Real Estate confronts the Banks
by
Stefan Swanepoel, Dennis Galloway and
Kenneth Jenny
June 2001 - Another publication by RealSure, Inc.
Discussion on the Gramm-Leach-Bliley Act
and the possible involvement of banks in the real estate brokerage
industry.
Preface
Rarely has pending legislation suggested changes to the financial
services arena as controversial as the recent Gramm-Leach-Bliley
Act (GLB Act). The proposed rule would declare real estate
brokerage, real estate management, and employee relocation
to be activities that are "financial in nature"
or "incidental to a financial activity" under the
GLB Act. This would allow financial holding companies and
national bank subsidiaries to enter these businesses. The
impact on the real estate brokerage industry has escalated
and this GLB Act has become one of the most highly profiled
changes positioned to impact the real estate brokerage industry
since its inception.
More than a legal source or definitive research work, the
purpose of this whitepaper is to provide both the banking
industry and the real estate industry with a "plain text"
synopsis of the facts and discussions surrounding this pending
legislation. The GLB Act has already been the subject of numerous
research projects and countless related articles and it is
impossible to cover the subject matter in its totality in
this single writing.
Contrary to many other research papers and articles which
address the matter of the Banks' involvement in real estate
brokerage, the intent of this whitepaper is not to promote
one specific viewpoint above another but rather to provide
a more objective overview detailing the major views points.
The authors have endeavored to do so in an objective and balanced
manner, highlighting both the positive and negative of each
viewpoint and commenting where deemed appropriate to suggest
possible counter arguments.
At a 30,000-foot view the issues in question are:
- If financial institutions are allowed to engage in real
estate brokerage activities, is this the first step in mixing
commerce and finance?
- Could this legislation have grim consequences for the
nation's financial system and destroy one of the country's
largest entrepreneurial industries?
- Would it enhance professional customer service, streamline
the currently fragmented and complex transaction and will
it reduce costs to the consumer?
The debate is furious and both sides have major players in
their camps.
Opposing is the National Association of Realtors® (NAR)
claiming that the consumer would be the real loser if financial
institutions entered the real estate brokerage industry. NAR
fears that a few large financial institutions would dominate
the industry resulting in less competition and higher costs.
Supporting is the American Bankers Association (ABA), which
contends that the benefit to the consumer is access to greater
choice and healthy competition. ABA further feels that it
will work to simplify the current real estate brokerage process
and introduce the convenience of true one-stop-shopping for
the consumer.
Clearly the controversy is turning out to be one of the most
perplexing challenges the Federal Government will face in
2001. Although the proposed rule includes real estate brokerage,
real estate management and employee relocation, this whitepaper will only focus on the real estate brokerage side of
the debate.
The authors have also decided to include an added dimension
to this work by outlining some possible scenarios for involvement
by financial institutions. Some of these dimensions are irrespective
of whether or not proposed changes are approved. It is important
to note that all scenarios referenced are hypothetical and
are not meant to reflect the actual plans of any one company
or institution. Also, no proprietary information known to
the authors has been referenced and no confidential information
obtained under restriction of any confidentiality agreement
or limited in terms of a Consultant/Client relationship has
been included.
Enjoy the read.
Disclaimer
While great care and research was undertaken to provide accurate
and current information, the ideas, suggestions, comments,
general principles and conclusions contained in this whitepaper are the opinions of the authors. The authors and publishers
disclaim any responsibility for any liability, loss or risk
(financial, personal or otherwise) that may be claimed or
incurred as a consequence, directly or indirectly, of the
use and/or application of the contents of this document. References
to any company, products or services do not constitute or
imply endorsement or recommendation. The reader is urged to
consult proper counsel or other authority regarding any points
of law, finance, technology and business before proceeding.
The information contained in this paper is intended as an
overview and should not be a substitute for common sense,
thorough research and competent advice. Conclusions expressed
herein are subject to local, state and federal laws and regulations.
REALTOR is a registered trademark of the National Association
of REALTORS. Provided the integrity and meaning is maintained,
any part of this paper may be reproduced by citing the title
of the paper and the authors.
