Redesigning Settlement Services.
Let’s say you are going to redesign the settlement service and housing finance industries and regulatory framework with a clean slate.[1] You are a 21st Century, data-driven Washington DC regulator[2]with massive powers to control and influence the housing market and you have been tasked with (i) protecting consumers and (ii) furthering housing equity.[3] What’s your philosophy on the best way to protect those consumers and facilitate fair housing goals? For example, do you believe disclosures alone will enable consumers to protect themselves[4]or do you think guardrails on pricing and features of the products and services are needed too? Can the free market operate on its own to produce optimal outcomes or is there the potential for market failures such as market concentration, conflicts of interest or regulatory barriers and requirements that can inhibit efficient market operation and/ or enable or encourage unfair outcomes to result?
Boiling Frogs[5]
Well, we might be watching this scenario unfold before our own eyes today. No, I don’t mean to suggest there is some deep state plot at work. This is all happening in broad daylight. The bottom line appears to be a multi-front attack on the value of settlement service providers which could offer many new opportunities as well as challenges. This is a time in which every provider will need to assert and articulate their value to the consumer.[6] If you are mortgage originator who just funnels borrowers to the online application of your favorite wholesaler or a realtor who just provides access to listings to home shoppers, you might need to up your game quickly because otherwise, your commissions are a “junk fee”.
Starting at the top, in his State of the Union address on March 7, 2024, President Biden said that CFPB would “engage in rulemaking and guidance to address anticompetitive closing costs imposed by lenders on homebuyers”. Biden specifically noted homeowners would no longer[7]have to pay for lender’s title insurance on refinances.[8] This announcement was followed the next day by CFPB’s press release decrying housing related “junk fees” and closing costs. All of this, of course, was swiftly followed by the groundbreaking National Association of Realtors™ (NAR) settlement. Although not exactly a result of federal government enforcement action[9], NAR has agreed to a $418 million nationwide settlement over the antitrust issues I covered last November in Ed. #69: The Realtors’™ Crumbling Dam (mortgagemusings.com).
This all seems consistent with the expressed consumer protection philosophy of CFPB Director Rohit Chopra[10] as well as his views on market power and longstanding legal antitrust doctrines applied to the real estate brokerage industry anew. Unfortunately, many in the settlement service industry may not realize they are the proverbial frog in a slowly heating pot that never jumps out before boiling to death. Sticking with that metaphor, however, the heat in the pot has been turned up tremendously in the last few weeks. These regulators and, perhaps more importantly, the politicians they report to have apparently decided that the cost of housing is too great and that’s because they think settlement service providers involved charge too much for their services and products. Clearly, they don’t understand the value of those providers (or care). And, my froggy friends, it is no coincidence this is happening in an election year.
Defending your value
In a classic microeconomic model, a middleman is someone who connects consumers with needed products and services. The value that the middleman provides is information that the consumer does not have. To “cut out the middleman” you need to deliver the market information to the consumer in another way (or make the information obsolete). Shopping for a home (especially for first time homebuyers) isn’t exactly like pro-se litigation or DIY surgery, but people need knowledgeable professionals to help them understand the complex nature of the process and to appreciate[11]that the skilled professional can make that immensely easier. In the housing industry, real estate brokers, mortgage lenders, title agents and insurers, appraisers, credit providers, lawyers, home inspectors and many others are going to have to justify their value as middlemen to those regulators and the consumer market anew (or maybe for the first time).
While the NAR settlement and the consumer regulators’ protection philosophies are premised on antitrust and market power principles, unless the value provided by participants can be articulated the end result of many of these latest moves is likely to be more consolidation and delocalization of real estate services. The Amazonificationof home buying and selling could cut out the middlemen, but seems unable to deliver the service level and informational comfort presently provided by good mortgage and real estate professionals. But I wouldn’t look for the government to do more to assure service levels.[12] Right now, they just want quick wins on pricing and optics of “going after” an industry that has done a poor job of explaining why they get paid a lot to provide information.
NAR settled, but what’s next?
For Realtors, the dollars of the NAR’s settlement are much less important than the other terms of settlement.[13]Most folks (including the Biden Administration) believe that untethering the cooperating (buyer’s broker) commission from the multiple listing services opens the door to broker commission negotiation.[14]Whether that is accurate or agents will be able to buttress their broken dam (keeping total commission around 5 or 6 %) with better articulation of the value they provide remains to be seen. At a minimum, as figuratively emphasized by Sharran Srivatsaa, President of Real Brokerage, Realtors will have to find another route to drive from Laguna Beach to LA.[15]Appeals of the other real estate company cases could result in different outcomes and precisely how the market will adjust or whether entirely new models will thrive is yet to be seen, but how broker commissions are going to be justified (and disclosed) is going to change.
