainted and obviously manipulated as to be worthless. One such survey was submitted to the GAO (the U.S. Government Accountability Office) and the GAO actually used it in their report about the problems with controlled business arrangements. The Consumer Federation of America wrote a letter (click here to download it) to the GAO questioning the use of this data that failed to meet even the most basic data collection standards (RESPRO collected the data from their own membership).
From a consumer’s perspective, this so-called “One Stop Shopping” (we call it “One Stop Robbing”) causes prices to go up and secretly neutralizes all the safeguards designed to stop bad transactions from being processed. From the perspective of the real estate industry, when they advise, counsel and guide their unsuspecting clients into a CBA, they are doing it for profit and to insure that all transactions close and more importantly to ensure that commissions get paid.