CONTENTS
Preface
SECTION 1 - History and Overview
SECTION 2 - The Current Debate
2.1. Taking Position Against Allowing Banks into
Real Estate
2.2. Taking Position in Favor of Allowing Banks Involvement
2.3. Consumer Surveys
SECTION 3 - The Industry in Question - Real Estate Brokerage
3.1. Is Real Estate a Financial Transaction?
3.2. Is the Real Estate Brokerage Industry Changing?
SECTION 4 - Financial Institution's Historic Involvement
4.1. In the Real Estate Industry
4.2. In the Securities and Insurance Industries
SECTION 5 - Entry Strategies into the Real Estate Industry
5.1. Possible Methods of Entry by Financial Institutions
5.2. Potential Candidate Types to Partner or Acquire
APPENDIX A - TOP Mortgage Originators in 2000
APPENDIX B - TOP Real Estate Brokerages in 2000
APPENDIX C - Acronyms and Terminology
SECTION 1 - History and Overview
Spurred by the 1929 market crash and in the belief that the
stock market speculation by the banks led to their collapse,
the 1933 Banking Act was aimed at restoring confidence in
the banking system. It established the Federal Deposit Insurance
Corporation (FDIC), which insured customer accounts and prohibited
banks from both accepting deposits and underwriting securities.
In a section called the Glass-Steagall Act (GS Act), it forced
the separation of commercial and investment banking.
Following World War II, banks sought ways around the restrictions
by forming holding companies that in turn engaged in commercial
activities. Then in 1956 the Bank Holding Company Act (BHC
Act) (amended in 1970) placed further restrictions on what
banks can do in the insurance business and once again reinforced
the division of commercial and investment banking activities.
Shortcomings of the Glass-Steagall Act
Since the 1980's there has been extensive debate about
the shortcomings of the GS Act and over the last two decades,
The Board of Governors of the Federal Reserve System (FRS)
and the Secretary of the Treasury (collectively referred to
as the Agencies) have softened some of the GS Act separation.
The motivation has been twofold; at the domestic level,
the GS Act is working against market forces and prevents banks,
state, and local government enterprises, from realizing the
cost, efficiency, and other benefits that would result from
greater competition; and at the international level, U.S.
banks are limited by restraints that do not inhibit their
foreign counterparts.
By 1986 the FRS decided that an investment banking affiliate
of a well-capitalized commercial bank would not be considered
"principally engaged" in prohibited activities if
no more than 5 percent (today that percentage has grown to
10%) of the investment banks' revenues came from those activities.
As the distinction between commercial and investment banking
became increasingly blurred, the debate concerning complications
and risks historically associated with mixing banking and
commerce heated-up, (i.e. concentration, conflicts, unfair
competition and breaches of fiduciary responsibility). Earlier
efforts to repeal the GS Act including reforms proposed by:
Rep. Jim Leach (R. Iowa), chairman of the House Banking Committee;
one by Sen. Alfonse D'Amato (R. New York), chairman of the
Senate Banking committee and Rep. Richard Baker (R. Louisiana);
and Treasury Secretary Robert Rubin; met with stiff resistance.
Repeal of the Glass-Steagall Act
By the mid 1990s many economists and policymakers viewed
the terms of the GS Act to be largely unnecessary and in November
1999 President Clinton repealed the GS Act and introduced
the Gramm-Leach-Bliley Act (GLB). This specifically allows
a bank holding company or a foreign bank that qualifies as
a financial holding company to engage in a broad range of
activities that are defined by the GLB Act to be "financial
in nature" or "incidental to a financial activity."
The Current Controversy
The current controversy started on December 31, 1999 when
the Agencies issued a proposed rule at the request of the
ABA and Fremont National Bank & Trust to define real estate
brokerage activities as financial in nature under section
103(a) of the GLB Act. Section 103(a) of the GLB Act already
enumerates certain activities that are considered to be "financial
in nature" or "incidental to a financial activity"
under the statute. Included among those activities are traditional
banking functions, activities that the FRS had previously
determined to be "closely related to banking" or
permissible for banking holding companies to engage in, securities
and insurance activities, and merchant banking activities.
Previously when considering whether an activity was closely
related to banking the Agencies looked to see if the banks
generally:
(i) Conducted the proposed activity;
(ii) Provided services that were operationally or functionally
so similar to the proposed service as to equip them particularly
well to provide the proposed services; or
(iii) Provided services that were so integrally related
to the proposed service as to require their provisions in
a specialized form.
Many however believe that in 2000 when Congress debated
the legislation that became the GLB Act their intent was
that real estate activities were non-financial, commercial
activities. The new proposed rule would, however, now declare
real estate brokerage, real estate management, and employee
relocation to be activities that are "financial in
nature" under the GLB Act.