Mr. Srivatsaa seems to agree with me about articulating your value. In fact, his advice to Realtors is that instead of marketing yourself, “showcase the complexity and deliver simplicity.”[16] That is exactly what a value proposition is.
Mortgage junk fees?
Realtors, of course, aren’t the only middlemen who will need to articulate their value proposition. Housing Wire’s James Kliemann pointed out the irony between Chopra’s views on competition and the LO Comp Rule in a recent subscriber email about how the NAR’s commission litigation is impacting loan originators. Kleimann noted,
It’s been just over a week since news of the NAR settlement broke, but I’ve already heard from LOs who say clients are now asking more often about negotiating their commissions, too. Few consumers know about or understand the LO Comp rule. [17]
CFPB’s junk fee concerns for mortgage finance seem to have come out of nowhere (or from a sleeping dog[18]). CFPB is asking consumers to provide evidence about excessive fees[19], but even before getting that requested evidence CFPB claims, “Closing costs are high and increasing because there is little competition. Borrowers are required to pay for many of the costs associated with closing a home loan but cannot pick the provider and do not benefit from the service.” Yikes, the drafters of the TRID Rule for this 21st Century data-driven regulator must be wondering why they worked so hard on that disclosure regime. Assuming CFPB would use its UDAAP authority to limit excessive fees, CFPB will need to find that the CFPB’s own required TRID disclosures fail to cure the unreasonable advantage-taking that they assume is taking place.
Meanwhile, in its mortgage closing junk fee missive[20], CFPB specifically highlighted lender’s title insurance as an example of these kinds of costs, but it seems every settlement service provider has a target on their back these days.[21]
How will this title waiver work?
While there’s a lot to unpack in all of these “junk fee” allegations (which may be fodder for future Musings), I specifically dug a bit further into the refinance title waiver issue this week by looking at the Statement from FHFA Director Sandra Thompson and its related FAQs. Initially, I had assumed that the plan from the GSEs would be the classic, ‘Sure we’ll buy your loans without title insurance, but you’ll still be on the hook for all the same reps and warrants when you sell’. That assumption got me worried about a slippery slope to mortgage bankers taking on more and more repurchase risks in an effort to avoid closing costs, but it turns out that was an incorrect assumption.
As FHFA’s FAQs makes clear, while that would normally be the case, that isn’t the plan for this pilot program. Still, my assumption wasn’t off base. Per the FAQs,
Lenders are permitted to sell refinance mortgage loans to the Enterprises only if they warrant that the mortgage is a valid first lien on the homeowner’s property. Additionally, the property must be free and clear of any prior lien or encumbrance. These title requirements will not change under the pilot, but Fannie Mae will not require a repurchase or make-whole payment for certain title-related representations and warranties if lenders elect not to obtain title insurance or an AOL. Under the pilot, an automated title review process to assess title risk will inform whether title insurance or an AOL should be required, or if additional independent verification of title is unnecessary. [emphasis added]
So, there’s an automated title review process the GSEs control as part of this pilot to assess the title risk and if the loan qualifies, the GSEs will not require repurchase if a title defect causes a loss. At this point I don’t know if this “automated review” is something the GSEs developed on their own or a vendor (middleman) is providing the information. The industry needs to hear more about how that title review process is going to work and also see the language for the waiver of repurchase/indemnification remedies against the standard seller/servicer guides. To be clear, I can imagine situations where a rep and warrant issue with title that would have been revealed on a title search is also a violations of other underwriting requirements, so the precise language of the waiver is critical to assessing the real risk to the lender.[22]
GSEs join the “junk fee” party
Meanwhile, perhaps most interesting, it seems the GSEs themselves are going to be charging a fee for this automated review. As noted in the FAQs,
“If the automated title review process confidently assesses that title risk is low, lenders will not be required to provide additional independent verification and instead will pay a fee to the Enterprise to cover the risk that there is an unexpected title defect.” [emphasis added]
So, in lieu of lender’s title insurance on refinances, the GSEs are going to be charging their own “junk fee” for that bit of information and release from rep and warrant liability. This raises many questions such as whether: (i) the fee to the GSE will be less than the full cost of title insurance, (ii) such a fee from the government (yes, the GSEs are the federal government) can be passed through to consumers, or (iii) the GSEs are even authorized to assume title risks for fee.[23]Likewise, please don’t ask me yet where to disclose that GSE fee on the TRID disclosures.
