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In this letter to HUD we point out the problems with what the builders are doing as well as Affiliated Business Arrangements (AfBA’s) in general.  And we do so from a different perspective – from that of the consumer.  In fact, CAARE may be the only consumer group that chimed in among the thousand or so comment letters submitted by industry participants.  

AfBA’s in real estate are not like One Stop Shopping at Target, yet the industry commonly disarms the public by calling these dangerous relationships just that.  We believe that a more appropriate name for these widely used arrangements should be “One Stop Robbing,” or “Sophisticated Captured Audience Marketing” (S.C.A.M.).  Our letter explains why these arrangements are so bad for the consumer and our economy.

But what builders are doing in order to force consumers to use their affiliated mortgage and title services is reprehensible.  And that is the main topic of HUD’s request for comments on their Advanced Notice of Proposed Rule making.  Sure consumers pay higher closing costs and interest rates when they are steered into builders’ AfBA’s.  But what about the loss of safeguards that can only come from impartial decision makers?   If the builder owns the title company can they really be expected to call out a major title defect on their property and cancel their own closing?  What type of confidence do such arrangements in still in the residential real estate market?

In our letter we discuss the problem and show just how far home builders will go to trick consumers to buy their houses.  We even attach as exhibits some of the secret solicitations some of the builders sent directly to the home buyers’ Realtors seeking to bribe buyers’ Realtors with offers of bonuses (on top of their commissions) as high as $4000 and even a free Lexus.  We also point out the hypocritical view the National Association of Realtors takes by comparing the letter they wrote last month to a cite they include in their letter to HUD this month.  Can they really be trusted to provide our media with housing statistics if their own President can’t get her facts straight?

If you want to help by either volunteering or donating much needed support, please e-mail me or click on the donate button on our website in the upper right hand corner.  We are all volunteer non-profit 501(c)3 charity organization that gets all its funding from the public.

Just click on the image below to read the letter.  Thanks!

 

Great article by the Ohio Independent Land Title Association on the comment letter submitted by RESPRO. In CAARE’s eyes, RESPRO is an anti-consumer organization dedicated to proliferating controlled business arrangements which cause consumers to be stripped of unbiased decision making in the determination as to the quality of their transaction and it causes consumers to overpay for those stripped down services. Here’s the blog post: “On August 1, 2011, RESPRO submitted their written testimony concerning the Credit Risk Retention Rule found in Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). This is the same subject known by normal human beings as the Qualified Residential Mortgage (QRM) rule. RESPRO’s target in the QRM proposal is the 3% “points and fees” threshold that federal regulators propose to adopt as part of the QRM definition in their Risk Retention regulation. RESPRO says the rule unfairly discriminates against the affiliated business model to the detriment of consumers and the mortgage marketplace…”

Here’s the rest of the article (click here).

What is bribery and does it exist in residential real estate? You be the judge.

Guilty of Bribery:  As taken out of context from a criminal commercial bribery statute we were able to come up the following general definition as to what typically constitutes bribery:   Whoever corruptly offers, gives, or agrees to give directly or indirectly, any benefit, consideration, compensation, or reward to any agent or fiduciary of a person with the intent to influence the person’s performance of duties as an agent is guilty of commercial bribery.  The same is true for those who receive a bribe.

If a builder were to secretly offer Realtors who represent buyers an extra Five Thousand Dollars ($5,000.00), would this constitute a bribe?   Do you think secret money being offered to buyer agents is intended to influence the agents’ advice and guidance in selecting a builder?   If you were a consumer and found out that your Realtor was being offered $5,000 per transaction (for up to five transactions) from a particular builder, how would you feel?   And who does that money really belong to, the Realtor or the buyer?  Here’s a typical advertisement from a national builder sent out to Realtors and one from a local builder:

 

 

Last September CAARE was contacted by an ALTA (American Land Title Association) story writer to participate in a point / counterpoint on the issue of Affiliated Business Arrangements.  After months of work and after the project was ready to go to print, ALTA pulled the story!   Neither we nor the RESPRO representative (Marx Sterbcow) chosen for the “counter point” were permitted to see the other’s answers.   We can only speculate that we may have done too good of a job….