The Agencies need to therefore jointly determine whether
real estate brokerage is an activity that is "financial
in nature" or "incidental to a financial activity."
AUTHORS' COMMENTS
The Federal Reserve Bank previously
determined that real estate brokerage was not closely
related to banking for purposes of the BHC Act. In fact,
on three occasions Congress has debated and voted decisively
to keep real estate brokerage "off the table."
However, the interpretation this
time has to be based on an expanded wording "financial
in nature or incidental" (in the GLB Act) compared
to the previous wording of "closely related to banking"
(in the BHC Act.)
Change would not require new legislation.
The only requirements would be for the Board of Governors
to amend Subpart I of the Board's Regulation Y to add
"real estate brokerage" to the list of activities
and for the Secretary of the Treasury to amend its financial
subsidiary regulations by adding "real estate brokerage"
to the list of approved business activities.
Consumer Privacy Protection
One of the major items of the GLB Act is the provision
that institutions engaged in certain financial-related activities
must:
(i) Establish privacy policies with regard to information
they accumulate about consumer customers,
(ii) Notify customers of those privacy policies,
(iii) Give customers the right to "opt-out" of
any disclosures of such customers' non-public information
to third parties.
Virtually all companies, including banks, insurance companies,
and leasing companies, engaged in the processing of any consumer
financial information, including applications that detail
salary, credit or debt information, are covered by the above
GLB Act and/or the Fair Credit Reporting Act (FCR Act). Penalties
for non-compliance of privacy issues can be severe, resulting
in fines of up to $11,000 for each infraction.
Compliance is so complicated and daunting that the Federal
Trade Commission (FTC) decided to delay implementation of
some data sharing disclosure regulations from the original
November 2000 deadline to mid 2001.
SECTION 2 - The Current Debate
2.1. Taking Position Against Allowing Banks into Real
Estate
The historical advocate against involvement in real estate
brokerage by financial institutions has been the National
Association of Realtors (NAR). It has, however, received significant
support for this position from various large real estate trade
associations including: CCIM Institute, the Institute of Real
Estate Management, the International Association of Shopping
Centers, the National Affordable Housing Management Association,
the National Association of Home Builders, the National Auctioneers
Association, and the National Leased Housing Association.
Due to a massive grass roots campaign (an alleged 100,000
communiqués hit Washington) orchestrated by the NAR,
the original public comment date of March 2001, was delayed
until May 2001. Following are the main arguments and viewpoints
supporting the NAR's contention that financial institutions
should not be permitted to practice real estate brokerage:
(i) The GLB Act does not specifically authorize financial
holding companies (FHC) to engage in real estate brokerage.
AUTHORS' COMMENTS
Although this contention is true,
from time to time, the GLB Act also authorizes each Agency
to supplement the statutory activities with additional
activities.
(ii) It would be inappropriate for the Board of Governors
to now permit FHCs to provide real estate brokerage
services because the Board prohibited bank holding companies
from acting as a real estate broker in 1972.
AUTHORS' COMMENTS
The Board's 1972 decision was made
pursuant to the original "closely related to banking"
standard. The GLB Act now authorizes the Board to approve
any activity that is "financial in nature" or
"incidental to a financial activity."
(iii) Financing real estate or any other tangible assets
or durable goods does not transform that asset into
a financial instrument.
AUTHORS' COMMENTS
The home is the largest single
investment for many individuals and serves as a means
for the creation of a valuable asset through appreciation.
Real estate is different from most other assets and could
in fact be a financial instrument.
(iv) Banks offering a wider range of commercial type
services will face more risk and be financially more
fragile and the country could experience another Savings
and Loan (S&L) fiasco as was experienced in the
decade of the 80s.
AUTHORS' COMMENTS
The charge that the S&L industry
lost billions of dollars because of deregulation is misleading
when in fact the industry was already insolvent by the
late 1970s, before deregulation existed. Also, during
the 1930s only 15 of the 207 nationally chartered banks
with securities affiliates failed - a lower percentage
than the rate of failure for the banking community as
a whole. We could find no solid evidence that the combination
of commercial and investment banking escalated the failure
of any banks.
