Friday, April 30, 2004

By Samantha Peterson

Rising mortgage rates spur new joint ventures

Cefrina and James Allen shopped around for a mortgage before they met with a loan officer at Prudential California Realty’s in-house mortgage company earlier this year. The couple liked that the loan officer presented all their options and that he didn’t pressure them.

Plus, Cefrina Allen said, getting a mortgage through their realty broker had an added bonus.

“Everything was right under one roof,” she said.

As interest rates climb upward, more banks are stepping up their efforts to reach home buyers like the Allens by getting closer to the source of home purchases – realty brokerages. With loan refinancings dropping off, lenders are trying to get as close as possible to the point of sale as a way of capturing more purchase-money loan business.

“There’s much more increased energy and effort in building the purchase business,” Jim Panepinto, president of Chase Ventures Holdings, an affiliated company of Chase Home Finance, said.

The uptick is apparent from the seemingly weekly announcements of new broker-lender partnerships. Countrywide Home Loans has announced at least three new ones within the past six weeks.

Such partnerships aren’t new, but an increasingly competitive marketplace with diminishing loan volume is lending more urgency to the deals for both lenders and brokers.

Lenders view these partnerships as a way to align themselves with realty companies that already have a large customer base, Panepinto said.

And realty brokers have realized that services they once considered to be “ancillary” should be part of their core business to improve their position within the marketplace, said Chuck DelGrande, managing director and head of the real estate sector for Presidio Merchant Partners.

DelGrande also sees another reason for the new partnerships. There’s a sense, he said, that banking will become less regulated and although no one’s sure yet what it will look like, lenders want to position themselves for it.

Meanwhile the capture rate of lender-brokerage partnerships hovers only in the high teens to low 20s, DelGrande said. Some partnerships enjoy a higher penetration rate, but others can’t seem to get the number north of 10 percent, he said.

Still, those low numbers don’t deter potential partners. Lenders point to the variety of loan products they plan to offer as a potential way to reach more home buyers.

Jeff Mandel, Bank of America
Bank of America, which began partnering with realty brokers about a year ago, plans to make mortgages just one of its offerings. Jeff Mandel, the bank’s national real estate partnership executive, declined to give any details, but he said the bank is building a “financial services relationship with mortgage as the cornerstone.”

Bank of America had been partnering with home builders for a while, but decided to target realty brokers as well to capture another segment of home buyers. The move came as the bank realized its refinance volume, like that of other lenders, eventually would drop off, Mandel said.

Mandel said the bank looked for brokerages that would be “true partners” for the long haul, matching Bank of America’s culture and philosophy. That has resulted in one publicly announced partnership so far, with RE/MAX 100, which has eight offices in Maryland and northern Virginia. More than 10 other partnerships have been signed, but not yet announced, Mandel said.

The search for the right fit was an objective Ed Krafchow, president of Prudential California, Nevada and Texas Realty, kept in mind when the company sought a partner for its mortgage operation

Last September, the Prudential company partnered with JP Morgan Chase in a 50-50 joint venture. Krafchow said few financial companies were interested in an even split, but Prudential believed that was the only way to go. Chase’s willingness to accept that arrangement and the lender’s good fit with Prudential’s culture led the brokerage to choose the New York-based company to help run its home loan group.

Prudential’s mortgage operation was already closing more than $1 billion a year in loan fundings, but Krafchow believed a financial company’s experience would grow the operation even more, he said.

DelGrande, who helped put together the Prudential-Chase deal, said many large brokers who have a mortgage division are considering similar partnerships. They’re weighing the impact such a move could have on their bottom line and whether they’d be able to retain any control of the lending operation.

Most large realty brokerages provide some type of ancillary service either directly or through a partnership, but providing mortgage services on their own can be a challenge because “most of these companies don’t know the mortgage business,” Panepinto said.

Partnering with a lender can provide expertise and add a revenue stream to a broker’s business model, he added.

