Industry Gets Some Clarity On Mortgage Commission Rules

Estimated read time 20 min read

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The real estate industry is starting to get some of the clarity it’s been seeking on how mortgage lending will work after pending changes to the rules and customs governing how agents get paid are implemented.

But the big question — whether regulators will allow buyers to finance their agent’s commission into their mortgage — remains unanswered.

Mortgage giants Fannie Mae and Freddie Mac notified lenders this week that if sellers want to continue to pay buyer agent commissions, as is the custom today, those payments won’t count against limits on “interested party contributions” (IPCs).

In a March 28 bulletin, the Department of Housing and Urban Development (HUD) staked out a similar position for FHA loans, saying sellers can pay buyer’s agent fees without those payments counting as a seller concession.

Rather than adopting new rules, HUD, Fannie and Freddie have merely provided clarity on existing policies that real estate and lending industry trade groups, including the National Association of Realtors and the Mortgage Bankers Association (MBA), have been asking for.

The question now on everyone’s mind: If buyers would rather pay their agent out of their own pocket, will they be able to finance that expense into their mortgage?

“It’s very helpful for sure,” Jason Haber, a Compass-affiliated broker and co-founder of the American Real Estate Association, told StuffsEarth in a statement. “It means sellers can continue to pay for buyer’s agents without incurring the interested party contribution cap. Next up though, we need clarity about the flip side: What happens when the buyer pays for [their] own broker commission — does that count against the cap?”

HUD, Fannie Mae and Freddie Mac had not responded to StuffsEarth’s request for comment by press time. The Department of Veterans Affairs, which prohibits homebuyers taking out VA-backed loans from paying agents directly, did not respond to StuffsEarth’s request for comment on whether it’s open to industry pleas that it revise that policy.

HUD and Fannie and Freddie’s federal regulator, the Federal Housing Finance Agency (FHFA), may be waiting to see what the final rules for the agent compensation will be before they start changing policies around mortgages.

The pending changes to the rules governing agent commissions are outlined in a proposed $418 million settlement that NAR agreed to last month in the hopes of resolving allegations that Realtors have stifled competition, leading many sellers to overpay when listing their homes.

The settlement must still be approved by courts, and there are more lawsuits in the works on behalf of buyers. On top of that, the Department of Justice may decide that the NAR settlement doesn’t resolve its longstanding concerns about competition in real estate.

Stephen Brobeck, a senior fellow at the Consumer Federation of America, told StuffsEarth in a statement that the group “is pleased that [Fannie and Freddie] issued this clarification,” and doesn’t seen any reason buyer’s payments to their agents should count count against the IPC cap.

Fannie and Freddie limit IPCs — concessions offered by sellers, builders, real estate agents or other “interested parties” who may benefit when a home sells for the highest price possible — to between 2 percent and 9 percent of a property’s value.

One reason for limiting concessions by interested parties is to protect lenders who are at risk if buyers pay more than what a home is actually worth. When buyers have some equity in their home, they’re less likely to end up in foreclosure. And if lenders do have to foreclose on a home, they’ll end up in the red if it’s worth less than what they’re owed.

But if commissions are already “baked in” to asking prices — and the pending NAR settlement eventually results in commissions paid to buyer’s agents being stripped out of the asking price — that’s not as great a concern, Brobeck reasons.

“Economists and other experts agree that buyer agent commissions are now included in list prices,” Brobeck told StuffsEarth. “If the commissions are removed so that buyers can negotiate them before they are financed, lender (and) investor risk should, if anything, diminish.”

In an in-depth April 2 report, Brobeck said that if buyers were allowed to finance agent compensation through mortgages that were no larger than current loans, they’d be more likely to hire an agent to represent them.

“It would be perfectly sensible to permit buyers to finance their commission through their mortgage if they chose, paid out of the proceeds at closing,” he wrote.

While it could take time “for the laws of economics to work to strip buyer agent compensation from listed home sale prices,” regulators could speed that process by distinguishing between loans where buyers directly compensate their agents, and loans where sellers provide a credit that’s added to the sales price, Brobeck suggested.

One interesting proposal would be to allow Fannie, Freddie and FHA to guarantee loans that slightly exceed a home’s appraised value, as long as the excess funds are used exclusively to pay non-recurring closing costs such as agent commissions.

In his report, Brobeck wrote that Ed Zorn, vice president and general counsel at California Regional MLS, proposed to CFA in December that allowing the mortgage giants to guarantee loan amounts up to 2.5 percent above appraised value would be appropriate.

“We prefer 2.0 percent but think this proposal merits serious consideration,” Brobeck wrote.

Zorn had not responded to StuffsEarth’s request for comment by publication time.

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