Bad brokers?

Posted by: Dean Foust on August 15, 2007

usedcarsalesman.jpgThis housing boom was different in many ways, starting with how the actual mortgage loans were made. Time was you went to Jimmy Stewart and the local Building and Loan and, if the bank’s lending officer smiled upon you, you got a loan. No more. Banks decided the “overhead” of employing mortgage reps was too expensive, so they increasingly outsourced the origination to a new generation of independent mortgage brokers who were, basically, paid for “piece work”—getting a commission on each mortgage loan they brought to the bank.

It’s easy in hindsight to see the economic incentive of these independent brokers to do whatever it took to qualify a borrower and collect the commission because if they load DID go bad, odds are that wouldn’t occur for several years and the broker would be long gone down the road, selling used cars, cell phones or whatever the fad du jour was at that point. (Although the same principle applies, unfortunately, for all of the investment bankers who bundled these mortgages into securities that they sold to investors. My bonus is my successor’s headache, not mine…)

futureofwork.jpgMy BusinessWeek colleagues Brian Grow and Mara Der Hovanesian collaborated on a story (which can be accessed by clicking here) in the current print edition (cover story: The Future of Work”), of BusinessWeek, titled “Did Big Lenders Cross the Line?” It explores the question of whether brokers who played fast and loose—increasing an applicant’s income, or even whiting it out to put them in a “no doc” loan that carried a higher interest rate, and with it, higher commissions. And whether the big mortgage lenders either encouraged, condoned or turned a blind eye to this behavior. It’s a good read.

But I’d be remiss without noting that we have quite a number of real-estate agents and lending officers who visit and post on this blog. What do you think? What have you seen when you’re working in the trenches every day?

Reader Comments

rich

August 15, 2007 9:08 PM

U.S. mortgage brokers were on the threshold of creating a reputable well-paid profession. But now they will never be taken seriously as a profession again. Some will be sued, but many more will be ostracized in their communities for the perceived wrongs they have done to good people. Some fairly honest brokers surely will be tarred with the broad brush.

U.S. consumers have long memories about things like this. The more pain the real estate downturn creates for them, the more and longer they will despise mortgage brokers.

Lord

August 16, 2007 1:33 PM

When you reward such behavior with higher commissions, you can't help but encourage it.

RealEstateCafe

August 16, 2007 2:15 PM

What do real estate agents think about "bad brokers?"

Speaking as a buyer agent, I hope it is just a matter of time before the press begins asking if questionable real estate brokerage practices contributed to the overvaluation of housing markets and unfolding mortgage meltdown.

Here's an example of another kind of "bad broker" from our blog post entitled, Double Bubble: How counterfeit buyer agents inflated the housing bubble:

"My so-called buyer's agent (who promptly switched roles at contract signing without explanation), initially advised me to bid $750,000 for my house of choice, which was listed at $699,900. When I told her that such an offer was beyond my price range, she was quite adamant that I not offer anything under the list price. When I finally backed out the deal because of her bait and switch scam, I later heard that the house in question sold shortly afterwards for $682,000--in other words, nearly $70,000 less than the bid suggested by my so-called buyer agent."

"This type of price inflation (caused by seller's agents masquerading as buyer's representatives) must have a very distorting impact on housing costs. The economic fallout is enormous: ordinary citizens are forced to move out farther in search of decent, affordable places to live, which leads to a host of problems connected with traffic congrestion, suburban sprawl, etc."

"As I perceive it, the real estate cartel's use of dual agency [a.k.a. "designated agency"], which works to the detriment of the average consumer while enriching dishonest agents through the practice of double-dipping, contributes significantly to the manifold problems we see in the residential housing market and therefore should be fully exposed."

The homebuyer above concluded, "Isn't there any investigative team or media personage with the courage and tenacity to shed light on this problem?"

Full blog post online at:
http://tinyurl.com/yp8ocw

Annon Last

August 16, 2007 10:37 PM

I firmly believe both Realtors and Mortgage brokers should be brought up on criminal charges and made to refund the last 3 years of commissions plus punitive damages to a central fund to bail out the foreclosures. I have sat on the side line for more than 2 years waiting for this to happen. Realtors are no better then mortgage brokers and they are still up to this day trying to get their 35,000 year income buyer into that "lovely house" listed for 1/2 million dollars.. OH MY.. says Mr. or Ms. realtor… "they just fell in love with the house" "I as their buyer agent was only concerned about my potential buyer and it would just BREAK my heart to see them NOT get into this lovely romantic house with a white picket fence”

Jonathan

August 17, 2007 10:42 AM

As prior posts suggest, problems in the sub-prime lending market may be just the tip of the proverbial iceberg of self-dealing and conflict of interest in the residential real estate brokerage industry. Last year, during negotiations on my own against an agent representing the seller of a condominium unit I was interested in buying, I suggested to the seller’s agent that his firm consider reducing its commission to bridge the gap between my final offer and the seller to complete a sale. I was told by the agent’s sales manager that his firm does not reduce its commissions.