Chase has been putting together such partnerships for close to a decade. The lender has more than 40 joint ventures and 250 other business relationships on the books and more are in the works, Panepinto said.

Like others, Panepinto sees the broader range of products now offered, such as home equity lines of credit, as a big change in these partnerships.

As Krafchow explains, it’s part of a larger move toward a one-stop shopping experience for home buyers, who like the convenience. But broker-lender partnerships won’t succeed unless realty agents feel comfortable recommending the loan services to buyers, he said.

When Prudential started its mortgage operations a decade ago, Krafchow said, agents were skeptical and said it wouldn’t work. Now, the capture rate is 22 to 25 percent. That results from competitive products and services, which in-house mortgage operations must provide to remain viable, he said.

Still, Krafchow encourages other brokers to partner with lenders, and he doesn’t worry that such deals will encourage banks to enter the brokerage business.

“There’s an opportunity for both industries to grow together,” he said

April 26, 2004 - New-home sales posted an all-time record in March, buoyed largely by the second lowest interest rates since 1956 and a strengthening national economy. The pace of new single-family home sales increased 8.9 percent over an already strong February to a seasonally adjusted annual rate of 1.228 million, the Commerce Department reported today. This was a 21.8 percent increase over the March 2003 pace.

“Home sales were very robust as builders entered their peak selling season,” said Bobby Rayburn, president of the National Association of Home Builders (NAHB) and a home and apartment builder from Jackson, MS. “Builders are working hard to keep up with a very strong demand.”

The market is very strong and interest rates are still very attractive,” said NAHB Chief Economist David
Seiders. “Though interest rates are beginning to rise as the economy improves, we still expect the housing market to remain strong because the fundamentals— household incomes, employment and household formations— are strong.”

Three regions registered sales increases for the month. The South posted the largest increase with a 19.3 percent gain. The Midwest posted a 5.0 percent gain and the West registered a 5.1 percent sales increase. Sales in the Northeast declined 24.3 percent for the month, but sales for the first quarter of the year— an increase of 28.7 percent over Q1 2003— was the highest percentage change of all four regions.

The inventory of new homes for sale in March was 372,000 units, representing a very low 3.7-month supply at the current sales pace. “The supply-demand balance in the new-home market is very, very healthy,” Seiders said. “Builders are not overextending production. Only about a quarter of the inventory is houses that are actually completed and for sale, with the remainder representing units under construction or not yet started.”

The average for the 30-year fixed rate mortgage came in at 6.01%, up 7 basis points from last week, Freddie Mac said in its weekly survey. Purchase application activity jumped 6.8% from the prior week, according to the Mortgage Bankers Association of America, nudging overall applications up slightly from the prior week. More than half Bankrate.com’s survey participants see no changes in rates soon.

-Year ARM Unchanged From Last Week
McLean, VA – In Freddie Mac’s Primary Mortgage Market Survey, the 30-year fixed-rate mortgage (FRM) averaged 5.94 percent, with an average 0.7 point, for the week ending April 22, 2004, up from last week when it averaged 5.89 percent. Last year at this time, the 30-year FRM averaged 5.79 percent.
The average for the 15-year FRM this week is 5.25 percent, with an average 0.7 point, up slightly from last week when it averaged 5.23 percent. A year ago, the 15-year FRM averaged 5.12 percent.
One-year Treasury-indexed adjustable-rate mortgages (ARMs) averaged 3.69 percent this week, with an average 0.7 point, unchanged from last week. At this time last year, the one-year ARM averaged 3.79 percent.
(Average commitment rates should be reported along with average fees and points to reflect the total cost of obtaining the mortgage.)
“Although this past month’s dramatic rise in mortgage rates is consistent with an economic recovery, it will take more than one month of strong employment gains to verify this recovery is sustainable,” said Frank Nothaft, Freddie Mac chief economist. “The market is behaving as though the recovery is a fait accompli and has entered a volatile period of trying to outguess the Federal Reserve Board’s next move.
“Home purchase applications are still strong, according to the Mortgage Banker’s application survey, which also showed that refinancing fell off over the last four weeks, due almost entirely to higher mortgage rates.”

