Real Estate, Banks, and the Internet. Why do we need S 413 (HR 111)? Realtor Associations seem to take a view of stopping any change that could effect their business model. Maybe it is time to have them evaluate their own model.
The real estate industry is changing; that change is being driven in part by the internet, and in part by market conditions along with the banking industry. It is hard to defend banks at this time. This may be why the “Community Choice in Real Estate”, a bill which would amend the Bank Holding Company Act of 1956, could easily become law. The National Association of Realtors (NAR) and the local branches like the Houston Association of Realtors (HAR) are actively supporting the passage of this bill. It would help protect the Realtor business model.
This bill has been around for a while, and it is a simple bit of legislation: financial service firms cannot conduct real estate brokerage and real estate management activities. This is the flip side to HR 698, which prevents commercial companies from becoming bank holding companies. The concern behind these bills is that consumers need to be protected from having their options limited by a firm selling a house. Here is the scenario: a bank has foreclosed on a home. Their property management division takes care of the upkeep of the home, while the bank’s real estate brokerage service offers the home for sale. Along comes the buyer who is told that if they wish to buy the home, they have to obtain a mortgage from the bank offering said home. This bank has an insurance division, so they also insist on the buyer purchase their insurance. Hence limiting their “choice”, which leads us to the title of the bill.
Would banks limit consumer choice? That is possible. If you are reading this blog, or are spending time on the web at sites similar to this one, you are obviously an informed consumer, or quickly becoming one. You would know your rights to make a choice, but are all home buyers taking these same steps? To a degree, they are. More people are beginning to start their home search on the internet (figures state as many as 80% of home buyers begin their experience on the internet). Are they digging deeper to obtain more details that would help them make wise decisions? That may not be the case. In fact, they may just be looking for a home, a Realtor, but not details to help them negotiate this purchase well. An uneducated consumer walks into such a major purchase with a disadvantage. This bill would take away that problem.
In my opinion, we face a problem when limiting the ability of a business to find the most efficient mean to carry out trade, and NAR has a history, in my mind at least, of preventing competition. Let us go back to 2007-2008, when the Department of Justice had a case against NAR because they prohibited online brokerages, such as Redfin and ZipRealty, from accessing the MLS (the database of homes that are for sale). Online brokerages offer the consumer the chance to lower their fees associated with the purchase. The internet offers the opportunity for the consumer to pick an choose which service its wants, thereby saving money. NAR does embrace the fact that the internet will be a force in real estate, so they encourage Realtors to head online. Spread the word! Have the consumers come to you! Keep the status quo! At least that is the way it appears.
Banks do not have the best track record when it comes to the foreclosure market. A survey of newspapers or your local news channel will present to you stories of loans not being modified. I have dealt with home inspections where the banks seem to be making it difficult for the buyers by giving no time to have an inspection, insisting on certain prices without concessions to make home repairs found during the inspection, and more. We have seemingly forgotten that treating the consumer with respect and integrity is better for business in the long run. Unfortunately, this method does produce quick, large profits. This pursuit of profits is at the heart of the economic crisis. It has shown that we do need to monitor businesses to ensure that their behavior is satisfactory. I do not think that this means limiting the way a business functions, which is the aim of the Consumer Choice in Real Estate Act. If it was up to me, I would love to see the current CEOs fired from their jobs, and the banks severely punished. This would be satisfying, and it would be the worst thing for the nation, because we rely on the banks to have our economy function.
What would be the best way to give consumer’s a choice? First, we need to include financial education in a high school environment, maybe even earlier. The greatest limitation on consumer choice is their own lack of understanding. We are responsible for ourselves, and we need to take our own actions to improve our lives. We can begin to do this through better education. Secondly, we need to find ways to effectively monitor businesses. There are too many connections between business and government. As an example, the Texas Association of Realtors develops forms which control how the home sale will happen, and these forms are adopted by the Texas Real Estate Commission. This is not entirely a bad thing. Realtors would know best of how to deal with such a transaction, but this process leaves the consumer out of the picture. We need the expert knowledge of professionals in the industry to develop rules further, but we need an advocate for the consumer to ensure their interests are noted. Thirdly, we need to allow businesses to find more cost effective methods for developing their operations model. If we have taken steps one and two, this third step will reduce costs to the business, which would hopefully be passed onto the consumer. Fourthly, rewrite the rules so shareholders will have more power in companies that they own over the CEOs. CEOs have too much power over large corporations, and the owners (the shareholders) have few rights in dealing with them. A sea change is beginning, where some firms have adopted rules that place more authority with the shareholder, but this should come from the SEC as a rule that all companies should follow. The SEC was meant to protect the shareholders, but they seem to believe that protecting the CEOs is protecting the shareholders.
The big problem with my proposal is the first idea, financial education. I accept that there will be people who come away from such education with little to show for it. I think if we begin to treat consumers as adults by telling them they have to take responsibility for their actions, eventually such education would succeed. That is my thoughts on the matter; what are yours?