(v) Pitting federally subsidized, highly advantaged
financial institutions (with a high barrier to entry)
against unsubsidized, less advantaged real estate brokerage
firms (with a relative low barrier to entry) is a recipe
for trouble.
AUTHORS' COMMENTS
Although it would not be a level
playing field, many a competitive contest has been waged
on an uneven playing field and the larger competitor has
not always been the winner. Over the years the real estate
industry has seen various large capital players enter
the industry - Sears, Merrill Lynch, Metropolitan Life,
Prudential, and Cendant, to name a few - and none have
dominated the industry. Also the GLB Act was specifically
drafted to insulate banks and to allow for fair competition.
(vi) Vertical integration of the transaction will magnify
the market power of integrated firms thereby raising
barriers to entry, limiting choice, and possibly increasing
costs for consumers.
AUTHORS' COMMENTS
Many believe that to the contrary,
the opposite will actually happen - increased choice and
costs savings will occur. Also, banks learned with their
involvement in securities, that they have to conduct business
according to the same licensing and other regulatory rules
as everyone else in the industry. It should be noted that
when financial services companies engaged in securities
brokerage activities, there was a decline in overall commission
rates.
(vii) Banks will make real estate commissions a loss
leader to undercut independent real estate brokers,
gain the business, and then cross sell the banks' products.
AUTHORS' COMMENTS
Although it is highly unlikely
that Banks would introduce an immediate wholesale commission
reduction or price war, more negotiation of real estate
commissions is inevitable. Consumers have for a long time
felt that the industry average commission rate of 6% rate
is excessive. With recent online initiatives via the Internet,
web portals and new paradigm real estate brokerages have
been formed the decline in commission rates is already
very much in process.
(viii) Real estate brokerage is a cyclical volatile
business subject to economic down turns. This could
pose safety and soundness risks to banks.
AUTHORS' COMMENTS
There are specific laws in place
protecting deposit-taking institutions. It would further
appear that many large banks are better capitalized than
most if not all traditional real estate brokerages. With
solid business decision making and business principles
these institutions should certainly be able to survive
and prosper in nearly any shift of the economic environment.
(ix) Large real estate brokerage firms do not have significant
advantages over smaller real estate firms. Therefore
it would seem that banks are unlikely to benefit from
economies of scale, cross selling, or diversification.
AUTHORS' COMMENTS
Numerous large real estate companies
such as NRT and HomeServices have proven that size does
matter. Both have continued an aggressive path of expansion
and both are profitable. We believe cost savings and additional
savings could occur if real estate brokerage and banking
is combined into one delivery vehicle.
(x) The Agencies should delay their finding until such
time as FHCs gain experience in conducting the various
other new activities authorized by the GLB Act.
AUTHORS' COMMENTS
This does not support the argument
that suggests prohibiting financial institutions from
engaging in real estate activities. It does though make
a valid argument to postpone such involvement.
2.2. Taking Position in Favor of Allowing Banks in Real Estate
In requesting the change, the ABA has been the strongest
proponent in favor of permitting financial institutions to
become involved in real estate brokerage. Other associations
supporting this position include: America's Community Bankers
(ACB), the Consumer Bank Association (CBA), the Financial
Services Roundtable, and the New York Clearing House Association.
Following are the main arguments and viewpoints supporting
the ABA's contention that financial institutions should be
permitted to practice real estate brokerage:
(i) Financial institutions will enhance competition, change
the market place, and raise the bar, forcing improvements
in efficiency, pricing and service levels - all to the benefit
of consumers.
AUTHORS' COMMENTS
Although this is true the counter
argument is that financial institutions might be able
to cross-subsidize their real estate services with federally
insured banking operations and undercut independent real
estate brokers with a more negotiable discount brokerage
model.
(ii) Real estate is a financial asset because: (a)
the home is the largest asset for many individuals;
(b) real estate serves as the underpinning for hundreds
of billions of dollars of mortgage-backed securities;
and (c) real estate serves as a means of wealth creation
by increasing in value over time and providing tax benefits.
AUTHORS' COMMENTS
Although real estate brokerage
does have certain characteristics of a financial transaction,
being the largest single investment in an individual's
portfolio does not necessarily imply it is a financial
asset.
(iii) The sale or lease of real estate is a financial
transaction because it is the most complex and financially
difficult transaction most individuals will make.