By Glenn Roberts Jr.

Real estate professionals cite growth in discounters and real estate technologies, a booming real estate market and an increase in competition among brokers as being among the contributors to a surge in low commissions and uneven commission-sharing in some markets.

Uneven splits are an aspect of the changing structure of commissions in real estate, with the traditional but unofficial 6 percent commission shared by listing agent and buy-side agent sinking to a low of about 5.12 percent in 2002 and 2003, according to industry research by REAL Trends.

The results of an informal Inman News survey on uneven commission splits, tallied today, found that 77 percent of respondents see “a growing practice of uneven commission splits between listing agents and buyers’ agents.”

While uneven splits in commissions between the buy-side and listing-side brokers are legal, the manner in which these splits are implemented can make them illegal. Also, Realtors have a professional responsibility to disclose their own practices related to uneven commission splits.

Laurie Janik, general counsel for the National Association of Realtors, said brokers must make independent business decisions about commissions to avoid illegal splits.

“Two or more brokers cannot say, ‘How much are you going to offer?’” she said. For example, the law does not allow broker “A” and broker “B” to jointly set a low share of the commission split for broker “C” in order to drive company “C” out of the market.

Uneven splits in commission “are going to be treated as lawful unless they are the product of some type of conspiracy between competitors, or in the unique circumstance where a company that is imposing an adverse split may have some monopoly power in the market where they operate,” Steve Squeri, general counsel for RE/MAX International, explained.

Steve Squeri, attorney
It is also legally questionable, he said, whether listing agents who offer a lopsided commission split are somehow breaching their duties to the seller.

“The argument would be that you’re not acting in the best interest of the (seller). That has yet to be completely tested,” Squeri said.

Janik said that as a rule “so long as (brokers) make independent business decisions they’re fine.” She added that the issue of illegal commission splits “is not an issue that the courts have really dealt with that much.”

Even so, the National Association of Realtors amended its Standards of Practice in recent years to provide for disclosure relating to compensation amounts.

Thomas O. Gorman, a lawyer who represented Realty One in commission-split litigation with RE/MAX, also said uneven commission splits are typically legal unless there is a conspiracy to harm a particular company. Gorman said data gathered for that litigation did not uncover any rampant trends with uneven commission splits.

Thomas Gorman, attorney
“It was very difficult to collect the data on it,” though the information that did surface showed that “generally the splits were pretty even,” he said.

There were a few instances where the differential in commission splits was “fairly significant,” he said. The uneven splits were typically in favor of the listing agent and seldom gave the listing agent more than 70 percent of the total commission.

Perhaps the great regulator of uneven splits is the fact that real estate companies “are at once cooperators with each other but at the same time competitors,” Gorman said. Companies that impose uneven splits might expect retaliation from competitors.

Squeri said national data collected about uneven splits showed this practice was typically limited to a single company, and the practice typically lasted no longer than three to six months.

“Firms generally don’t do it because the market doesn’t allow them to do it,” he said.

In the RE/MAX vs. Realty One and Smythe, Cramer Co. case, which went to trial in April 2000, RE/MAX alleged that brokers associated with RE/MAX’s franchisees received lower commissions on split-commission transactions, and that this practice was “designed to drive RE/MAX out of business in Northern Ohio by deterring its agents from doing business there,” according to court documents.

The splits were typically 70/30 or 75/25 in favor of Realty One and Smythe, Cramer, court documents state, and the practice began in 1987.

The jury initially “returned a verdict finding that Realty One and Smythe, Cramer had illegally agreed to restrain trade,” court documents state, though a mistrial was declared after the jury began deliberations to consider additional elements of RE/MAX’s claims. RE/MAX settled the case with Smythe, Cramer in July. The settlement process with Realty One became contentious, though those parties eventually settled for $6.67 million.

