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Tuesday, July 18, 2006

Real Estate Kickback Schemes Marches On

Today, the U.S. Dept. of Housing and Urban Development (HUD) announced that it reached yet another settlement with a large national lender and two large builders for violating the Real Estate Settlement and Procedures Act (RESPA). One of RESPA's functions is to protect consumers by prohibiting kickbacks in real estate that artificially increase the premiums consumers pay for title insurance or other costs related to purchasing a home. The settlement was for $1.6 Million. A drop in the bucket in a billion dollar real estate market.

Title insurance is big business and exceptionally lucrative. Real estate online news source, Inman news, reported earlier this year that in comparison to homeowners insurance or medical insurance where two-thirds or more of the premium actually goes to pays claims, title insurance claims are under 10% of premiums collected.

Title companies, builders, lenders and real estate brokers have been under scrutiny this year by HUD and several states (Washington, California, Colorado, New Mexico among others) due to the proliferation of setting up what are called captive reinsurance companies or other affiliated business fronts created to skim referral fees off the backs of consumers.

Earlier this year several of the most prominant title companies and parent companies that operate around the country and in our market have settled these alleged cases without admitting any wrong doing. Naturally.

It pays to shop and discern fees for title, escrow and lenders when buying AND selling a home.

Ethics in real estate. Is it an oxymoron?

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16 comments:

jcricket said...

This kind of thing just calls out for an Internet-based solution. If there was a clearinghouse for title and escrow services, and some easy way to select which one you want when signing up with a lender, that would solve a lot of the hassle issue with shopping around in the current environment.

Seems like something that Yahoo or Bankrate.com could add to their "shop for a mortgage" service. I know the lenders might not like it, but consumers would.

Anonymous said...

Agents would resist for varying reasons. Loss of control for starters.

cosmos said...

RE biz ethical? You've got to be kidding. Everyone should do FSBO. Buyer works with lender for getting money and hires inspector. Escrow company takes care of title and closing. Why does anyone think it is complicated? The public has been sold a phoney bill of goods.

s-crow said...

Does anyone have any unique personal experiences good or bad they can share regarding ethical behavior in real estate.

ie, dialogue with Realtors in open houses, out working with agents, your own transaction perhaps etc..

jcricket said...

s-crow - Everyone I've worked with in my RE transactions have been ethical. My mortgage banker has gladly told me that her product was worse than one I found on the Internet through my bank, on two separate occasions, and continued to work with me subsequent times. She didn't black-ball me or make me feel bad when I found a better deal.

My RE agent has never talked up a property to me (beyond showing it) and specifically suggested I go below asking price and not escalate on a particular property. He was more than happy to let me walk away, even though we'd been looking for more than 3 months and it meant more work for him without a payoff. He's never made me feel like he was trying to sell me on anything, beyond helping me find a place that I liked, to the point where he doesn't even walk us around the property ooh-ing and aah-ing over home features. He just trails us and let's us do the talking/ask questions. And he's a "traditional full service agent" working for one of the larger RE companies in Seattle.

I consider both of these people totally ethical, and they're a large part of why I'm not swayed by the whole Web 2.0/FSBO idea.

Anonymous said...

Another swipe at the entire industry by the host, a professional complainer.

Capitalistchristian said...

Cosmos

Are you speaking from any experience doing FSBOs? You see in a buyers market, a FSBO is by far the worst way to sell your home. The problem with both internet based companies and FSBOs are the potential for legal liability. I would gladly shop around on-line for a mortgage or other services, but when it came time to close a deal, I'm going to be looking at someone face to face. I won't be giving my SSN over the internet to some "would-be" borrower. The number one crime in this country that is going through the roof is called identity fraud. And the legal ramifications for buying a house FSBO, having potential title problems, and other legalities which you have no idea what youre doing, simply isn't worth it.

Therefore, shop around, find yourself a good agent and mortgage broker and make educated decisions. Its not that hard. You feel completely fine paying a car dealer 10% for a car, a waitress 15-20% tip for a meal, a lawyer 50% for his winnings, but when it comes to a realtor showing you 20 houses over the course of 3 - 4 weeks (for free until anything actually closes) you feel like you're being "robbed" of the 2.5 - 3% commission they receive (of which they'll get around 50-65%). Why are you such a hypocrite?
Should these people all be charity workers? I recommend you all try to do a FSBO and ask the same price that other homes that are listed on the MLS in your neighborhood are going for - good luck. You'll be calling a realtor after 6 months when you haven't received one decent offer.

The only exception I see is if you have your own lawyer, its a red hot market (think 2003-2004) and your house would sell in a week with or without a realtor. Then go ahead. Until that time - peace be with you.

Anonymous said...

"Another swipe at the entire industry by the host, a professional complainer."

Try being a lawyer, I get this all the time despite the fact that I follow the rules of professional responsibitlity to a T.

