Defining 'Brokerage': The Great Bank Heist

REALTORS® fight to protect consumers as big banks grab for brokerage business.

March 1, 2001

Mark Macek knows what will happen in his market area of 65,000 people if federal regulators decide, at the urging of large, national banks, that real estate brokerage is a financial activity.

“Banks will come into our community and buy out the largest one or two brokerages and then decide, based purely on profit, who should remain in those brokerages and who should go,” says Macek, 2001 NAR regional vice president and managing broker of a RE/MAX office in Great Falls, Mont.

What’s more, consumers can say good-bye to the high-touch treatment that distinguishes real estate brokerage from other sales activities.

“People look to their real estate professional as an independent party whose loyalty is to them and the protection of their most important asset,” says Macek. “Is it right for those interests to be represented by a company whose primary stake is in its loan portfolio?”

That’s a question that’s been on the minds of many in the real estate industry since late last year, when the U.S. Treasury Department and the U.S. Federal Reserve issued a proposed rule to define real estate brokerage as a financial rather than a commercial activity. That would open the door for banks to enter the real estate brokerage business. The rule would apply to property management and relocation activities as well.

“This country’s broker-centric real estate industry is the envy of the world,” says NAR President Richard A. Mendenhall. “There’s no need to introduce such far-reaching change into an industry that’s working as well as ours.”

Since the rule was proposed, NAR has given lawmakers on Capitol Hill and federal bank regulators an earful. The association launched a Call for Action in late January, calling the change a “big grab” on the part of the banking industry--one that won’t benefit the consumer. But banking interests would have the country’s federal financial services regulators believe otherwise.

The American Bankers Association, one of the principal backers of the drive to define brokerage as financial, has argued that bank-owned brokerage activities would respond to the increasing desire by buyers and sellers to obtain their brokerage and mortgage finance services from a single provider.

According to a new white paper produced by NAR Research, the problem with banks’ reasoning is two-fold.

First, banks would have a competitive advantage, stemming from their federal deposit insurance, interest-rate subsidies, and financial information databases on customers. Their presence in the market would destabilize what is currently a balanced, efficient brokerage market, the white paper argues.

Second, consumers would end up with fewer choices and increased costs, which would drive lower-income buyers out of the market just as the industry is poised to make striking gains among underserved households.

“Banks don’t understand the risks and problems that come up in a transaction,” says Sue Wiskowski, 2001 vice chair of NAR’s Public Policy Coordinating Committee. “It’s one thing to make mistakes with their own money, but given the subsidies they receive from the federal government, it’ll be the public that bails them out if they mismanage their brokerage activities--just as we bailed out the savings and loans in the 1980s.”

On its face, the idea that real estate brokerage is a financial activity will be a hard case for banks to make, the NAR white paper shows.

A financial transaction involves intangible assets with “notional” market value such as cash, stock, and derivatives. Commercial activities, in contrast, deal in tangible assets such as automobiles, property goods, land, and built-up property.

Although most homeowners benefit from the appreciation in value of their home, that’s secondary to the home’s shelter value when it comes to people’s reasons for buying, NAR says.

Nor is it always necessary for homebuyers to secure financing. As it is, 20 percent of buyers complete their purchase without engaging a lender.

“Even when financing is used, it is only one component of a complex transaction,” the NAR paper says. “The financial transaction is incidental to the real estate transaction.”

What real estate brokerage boils down to is stewardship, NAR says.

According to the white paper, brokerage begins when the homeowner contracts with a practitioner to sell a home and ends with the practitioner assisting the seller in negotiating and closing the sale.

To make its case, NAR has been ratcheting up its efforts on a daily basis. Concerned REALTORS® have flooded Congress, the Federal Reserve, and the Treasury Department with letters opposing the change.

That’s the kind of input lawmakers and regulators want to hear, NAR analysts say. As the regulators themselves say, in the preamble to their proposed rule, they’re “not convinced that real estate should be deemed a financial asset.”

That view has always been clear to REALTORS® . Now NAR is working hard to make sure it’s known in Washington, D.C., as well.

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.

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