RE/MAX collected about $10 million in total from its two competitors related to the settlement, according to court testimony. In November 2001 the U.S. Court of Appeals in Cleveland affirmed the settlement agreement, which limited Realty One’s ability to set adverse splits for RE/MAX franchises

Guest perspective: Debt addiction fuels ‘fabricated’ property valuations
Tuesday, April 13, 2004

By Tom Fryer

Editor’s note: The Center for Economic and Policy Research in Washington, D.C., held an essay contest to find out whether anyone could challenge the center’s housing bubble theory. The winner was Hilary Croke, a Federal Reserve Board employee, whose four-page essay argued against a collapse in house prices. This story is a response to Croke’s essay.

Is all this bubble babble just gibber jabber? Does it go beyond a Dr. Seuss story or Chicken Little saying, “The sky is falling, the sky is falling?” Those who dismiss the bubble argument as a modern day fairy tale with limited risks to the American dream have grown carelessly unrealistic in their assessment of what is strikingly evident.

So, what is strikingly evident?

What is strikingly evident is that millions of Americans are hooked on the most ferocious of the reality-avoiding addictions, the credit habit. This insatiable dependence has resulted in the largest accumulation of debt in the history of our country. This debt is the disease; the swelling bubble is merely a symptom.

What is strikingly evident is that too many financiers have been quick and easy to provide accommodation and short-term relief for the country’s burgeoning credit addiction. All financing segments of the economy have participated for short-term profits. Millions of consumers have fallen prey to all the wild credit pitches and unsound lending practices. This financial malpractice is the wrong prescription. The bulging bubble is a forewarning.

What is strikingly evident is the escalating social structuring of mortgages to homeowners who really cannot afford the high cost of homeownership. Everyone is entitled to homeownership, but not everyone can afford the rising costs of utilities, property taxes and home insurance, not to mention the increasing cost of home maintenance. These are unrealistic lending practices. The inflating bubble is only an omen of things to come.

What is strikingly evident is that many balloons coming due in the commercial real estate mortgage arena in the next few years may be classified as “troubled loans” for they will no longer be able to be supported by fabricated values. Truth in lending takes on a new meaning. The financial fabric of these commercial balloons will soon begin to tear apart.

What is strikingly evident is that the money supply and monetary policy have been manipulated to support the quick credit fix. The motivating impulse has been a methodical lowering of interest rates to refinance debt, but not to create wealth. Most of the real estate values are a fabrication, not real wealth. This compromises the soundness of the credit system and the financial markets. The bloated bubble can take only so much strain before it begins to rupture.

This entire hubbub about the bubble babble is more than hullabaloo. At what point do the economic and monetary system’s quick credit fix engines begin to sputter and backfire? At what period in the careless financial cycle will the creation of capital not be sufficient to satisfy all the ominous credit obligations? At what point does the bubble burst and, like the tremors of an earthquake, send shockwaves across the economy?

All the volatile ingredients are currently present for the bubble to burst. Current market conditions are deceiving. While most economic barometers show near normality on the surface, the fault lines lying beneath the financial markets are beginning to show movement. Just an slight upward movement of interest rates with the interest groups not having any resources to refinance their debt will send the shockwaves across the financial markets and spew over into all sectors of the economy. This may happen late in 2004, but if not, surely in the first quarter 2005.

Can a change in monetary policy hold back the impending surge? We must be reminded of what the historians have already said about reckless money and credit expansion of the 1920s. W.E. Woodward wrote, “No man, or group of men, can hold back the movement of collective social and economic forces.” Lawrence Reed said, “the economy was having a party, the Federal Reserve was spiking the punch, and a good time was had has by almost all. Few could read the handwriting on the wall.”

History tells us there will be a momentous consequence or a day of reckoning for almost a decade of financial greediness and credit overindulgence. This babble we constantly hear on the bubble will be the inevitability of property value decline, the inescapability of people going about their daily routines unruffled and unscathed by all the financial folly. One will not be able to retreat from its realities for the consequences will be much more than the sound of popping bubbles, a gurgle or fizz. It goes much deeper, further and wider than a bubble bounced around by easy credit terms and changing interest rates.