ALTA as stated on their website, “is the national trade association and voice of the abstract* and title insurance industry. ALTA® members search, review and insure land titles to protect home buyers and mortgage lenders who invest in real estate…ALTA® members advocate safe and efficient transfer of real estate and insist on high standards when searching land title records and preparing insurance documents.”  So to us, this story seemed to be a perfect fit for both ALTA’s mission and ours.

What better way to “advocate for safe and efficient transfer of real estate” than to remove conflicts of interests and inappropriate influences that affect the unbiased examination of title and disbursement of funds?  What better way to “protect home buyers and mortgage lenders who invest in real estate,” then to make sure home builders, Realtors or mortgage lenders are not in a position to determine the insurability of their own files?    To us, Affiliated Business Arrangements are an important reason why the real estate industry COLLAPSED.   To us, this debate raised some of the most important issues of this decade.

We took on this project as a public service to those in the industry and to the consumers whom we represent and we did what we think was a great job explaining the problems and hazards of Affiliated Business.  After taking this project to completion (SEE ATTACHMENT) and investing many of our resources, ALTA’s Board of Directors pulled the story in March citing that this story was likely to increase the already large rift that existed between members who disagreed on the topic of Affiliated Business Arrangements. 

After examining the biographies of the current Board Membership it would appear that this decision may have had more to do with its Board’s interests in burying the issue, then preventing a rift.  Most of ALTA’s current Board are proponents of this anti-consumer practice called Affiliated Business.   We believe that Affiliated Business Arrangements cannot be defended as a legitimate business model any more than could a prospectus to start a train robbery business.  If we’re right that our points were too convincing and that’s why our story was pulled, then shame on ALTA.   To let this article go to press, would have been to admit that Affiliated Business is a bad thing.

With this news feed we ask all current ALTA members to examine whether ALTA truley represents their interests by burying this story.   And whether you are a member or not, if you think that this story should be run, then please consider writing to the current President of ALTA, Mark Winter (mwinter@stewart.com ) to let him know how you feel.

For a business intent on paying illegal kickbacks it is only a matter of performing a cost benefit analysis to determine that it is a profitable proposition to violate the law.  The cost of a potential enforcement action is far outweighed by the financial benefits of violating it.  For example, in 2007 First American Title Insurance Company was fined $500,000 in Minnesota for operating what the Minnesota Department of Commerce said were “sham title agencies that provided illegal referral kickbacks to local real estate agents, mortgage brokers, developers and other industry players”  (click here for the Star Tribune article – article has been removed by Star Tribune).

First American was forced to shut down their remaining 35 agencies in Minnesota.  However, those agencies had operated for years likely making tens of millions of dollars.  Their individual closing agents had developed close ties with their referrers, which meant that First American could continue to benefit from their activity long after their agents were shut down.  And for competitors who complained about the conduct, they were likely to be boycotted by the Realtors and other real estate professionals who were forced to be shut down.   First American gained a competitive edge.  For the small price tag of $500,000, the violation was well worth it. 

The Minnesota Commerce Department did not order First American to make restitution to consumers either.  The department decided it was better to negotiate an end to the long-standing practices rather than get tied up in litigation that could take years, said Paul Hanson, the department’s chief investigator.  In other words, the Commerce Department felt a slap on the wrist would suffice.  In a search of the Commerce Department enforcement actions, the First American case has vanished from their site. 

If RESPA had a 6 year statute of limitations, the Minnesota Department of Commerce and HUD could have exacted a more meaningful fine and restitution that would likely have added up to tens of millions of dollars instead of $500,000.

Consumer tips and tools for sellers. 

How to Negotiate a Real Estate Commission.

Negotiate Both Parts of the Commission. 

Offer Fee Directly to Buyer.  Require your broker to share their commission with buyer brokers AND unrepresented buyers. This is legal in all but 10 states and a practice that is encouraged by the United States Department of Justice (click here for a link).

Consumer Friendly Listing Contract. Use this as a guide to negotiating your own contract or directly with your Realtor. However, some states may have certain required disclosures and terms and in that case consider using this as an addendum to the contract that your Realtor provides to you. 