AUTHORS' COMMENTS
Real estate transactions are occasionally
originated for investment purposes. The complexity of
such transactions does not determine whether or not the
transaction is financial in nature. A very significant
percentage of all real estate transactions are however
dependent upon obtaining a home loan - a financial instrument.
(iv) Real estate brokerage is a financial complement
to a bank's current business lines.
AUTHORS' COMMENTS
Depending on how and where one
draws the line , this could be either a true or a false
statement. The lingering question is however, where will
the service delivery end, and if other commercial-like
activities will also be bundled in the future.
(v) Integrated real estate and financial services already
exist with many large companies such as Cendant, GMAC
Home Services, Long & Foster, and Prudential Insurance
Company of America owning and operating both brokerage
and mortgage operations and thus offering to the consumer
the benefits of one-stop-shopping.
AUTHORS' COMMENTS
This is a strong argument. It is
inconsistent for real estate brokerages to enter the mortgage
industry and to also argue that others should be prohibited
from entering the real estate brokerage business.
(vi) Bank-affiliated real estate brokerages will be
subject to stronger consumer protections and anti-tying
provisions. This will benefit consumers.
AUTHORS' COMMENTS
How long will that last? Banks
might later complain that the playing field is not level
because the new environment favors non bank-affiliated
real estate brokerages.
(vii) Numerous states have already permitted state-chartered
banks to own and operate real estate brokerage companies.
AUTHORS' COMMENTS
Few state-chartered banks have
actually exercised the right to enter into the real estate
brokerage business. It is therefore difficult to evaluate
the exact impact of such national approval to do so. Entrance
into this market will most likely be gradual and will
vary with each institution.
According to a survey conducted
by the Real Estate Settlement Procedures Organization
(RESPRO), two-thirds (67%) of their membership believe
that banks should be allowed to engage in real estate
brokerage. One fourth (25%) oppose involvement while 8%
are undecided. RESPRO membership consists mainly of financial
institutions, title companies, and real estate brokerages.
The majority of RESPRO real estate broker members are
also in the mortgage business.
2.3. Consumer Surveys
To gain more support for their viewpoints both sides in this
debate have commissioned independent consumer surveys.
On March 22, 2001 Yankelovich published A Study on Real Estate
Brokerage and Banking. This was conducted on behalf of the
NAR. A regionally representative sample of 2,049 Americans
was interviewed telephonically between March 15 and March
19. On May 1, 2001 Mathew Greenwald & Associates published
their Consumer Real Estate Survey on behalf of the ABA. This
national survey was also conducted telephonically scarcely
a month later, between April 23 and April 29.
AUTHORS' COMMENTS
These two surveys are inconclusive
as evaluation of both questionnaires reflected leading
questions - effectively voiding the accuracy and therefore
the value of the results. Both surveys supported the respective
viewpoints of the sponsoring party.
SECTION 3 - The Industry in Question - Real Estate Brokerage
3.1. Is Real Estate a Financial Transaction?
With home ownership at an all-time high in the United
States, real estate also remains the cornerstone asset in
most household portfolios. In many cases it has become the
best means of wealth creation.
Real estate brokerage could be summarized as being in the
business of bringing together parties interested consummating
a real estate purchase and negotiating a contract on behalf
of such parties for the:
(i) Purchase, sale, or exchange of real property; or
(ii) Lease or rental of real estate or the improvements
thereon for others on a fee basis.
It is accepted that real estate brokerage does not generally
involve the purchasing or selling of real estate with the
real estate company acting as a principal.
Real Estate Seen as a Commercial Transaction
One of the arguments raised by opponents is that selling
is fundamentally a commercial transaction. If banks are permitted
to enter real estate brokerage they would be mixing commerce
and finance, resulting in a violation of the longstanding
federal policy of keeping the two separate. The opponents
fear that through sheer power and size, huge banks could buy
up existing brokerages and thereby control a significant portion
of the industry.
Bank-controlled real estate brokerages would then become
marketing arms of mortgage departments and would develop more
interest in making the loan or selling mortgage insurance
than helping the customer negotiate the best transaction.
This could lead to higher costs for consumers, as banks could
cross-sell other products and services through this new captive
real estate brokerage subsidiary.
Real Estate Seen as a Financial Transaction
The proponents counter this argument by stating that real
estate brokerage can only be conducted today pursuant to various
state laws and regulations including licensing, qualification,
and sales practices. Those laws currently applicable to real
estate brokers would equally apply to bank-owned or affiliated
real estate brokerages. In effect, consumer protection could
be heightened because of additional protections currently
contained under the BHC Act. These protections currently do
not apply to non bank-affiliated real estate brokerages.