We have heard all the shop-worn clichés on this day of reckoning. “The chickens will come home to roost,” “an economic house of cards,” “the handwriting is on the wall,” “what goes around, comes around,” “the domino effect” and “a short-fused time bomb.” All these sayings may be trite and cute, but they are certainly fitting.

Does this perspective advocate doom and gloom? Not at all. The facts simply recognize the objective truth. A truth that is so strikingly evident.

30-year fixed up at 5.48%; 10-year Treasury up at 4.21%
Tuesday, April 06, 2004

Long-term mortgage interest rates were higher Monday, and the benchmark 10-year Treasury bond yield rose to 4.21 percent.

The 30-year fixed-rate average increased to 5.48 percent, and the 15-year fixed-rate climbed to 4.79 percent. The 1-year adjustable was up at 3.07 percent.

The 30-year Treasury bond yield climbed to 5.04 percent.

Rates are current as of 7:15 p.m. Eastern Standard Time.

Mortgage rate figures are according to Bankrate.com, which publishes nightly averages based on its survey of 4,000 banks in 50 states. Points on these mortgages range from zero to 3.5.

Investment property exchanges represent realty opportunity
By Glenn Roberts Jr.

It took a tax law to bring real estate and securities brokers together, though securities law is what’s keeping them—at least some of them—at arm’s length.

The unlikely “pairing” of securities and real estate professionals is common in 1031 TIC tax-deferred exchanges, in which property owners sell property, such as a rental home or apartment building, in exchange for a share in the passive ownership of a larger property, such as a shopping mall or office park.

The real estate community is expressing a growing interest in these transactions, which inherently require the sale and repurchase of property. While real estate agents play an integral role in the transactions, federal law prevents commission-sharing and other types of fee arrangements between securities brokers and real estate broker.

Most professionals working in the TIC-exchange industry would agree that under federal securities law, most—if not all—TIC exchanges are considered to be securities, not real estate transactions. That means only licensed securities brokers should be authorized to arrange these transactions, the experts say.

The “1031″ in these transactions refers to Internal Revenue Code 1031, which offers a tax shelter for these types of transactions, and “TIC” refers to the common owners of a property. Property owners often choose to participate in these transactions for tax reasons, as they offer a capital gains exemption, and also because they provide a more passive role in property ownership. TIC exchanges also offer a source of income, and proponents say the rate of return can range from 12 percent to 15 percent in some cases.

Experts say some companies in the exchange businesses are allegedly offering referral fees or other questionable forms of payment to real estate brokers relating to TIC transactions and are walking on shaky legal ground.

A January 2004 ruling by the U.S. Supreme Court expands the definition of TIC exchanges as securities transactions, noted Daniel S. Rosefelt, a lawyer and accountant who has been tracking legal issues relating to TIC exchanges.

The SEC has treaded carefully with the issue and has not announced any intent to aggressively pursue potential violators.

“Staff have not taken a position one way or another” on the TIC real estate vs. securities issue, an SEC spokesman said.

Rosefelt, in a September 2003 letter describing discussions with the SEC, said that “for policy reasons…the SEC does not want to publicly make any statements or address the tenants in common investment real estate issues at this time.”

Some companies in the industry have taken a very loose interpretation of securities law regarding real estate broker compensation for their involvement in these transactions, and some may have violated the law, said Greg Paul, a TIC exchange expert and president of Omni Brokerage in Salt Lake City. Omni, a real estate and securities brokerage, hosted the TIC Association’s annual conference in March.

The illegal approach is finding creative ways for a real estate securities broker to pay a real estate broker,” Paul said. “Frankly, it is done. But if it is done and one is caught doing it, it jeopardizes both of the licenses in the respective businesses.”

He cited an example of a possible violation: A securities broker reduces its commission so a real estate broker can be paid without additional cost to the property owner involved in the exchange. The fact that the securities representative and real estate broker communicated and agreed to the compensation arrangement could be viewed by the SEC as an unauthorized or illegal transaction.