Consumer Friendly Listing Clauses. Consider adding some of these clauses to the listing contract that your Realtor provides to you.

Open Houses Do NOT Sell Houses.  Read this article before you decide to allow your Realtor to hold open houses.  Open houses are for helping Realtors find buyer clients, they do not sell houses.

Pocket Listings. Do not EVER agree to this practice because it maximizes the broker’s commissions (often doubles them) while severely impacting seller’s ability to sell house at best price and terms. 

LIST of Top Ten Worst Practices.  Be aware of these bad practices.

Save $300. This simple negotiating tactic should save you $300 or more.

Articles

Survey – Real estate attorneys – See what attorneys think about dual agency and controlled business arrangements (“one stop shopping”).

Open Houses Do NOT Sell Houses.  Read this article before you decide to allow your Realtor to hold open houses.  Open houses are for helping Realtors find buyer clients, they do not sell houses.

Avoid Dual Agency.  Consumers top two reasons for hiring Realtors is to help negotiate price and terms.  Realtors are prohibited from doing both in a dual agency.

Designated Agency. Is it Fraud?

“One Stop Shopping”  Do not ever use services that are affiliated with your Realtor, brokerage or builder firm.  The service industries designed to provide safeguards to ensure healthy residential real estate transactions are now actually owned and run by the firms which have huge stakes in the transaction such as builders, Realtors, and lenders.

Large multiple industry interests are watering down the Consumer Financial Protection Agency (CFPA) bill through intense lobbying.  One of the most recent amendments to the bill excludes the title insurance industry because it was argued that they are already well regulated at the state level.  Keep in mind that it is not just the American Land Title Association that wanted this exception.  This amendment also benefits the mortgage, builder and Realtor lobby whose members all own substantial interests in title insurance companies.  They might as well own the appraisal firm too…

At the very least, the reasoning for excluding title insurance products is in error.   Title insurance is not well regulated at the state level – anywhere.  In addition, if one carefully examines the role of the title insurance company they will find that title companies also provide closing services to the lenders in addition to insuring the title.  A bad title company is in a unique position to facilitate the closing of a bad loan by insuring over title defects and mis-disbursing lender funds.

Although little attention has yet to be drawn to the significance of the title insurance industry, perhaps that should change. 

First, it is not true that title insurance is well regulated at the state level.  Although we have seen some enforcement actions at the state level in recent years, there is very little being done at the state level in regards to auditing escrow accounts, setting reasonable educational or experience standards for title insurance licensees, or scrutinizing unhealthy relationships between commission based service providers and safeguard service providers like title.  

As an example of the poor regulatory position of states, we recently attempted to perform a Data Practices Request (same as a Freedom of Information Request but at the state level) with the Minnesota Department of Commerce to identify the licensed title agencies in Minnesota.  Commerce was unable to fulfill this request because they didn’t even know who the title agencies were.  Keep in mind that it is the title agency that often receives the lender funds, disburses them and is also responsible for stopping bad transactions if the title is bad or the lender instructions are not met.  There could not be a better opportunity for financial fraud.  These title agencies handle hundreds of BILLIONS of dollars of consumers’ funds in Minnesota alone and the Commerce Department doesn’t even know who they are.

Aside from being subjected to little regulatory or legislative restrictions, there are other reasons that the title insurance industry should come under the umbrella of the CFPA.   Title agencies are often owned by, affiliated with, or selected by mortgage companies, builders and real estate brokerage firms.  Since title agencies hold the purse strings to the transaction funding, being able to exert undue influence over the title agency has become an important asset.

Imagine a cash poor builder who owns a property with mechanics liens and that property is subject to an underlying blanket mortgage that should be paid off at closing.   Imagine a property with a thirty thousand dollar real estate brokerage commission riding on the deal.  Or how about a mortgage lender that is short on transactions.  Imagine each of these firms owning a title company.  Each of those firms (representing three different industries) is in a position to influence whether or not the title company raises objections and closes the transaction.   If the last chance to stop a bad transaction rests with a title company, shouldn’t they be subject to the CFPA?   And what about the fact that the decision to fund the lenders’ money on a bad loan is influenced and possibly controlled by a builder, mortgage firm or real estate brokerage firm?   Shouldn’t they also be subject to the CFPA?