At least it is helpful to know that my mortgage banking clients (especially those that are bank owned with prudential regulators concerns about loss reserves) will probably not need to increase repurchase reserves to cover risks normally insured by lender’s title insurance policies. Maybe they should anyway, just in case.
[1]This is the kind of exercise in hubris-infused market planning by government bureaucrats that would make Friedrich Hayek roll over in his grave.
[2]Any similarity to any actual regulators is purely coincidental.
[3]Whatever that means. Remember, this is a hypothetical task for a hypothetical regulator.
[4]Someone might want to alert the Federal Reserve eggheads discussed in footnote 13 of my last Musing, that disclosures no longer seem to cut it at CFPB. Practically speaking, disclosures have always been largely ineffective as consumer protection because few consumers read them and even fewer would be able to negotiate something different. CFPB should be more forthright about its thoughts on that too to provide the foundational support for their actions. See also the section below titled, “Mortgage Junk Fees”
[5]My apologies to The Dispatch writer Nick Catoggio (formerly known as Allahpundit on the platform formerly known as Twitter) who pens a daily column with the same Boiling Frogs name. Catoggio is a frequent pessimist, but his columns are excellent because he walks you up one argument and then down the other.
[6]In that regard, someone please remind me why credit bureaus get to charge me for access to my own credit when I can practically give a lender direct access to all of my accounts on my cell phone.
[7]Technically, FHFA is going to permit a pilot program, so the President was a bit out over his skis on that one.
[8]Unfortunately, Biden’s Federal Reserve Board Chair has failed to announce any lowering of the Fed’s interest rate policy that would result in any refinances actually occurring (as a practical matter). Wait for it, however, as this is an election year. Also, I have no idea how lowering the cost of refinances will do anything to increase the housing supply which everyone including the Biden Administration, seems to agree is the reason for consumer inability to attain homeownership. In fact, lowering refinance costs would likely only have the opposite effect. Supply/demand you know. Econ 101.
[9]The Justice Department has, however, been engaged in litigation with the NAR as well over anticompetitive concerns. It is unclear at this time whether that litigation will also be settled as a result of NAR’s settlement with the Missouri plaintiffs.
[10]Chopra shares those views with FTC Chair Lina Khan and Assistant Attorney General Jonathan Kanter, the head of the Justice Department’s antitrust division.
[11]By appreciate, I mean be glad to pay professional fees for the assistance.
[12]Then again, that’s basically what the mortgage servicing regulations do.
[13]I have not reviewed the full settlement agreement and it remains to be approved by the court, but per Housing Wire, “all fields displaying broker compensation on MLSs must be eliminated and there is a blanket ban on the requirement that agents subscribe to MLSs in the first place in order to offer or accept compensation for their work. The settlement agreement also mandates that MLS participants working with buyers must enter into a written buyer broker agreement. NAR said that these changes will go into effect in mid-July 2024”.
[14]The NAR claims that commissions have always been negotiable.
[15]Mr. Srivatsaa also noted that 89% of agents do not have a buyer presentation (vs. 27% for listing side). That’s going to need to change to demonstrate a value proposition.
[16]By the way, I learned about Mr. Srivatsaa’s video from Rob Hahn’s Substack. Rob is a great writer to follow for folks in the real estate sales business. His writing style and analysis reminds me of a similar writer in the mortgage industry except the mortgage guy uses a lot of footnotes and gives away all of his content for free. 😊
[17]LOL Have I ever mentioned that the LO Comp Rule is anticompetitive? I tend to repeat myself, so sorry if I have said that before like here, here, and here.
[18]Politicians and election years can wake sleeping dogs.
[19]This reminds me of when former Fox News host Lou Dobbs said on his show, “We know that the election was stolen, but we are just having a heck of time finding the evidence.”
[20]There was a separate junk fee announcement for other financial services.
[21]CFPB also mentioned credit report fees. Separately Chopra is going after appraisers too. Chopra’s written comments to the FFIEC’s Appraisal Committee described the Appraisal Foundation as a “lawmaking body that is neither accountable to the public nor subject to competitive market forces”. That kind of complaint sounds a bit like “the pot calling the kettle black”, but might still be valid.
[22]For example, if a mechanic’s lien has been filed it not only reflects a cloud on title jeopardizing lien position, but may also reflect a debt of the borrower that jeopardizes DTI qualification requirements that may not be reflected in the credit report.
[23]Do they need to be licensed as title insurers in the applicable states? Is that permitted under their “charters”? Do the “charters” even matter anymore 15 years into conservatorship?