There are both ethical and unethical people in all industries. BUT, only the bad ones get the press because good news doesn't sell papers.

Anonymous said...

There are both ethical and unethical people in all industries.

Tue Jul 18, 10:30:04 PM PDT

True. To be fair, real estate industry ought to look at other pay structures where agents are paid on per/hour basis or fixed fee basis. Further, certification should be introduced, just like in the financial planning industry (CFP, CLA, etc.) The barrier of entry inot RE industry is much too low considering its size and financial impact.

The Tim said...

I know this isn't really worth responding to, but sometimes I just can't help myself...

Another swipe at the entire industry by the host, a professional complainer.

Golly, I wish I could be a professional complainer—getting paid to sit around writing pithy complaints on a blog. How sweet would that be? That said, it should be noted that this post was written by S Crow, not myself. As you may recall, S Crow owns his own escrow company, and is therefore a part of "the industry." Furthermore, his comments could hardly be construed as a "swipe at the entire industry" any more than reporting the news that some baseball players doped up would be "a swipe at all of baseball."

Lastly, since you prefaced your comment with the word "another," I challenge you to provide examples of posts in which I have made "swipes" at "the entire industry." Until and unless you do so, I will have to characterize your comment as:

Another unsubstantiated swipe at the blog host by an anonymous commenter, not even willing put their name behind their words.

jcricket said...

There's a thread on RainCity Guide about the "pressure" that buyer's agents use (i.e. "Go ahead and lower the buyer's commission, then I won't show that house to my clients") that keeps commission rates relatively locked at 6%.

I agree with the anon poster who said we need a different RE model. On the thread above I posted that I think sellers should negotiate and pay the listing agent either a flat or % fee, for whatever services they think they need. Buyer's should pay their own agent, choosing from a menu of services whatever they think they need. If you needed a full-service agent (on either side), I'm sure one will still be available. If all you need is someone to drive you to a house or two and write up a single offer, you could get that too.

No conflict of interests, good agents still get paid, and consumers have more choices. You could even create a system where people pay a small down payment to their agent and the rest on completion of a successful sale/purchase. This takes some risk out for agents and, IMHO, reduces one of the "reasons" commissions are high (agents take the risk that they'll spend 100s of hours and not get paid).

And the other anonymous poster is confusing Tim and s-crow with some of the comment board posters. There are plenty of swipes against "the entire industry" in the comment threads, but rarely in the original posts themselves.

And I think my wife would agree with Tim that if there was a "professional complainer" position open, I would be first in line :-)

S-crow said...

Jcricket -

Thanks for the responses here and over at Rain City Guide.

There are tons of great resources to help consumers out in the market and our company works with some of the best.

People should know the cream of the crop, so let us know the name of he or she that helped you. That's the kind of person to highlight!

S-crow said...

Regarding S-crow (the other Tim) for being a professional complainer-

No, I'm just transparent, something I think is a breath of fresh air in this industry.

And, I'm more of a professional illuminator, one who is heavily consumer driven and likes to call it like I see it in my industry, good, bad, and the absurd. Because I'm not in the sales end of things, I do think it helps to lend a bit more equilibrium (code for non-bias)to my commenting and hopefully reduce the professional attacks (we have already received a few choice ones) for participating in a blog that is bearish in tone regarding the market. Blasphemy for me to participate!

For example, I never thought I'd ever hear the end of it for posting Zillow's link on our website's homepage. Those nasty comments were subsequently meaningless when Coldwell Banker Bain and John L Scott started posting sold data, caving under Zillow's pressure.

So, my hope is to shed light on what goes right and wrong in the business so the consumer and more importantly, the Realtor that sleuths this blog can gain insight into what the consumer really thinks and why and adjust their practice accordingly.

jcricket said...

People should know the cream of the crop, so let us know the name of he or she that helped you. That's the kind of person to highlight!

I only hesitated to do so because I'm not interested in seeing anonymous criticisms hurled their way when they haven't asked me to do anything for them (publicity-wise).

At any rate, two of the people I've worked with that I'd whole-heartedly recommend are Connie Lindsay of Homestone Mortgage and Mike Herren of CBBain. Neither has ever put me in what any type of position where I feel my interests are being compromised in favor of theirs.

cosmos said...

I have many stories of slimey behavior, from out and out lying (e.g. no mention of known defects)to fraud (e.g. mortgage officer who whites out applicants' entries)to incompetence (e.g. a buyer's agent who doesn't add an inspection contigency) to market manipulation (e.g. steering buyers only to a specific broker's properties; leading sellers to reject an offer so selling agent can write one up where they are dual agent), etc., etc.

The industry is scum...regardless of the few people in it who try to be ethical.

cosmos said...

I have bought and sold FSBO. It is easy. As far as I can tell agents and brokers don't add ANY value for an intelligent informed person, except for a seller who doesn't want to face a stream of buyers.