This exception was carved out by a Minnesota Congressman named Paul Erickson, a Minnesota Republican.  Minnesota may actually be the starting place where controlled business got its foothold and where it possibly has the most widespread effects.  It is typical for builders, brokerages and mortgage lenders to own title companies in Minnesota.  It should come as no surprise that Minnesota authored this atrocity they call an “amendment.”

 

Builders want to continue to force consumers to use their in-house title companies.   Allowing a builder to own a title company is little different than allowing a builder to determine if his own title is any good.  Builders recently pummeled HUD with a mountain of letters and a lawsuit to protect this anti-competitive, anti-consumer and manipulative arrangement.

New construction closings are likely the most complex and risky transactions a consumer or lender will ever do.  The title issues are enormously complex, fraud abounds and the potential for coercion and bait and switch is huge.  And it is the title company that must sort through the complex purchase agreements to properly represent them in the settlement agreement.  It is the title company that must uncover title defects created by the builder, mechanics liens that the builder hasn’t paid and handle situations where the buyer and builder disagree.  Of course, builders want to own the title companies that make these decisions.  What better way to protect their investment.

It doesn’t take long to imagine a routine real life scenario where a builder might abuse his ownership of a title company.  Here are a few:

• Sub-contractors have filed mechanics liens on the property and the builder disputes them.
• There is a blanket underlying mortgage on the entire development and the builder doesn’t want to pay off the part due to release the subject property.
• The builder is in financial difficulty and the title company is a perfect bank to “borrow” money.

Residential new construction is already a problem for consumers in that the purchase agreements are best described as contracts of adhesion and offer consumers no meaningful protection whatsoever.  The forms are typically custom forms in excess of 20 pages that would cost a fortune to even have an attorney review.  Consumers are already at a severe disadvantage.

In addition, title companies are responsible to collect and disburse funds in an unbiased manner that follows the instructions in the purchase agreement.  Is there any possible way to call a builder’s title company unbiased? 

And if the builder is trying to cover up title defects such as unpaid mechanics liens or unpaid mortgages, what better way to do that than by owning your own title company?

The other problem is that builders coerce buyers to use their biased title companies by offering fake discounts that exceed the price of the title work often by a factor of 5 or more.  Free rooms, $10,000 in discounts, free granite countertops are all things that we have seen.  When the title fees are only $1200 or so, the so-called “incentive” to use their title company becomes more of a demand than a choice.

And if the builder is capturing all of the buyers’ title work that comes through the door, what does that do to competition?   Competing title companies that offer title work for less won’t be considered because they would essentially have to pay the buyer $8,000 to match the benefit the consumer is getting from the builder.  The discount is nothing more than a stick to whack the buyer with if the buyer refuses to subject himself to the risky proposition of allowing the builder to examine his own title. 

Allowing builders to own a title company allows the builder to neutralize the safeguards that the title company is there to provide.  If you’re going to allow that to happen, it is CAARE’s position that you would be better off not even examining title at all.

On July 28th, 2009 CAARE was briefly interviewed on public radio about the problems with the new Home Valuation Code of Conduct.  The purpose of the HVCC is to obtain sound appraisals free of influence and coercion from vendors and parties to the transaction.  The goals are accomplished by preventing interested parties from communicating directly with appraisers. 

CAARE supports the idea of an HVCC but finds severe defects in the way this idea was implemented.  The end results of this first attempt at a good idea are higher prices and lower quality appraisals for consumers, lower pay for appraisers and the creation of an unregulated new profit center called Appraisal Management Companies (“AMC”).  We have solutions.

We ask, “Why to stop with appraisals?”  All the safeguard industries for which residential real estate depend are also routinely subjected to coercion, undue influence, bribery and self-dealing.  An economic recovery is likely to stall if those other areas are not also addressed.

It is time to remove all conflicts of interest from the residential real estate.