Proponents are therefore arguing that real estate brokerage
services fall squarely into the category of "arranging
… or facilitating financial transactions for the account
of third parties." As part of the home purchase transaction,
the buyer generally must provide a significant down payment
on the property and then make a long-term commitment of his
or her financial resources to repay the mortgage loan.
Opponents argue that the mortgage is in fact only incidental
to the purchase of a home and that a significant number of
consumers involved in real estate transactions require no
financing at all.
Issues of Cross Selling
Concerns have also been raised that excessive cross selling
by banks could take place. Currently Real Estate Settlement
Procedures Act (RESPA) governs the relationship between a
real estate client who is looking for a mortgage or other
settlement service from a real estate company's lending or
other affiliate/alliance partner. Although the RESPA has various
stringent disclosure requirements, numerous debates and findings
of circumvention indicate that the Act might also require
some changes should the current proposed changes to the GLB
Act be approved.
AUTHORS' COMMENTS
It would not appear that a bank
selling real estate would pose a risk to the nation's
financial system nor does it violate any protection of
the consumer. The concern is whether or not such a move
would put Banks in a significantly preferred competitive
position, is restricting their involvement in real estate
brokerage an unfair regulatory intrusion on their rights.
3.2. Is the Real Estate Brokerage Industry Changing?
The home buying process is one of the single most complicated
and complex consumer transactions. For this reason there are
a multitude of statutes and regulations providing consumer
protection and requiring comprehensive disclosures. Consumers
are increasingly beginning to view the home buying transaction
as a single, integrated process. Indeed, all participants
in the transaction have attempted to package the process as
a seamless one-stop-shopping experience.
Today's customers are increasingly taking control of the
transaction. Many of the trends outlined in "Real Estate
Confronts the e-Consumer" (RealSure, Inc. 2000) such
as one-stop-shopping, online customer acquisition, and the
wireless revolution have already changed and continue to change
the business rules within the real estate industry.
A growing number of companies have diversified and moved
aggressively toward offering one-stop-shopping for real estate.
Examples include major companies such as:
(i) Cendant
The nations largest real estate franchiser and the parent
for three of the nation's largest six real estate franchises
namely: Coldwell Banker, Century 21, and ERA Real Estate.
Combined, Cendant has over 12,000 franchised and company-owned
real estate brokerage offices and nearly 200,000 real estate
agents worldwide. Cendant has created Cendant Mortgage and
has very successfully expanded into the financial arena
by leveraging off its real estate companies to become the
nation's fifth largest retail mortgage loan originator with
over $22 billion in mortgage financing in 2000.
(ii) General Motors Acceptance Corporation (GMAC)
GAMC is one of the world's largest financial services companies.
Company holdings include GMAC Residential Holdings that
in turn owns GMAC Mortgage Corporation, GMAC Bank and GMAC
Home Services. GMAC Real Estate, formerly Better Homes and
Gardens Real Estate is one of the nation's six largest real
estate franchisers, with some 1,500 offices and nearly 25,000
agents. As of December 2000 GMAC Mortgage is the nations
seventh largest mortgage servicer, with a portfolio of $73
billion and nearly 1.8 million customers. In 2000 GMAC Mortgage
originated $17.8 billion in residential mortgages and was
the eight largest mortgage originator.
(iii) HomeServices
Publicly traded HomeServices.com, Inc., based in Minneapolis,
owns and operates ten of the nations premier independent
regional real estate companies in 12 states. HomeServices
is the second-largest independent residential real estate
brokerage firm in the U.S. based on closed transaction sides.
The HomeServices.com system offers integrated real estate
services, including mortgage, title and closing services,
and various related e-commerce services. Some of its companies
have partnered with Wells Fargo Home Mortgage to originate
residential loans.
(iv) Long & Foster Real Estate
Long & Foster Real Estate, Inc. is the Washington D.C.
area's largest real estate firm with over 160 offices and
7,000 sales associates throughout the mid-Atlantic region.
In 2000 Long & Foster generated over $13 billion in
sales and ranked fourth in a list of all real estate brokers
nationwide by Real Trends, an industry publication. Management
states that they provide consumers with the convenience
of one-stop shopping with their financial services (mortgage,
title, and insurance) available through one convenient and
financially stable source: The Long & Foster Companies,
which include Long & Foster Real Estate, Prosperity
Mortgage, Mid-States Title, and Long & Foster Insurance.