Paul said that ideally a real estate broker earns a commission on the sale of the relinquished property and the securities representative earns a commission on the transaction involving the newly acquired property.

“That’s the symbiotic way,” he said.

And the legal way. Referral fees paid to real estate brokers for bringing clients to TIC transactions are still a gray area, he said.

Real estate brokers are definitely expressing a growing interest in TIC exchanges, Paul said, noting that there were about 40-50 representatives from the real estate brokerage community out of about 450 total participants at a Tenants-In-Common Association conference held in early March. Total attendance was about 150 last year.

“Over the last two years there has been more cohesion develop between our side of the business and the real estate broker side,” Paul said.

David L. Baker, a licensed real estate broker, property manager, certified financial planner and a radio talk show host, doesn’t expect real estate agents to be all the things he is, but he would like to see them get up to speed on 1031 TIC exchanges.

“The challenge is: How do you get a Realtor paid for getting their client into (TIC exchanges)?” he said. “There have been some marginal operators who have been paying Realtors under the table, which puts everyone at risk.”

Baker hopes the real estate and securities industries will find a common ground on which real estate practitioners can realize new income by referring clients to the opportunities in tax-deferred property exchanges.

“For the last four years I have been trying to network with Realtors to get them to refer their clients to TICs,” Baker said. Real estate agents tend to balk at any involvement in tax matters, as this is not their traditional area of expertise, he added.

“Because this walks down the middle of two professions that don’t really talk to each other, it hasn’t really been marketed a lot,” Baker said.

In Baker’s reckoning, real estate agents should be able to charge a fee for referring clients to a TIC transaction and reviewing the merits of a TIC property that is considered for purchase.

“Realtors as professionals are used to be being paid on a commission basis on the back side of a transaction. They are not used to charging a professional service fee,” he said. “Now they need to move the bar up a little bit. They need to be professionals who can give advice for a fee. That’s going to be the hardest part of the deal. I just think they need a different mindset.”

Baker has brought his TIC education campaign to the National Association of Realtors. He addressed Realtors at an NAR conference in November about TIC tax-deferred exchange options. He also has worked to draw up a plan for an NAR continuing education course relating to this financial tool.

“My whole purpose is to get that information to NAR (members), so that they understand the significance and place for TIC in the real estate community,” he said.

The TIC exchange industry was born in the early 1990s and has grown most rapidly since about 2002. The industry is expected to be worth about $2 billion this year.

“The industry is developing. It’s still new—it’s learning to walk,” said Louis Rogers, a founding member of the TIC Association.

Jeffrey Gitt, a principal with 1031-NNN-Properties.com, a company that specializes in 1031-related deals, said his company does not handle TIC exchanges but he sees a value real estate salespeople studying up on tax-deferred exchanges.

Gitt’s company facilitates the exchange of properties through a 1031 exchange, providing its clients active ownership of a single-tenant location. TIC exchanges, in contrast, offer passive and shared ownership of a site, whether it is single-tenant or multi-tenant.

“It has always been my opinion that all Realtors should know about all of these programs and could get involved,” he said. “If they understood (this) business they would be actively seeking this kind of property because it’s advantageous to their clients.”

Shanon Ford, a TIC-exchange expert and vice president of Pacific West Financial Group, is part of a movement to develop standards for companies working in the industry.

“With the increased interest in tenant-in-common investments and the growth in the industry, several industry groups have been working hard to set forth a set of standards or ‘best practices’ in order to see that the industry has a strong foundation to move into the future,” Ford said.

“By collaborating to learn better ways to structure the TIC investment and bring it to market in a compliant manner, the client will be better served—and so will the industry,” he added.

Fed may hike up key funds rate as soon as summer

With the recent annoucement of the favorable job numbers, Mortgage rates have increased. Those affected would be unlock loans ready to close this month of April. Monday rates should be down a little but on Tuesday, Wednesday, or even Thursday, you may want to consider locking your rate.