As a result, I terminated my direct negotiations for the property and found a buyer’s agent who agreed to charge me an hourly fee for his services and rebate 100% of his buyer’s agency fee to me in the event I purchased the apartment. When I submitted an offer through my buyer’s agent, the seller’s agent complained on my telephone answering machine that I was trying to “put money in [my] pocket” at his expense, and, in a second message, warned that my agent “may have a great deal of difficulty collecting” his buyer’s agency fee.

The seller accepted my offer, which was conditioned on the seller agreeing to pay my agent a 2.5% commission at closing. Despite clear language to this effect in our contract, the escrow agent holding my deposit, who was also the seller’s agent, refused at the closing to pay my agent. The escrow agent instead paid this money to itself, as seller’s agent. I filed suit earlier this week to recover this money.

Lord

August 17, 2007 2:18 PM

Sorry, but it hard to tell who was greedier, the broker or you. I don't know what commission he agreed to or what his flexibility was in reducing it, but the answer was no. In a buyers market the seller is paying the commission anyway. State law prohibits paying commissions to unlicensed people or licensure would be meaningless so your buyers agent was probably in error in making such an agreement with you and escrow may have been right in not paying it. Of course if they couldn't do it, they should have just rejected it, but that is always hard to do. Hope you like your lawyer more than your broker. It gets expensive fast.

Ike

August 17, 2007 4:52 PM

Re: Johnathans Post, can I negotiate your pay on a daily basis? Lets say, today you will take a 50% cut for the same work you performed yesturday. Contrary to what you hear on TV, in print, and on the radio commissions are negotiated between a broker and their client and not the customer. As for the agent you employed and yourself, neither of you will receive compensation from this transaction. The selling broker can challenge the commission since your agent was not the procuring cause for the transaction; hence, your agent, not you, will be going before the local board of realtors for final disposition of that portion of the commission in question. The settlement agent can not "pocket" any monies for themselves other than the fees they charge. Contact your state's real estate licensing agency for more information on this matter or go online to your state licensing web site. Good Luck and enjoying throwing your monies to your attorney.

ike

August 17, 2007 4:57 PM

To those of you who feel or have been jaded by a realtor, REPORT THEM TO THE LOCAL BOARD OF REALTORS AND THE NATIONAL BOARD OF REALTORS. Realtors are held to a code of ethics and it sickens me when I see and hear about people who have been serviced poorly. If an agent and/or broker is found to be in violation of the code of ethics they can loose their license, just like a bad driver.

Joel Stern

October 25, 2007 9:13 AM

Regarding Ike's comment of August 17:
Last year I spoke to Laurie Janik, top legal counsel of the NAR in Chicago l asked her two questions: What happens if an agent (or company, as the case may be) blantantly violates the NAR code of ethics? Her reply: Nothing happens; all such matters are referred to the individual state real estate commission
The only problem with this approach is that the great majority of such bodies are composed of corporation-friendly realtors and attorneys who are less eager to protect the public interest than to ensure the profits of their corporate paymasters. Columnist Ken Harney wrote an article in 1006 about this incestuous relationship between the real estate cartel and "regulatory" commissions, which in my opinion are a compliant tool of corporate interests. My seond question to Janik was this: Do you see any conflict when a lawyer who works for major real estate companies takes part in drafting state consumer protection laws regulating the activities of real estate agents? Her answer: I see no ethical conflcit whatsover. Janik's attitude is typical of the corporate mindset, which regards consumer protection codes as a meaningless travesty and invconvenience that can safely be ignored in the pursuit of maximum profit.

shelly

January 5, 2008 11:21 PM

I have worked as a mortgage processor in Florida for 10 years. It is easy for everyone to put the blame on Mortgage brokers, but they are not fully to blame. Borrowers of the last 5-6 years believe themselves to be very savy with all the information on the internet about interest rates and different types of loans. It became that when a borrower came in for a loan they had already decided what kind of loan and rate they wanted, because they read about it online and thier brother has this loan. The Brokers I processed for spent more time trying to sway people away from the Option Arms. And for the people with less than perfect credit we tried to put them on a plan to homeownership with some additional savings, maybe payoff some small collections, negoitiate collections, longer time on the job. Anyone with any FHA experience knows these are the basics for approval. Well again the borrowers want to tell us how the neighbor across the street didn't have to put anything down and the seller paid all the closing costs, and my friend didn't have to show a paystub and so on. I saw many potential borrowers turned away from our office because YES, I am going to say it There are many Mortgage Brokers who have integrity and live by the saying "Am I doing this for myself or for the borrower" So what I am is saying is that a lot of these people really put themselves into the position they are in but do not want to admit that they made bad decisions. I guess it is just easier to blame the Mortgage Brokers

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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