SECTION 4 - Financial Services' Historic Involvement
4.1. In the Real Estate Industry
According to our research 26 states have permitted state-chartered
banks to engage in real estate brokerage. By way of example
Iowa code § 524.802 states that "A state bank shall
have…. the power to…engage in the brokerage of insurance
and real estate subject to the prior approval of the superintendent"
and the New Jersey Admin. Code tit. 3, §11-11.5(a)(4)
permits a subsidiary of a New Jersey state-chartered bank
to provide real estate brokerage services.
AUTHORS' COMMENTS
We were unable to validate evidence
of any abuse or harmful effects for few examples could
be found of state-chartered banks engaging in real estate
brokerage. It would seem that the involvement in real
estate brokerage by banks has not had a major impact on
the industry, nor has it disrupted the industry in any
significant way.
Financial institutions, through their subsidiaries and
affiliates, have long participated in virtually every
other aspect of the real estate transaction including:
(i) Holding bank real estate assets and acquiring real
estate in a fiduciary capacity or in full or partial
satisfaction of a debt previously contracted,
(ii) Making real estate investments that have, as their
primary purpose, community development,
(iii) Providing real estate appraisal services,
(iv) Arranging commercial real estate equity financing,
(v) Real estate lending,
(vi) Real estate leasing,
(vii) Providing real estate settlement and escrow services,
(viii) Providing real estate investment advisory services.
They are also currently engaged in a variety of activities
that are functionally and operationally similar to real
estate brokerage such as:
(i) Insurance agency services,
(ii) Securities brokerage,
(iii) Private placement services,
(iv) Futures commission merchant services,
(v) Agency transactional services relating to swaps
and other derivative instruments.
Since 1982, national banks have also had authority to
serve as a finder in locating, analyzing, and making
recommendations regarding the purchase or sale of property.
Since the passage of the GLB Act, FHCs and financial
subsidiaries have also been able to provide title insurance,
private mortgage insurance, and any other types of insurance
to the parties of the transaction.
AUTHORS' COMMENTS
It would appear that banks are
already participating in nearly every aspect of the real
estate transaction, other than brokerage. Numerous banks
currently own "affiliated" real estate brokerages
to manage their REO portfolio - at a reduced commission.
Expect later this year or next
year proposed changes to RESPA and the Truth in Lending
Act (TILA). This is needed to level the playing field
for all providers, regardless of their industry or affiliation.
There is also a need for significant clarification of
fees, disclosures, advertising, and Internet transactions.
4.2. In the Securities and Insurance Industries
The enactment of the GLB Act also lifted previous barriers
that had prevented banks from selling securities and life
insurance. This change was seen by some, similar to many in
the real estate industry today, as a threat while others viewed
this change as an opportunity.
Both sides seem to have examples to support their respective
viewpoints. Although there hasn't been a stampede since the
change, banks have acquired nearly 140 insurance agencies
and the number seems to be growing. Important point to remember
would be that even prior to the GLB Act banks were permitted
to be in the securities business in a limited way.
However in other cases banks provide access for their customers
to independent insurance sales agents, who follow up with
the needs analysis, close the sale, and process the business.
The banks retain the ownership of the relationship with the
customer, and save money by not investing in the infrastructure
required to operate an insurance agency.
AUTHORS' COMMENTS
Most likely the real estate industry
will also experience a variety of different strategies.
See the following section for possible entry methods.
SECTION 5 : Entry Strategies into the Real Estate Industry
5.1. Possible Methods of Entry by Financial Institutions
into Real Estate
With the current focus centered on the possible changes
to the GLB Act, it would seem that the majority of real estate
companies have anticipated that banks' entrance into the real
estate brokerage industry will be facilitated through acquisitions.
Acquisitions
Although approval of the new proposed rule could launch
a flurry of such acquisitions, it is unlikely. The real estate
brokerage industry is extremely fragmented. Outside of the
franchises, there are relatively few large independent national
or large regional real estate brokerages that could provide
the necessary geographic coverage and licensing for a nationwide
real estate brokerage delivery. However, for those few brokerages
that fall into that category a profitable exit strategy may
result.
Start-Up
In the short to medium term it is also unlikely that national
financial institutions will chose to start-up their own real
estate brokerages. Those who may, whether with independent
agents or salaried employees, will soon discover the high
levels of frustration associated with the existing brokerage
structure. The inefficiencies of the current real estate industry
will become apparent. Economies of scale will be difficult
to exploit because of the anticipated clash between the banking
culture and the real estate culture.
Other Participants
Also, entrance is not limited only to the banks. Companies
such as Cendant and GMAC have effectively and aggressively
entered the real estate industry. Therefore watch carefully
as other companies related to the real estate industry, such
as title insurance underwriters, P&C insurance carriers,
and utility companies become involved in providing complementary
services.
Good examples include; the recent acquisition by Fidelity
National Financial of VISTA Info (owner of Moore Data, the
nation's largest Multiple Listing Service [MLS] service provider)
and RISCO (nation's third largest MLS service provider); as
well as Berkshire Hathaway's ownership of both MidAmerican
Energy Holdings and HomeServices (the nation's second largest
real estate brokerage).
Methods of Entry
Methods of entry could include:
(i) Capitalizing and building new start-up real estate
brokerages,
(ii) Designing and building a new real estate business model,
(iii) Franchising current real estate brokerages under the
bank's brand,
(iv) Partial investment in existing real estate brokerages,
(v) Acquisition of existing real estate brokerages,
(vi) Acquisition of franchised or otherwise networked brokerages;
and/or
(vii) Partnering strategically with existing real estate
brokerages.
5.2. Potential Candidate Types to Partner or Acquire
Classifications of Companies Closest to the Point of Sale
Contact
(i) Large real estate companies,
a. National brokerage operations such as National Realty
Trust (NRT),
b. Large regional brokerages such as John L. Scott Real
Estate, DeWolfe Companies, and Weichert Realtors,
c. New paradigm e-real estate companies such as ZipRealty,
YHD, SOMA Living, eRealty, and BlueEdge Realty (owned by
Coldwell Banker),
(ii) Large home building contractors and their related in-house
real estate and mortgage operations such as Centex, Pulte,
and Kaufman & Broad,
(iii) Online mortgage originators such as LendingTree and
E-LOAN.
Classifications of Companies Slightly Removed from the Point
of Sale Contact
(i) Traditional mortgage brokers,
(ii) National relocation networks such as RELO,
(iii) Online real estate portals such as HomeStore, HomeSeekers,
RealEstate.com, and HomeAdvisor, or even more traditional
portals like AOL and Yahoo,
(iv) Traditional and/or re-engineered MLS service providers.
Classifications of Companies Related to the Transaction But
Not Directly Involved in the Point of Sale Contact
(i) Certain technology and specialty online initiatives
such as HomeGain,
(ii) Certain home-services related initiatives such as Home-Link,
Vital HomeServices, and Improvenet,
(iii) Title insurance and escrow/closing companies. These
companies have the most complete existing database of information
on homes and owners.
(iv) Software providers to the real estate industry,
(iv) Internet service providers to the real estate industry.
AUTHORS' CONCLUDING COMMENTS
Your opinion on whether or not
banks should be allowed to engage in real estate brokerage
will follow the side of the argument that is most favorable
to your position. Review the points made by both sides,
against or in favor (section 1).
It is the opinion of the authors
that the proposed inclusion of real estate brokerage,
from a legal stand point meets the statutory test, and
ultimately will be approved. The concerns about removing
the restrictions are overstated and the main reason that
the Agencies might not approve the request in 2001 will
be due to the magnitude of industry commentary and/or
political pressure.
You can be assured that banks will
in the future play an increasing role in the real estate
brokerage industry - in one form or another (refer to
section 5). Different financial institutions will most
certainly select different courses of action. However,
whether they choose to conduct real estate brokerage in-house
with salaried employees, separately through holding company
subsidiaries or indirectly through new transactional related
services, expect their impact to be considerable.
The United States and its consumers
operate within one of the most fragmented financial systems
in the world. Much of its structure which remains in place
today dates as far back as the early 20th Century. With
the accelerated change we have experienced in the early
21st Century, we believe there exists a multitude of opportunity
to improve the present systems and processes.
At the end of the day, whether
or not you are in favor of the approval of this legislation,
improving the overall process on the behalf of the consumer
should be the ultimate driver of the magnitude of such
change.
APPENDIX A
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