Real Estate & Property Law

I have to thank Al Heavens, real estate writer for The Philadelphia Inquirer for finally putting into print the reason that real estate giants and builders have Affiliated and Controlled Business Arrangements (AfBAs and CBAs). And it is not one-stop shopping. Sure, like we ever believed that one. As one real estate agent told me, she opened her own title agency after realizing that she was leaving money on the table.

In his column of October 5, 2008, Mr. Heavens writes that history shows HUD is forever trying to reform RESPA, consumers are filing complaints against builders, and the builders' affiliates are proclaiming to be "saviors."

But, here is the part that got my attention. Mr. Heavens states, "Before we disclose whom HUD is riling these days, we need to mention that mega builders and real estate giants don't make much money on the plain-vanilla home sale, even when sales volume reaches boom levels. They make their money from ancillary businesses ? primarily mortgages and title insurance." I may be incorrect, but I am guessing that when Mr. Heavens refers to "real estate giants" he is referring to the very large real estate brokerages, like those in Southeastern Pennsylvania that dominate the market and have their own title and lending operations.

Title insurance agencies owned by real estate brokerages and builders exist only as profit centers. The individual real estate agents are under tremendous pressure from management, like it or not, to steer the consumer into the affiliated title agency. The pressure and tactics are so great that most agents won't even consider referring a buyer to an "outside" agency. Check out Pull Back the Curtain of Smoke and Mirrors to read why agents use the in-house title agency. Not one has the best interest of the consumer in mind.

Where is the system of checks and balances, not to mention fiduciary responsibility when one party has control over sales, approving financing, and insuring title? Heavens writes, "Builders can document hundreds of sales that were to have been financed by outside lenders, but that failed to take place as promised." He goes on to quote Debra Still, President and CEO of Pulte Mortgage L.L.C. who appeared last month before a House subcommittee about those promised sales which as she testified, "were subsequently 'saved' by the builder's affiliated mortgage and title company at the 11th hour." She continues with, "?where financing has become unstable and uncertain, these relationships have taken on greater importance."

Funny, when others cannot, the entity with the most at stake miraculously can "save" a deal using its own lender and title agent. Could it be that there are fewer controls at the controlled entities? Could it be that the controlled entities are operating under looser guidelines than everyone else? Could it be that they just look the other way?

Why is HUD allowing the builders and real estate brokers to have control over mortgage lending and title insurance? Isn't it interesting, especially with the current real estate crisis that the builders are lobbying to maintain control of the other two entities in the transaction that offer independent oversight. There might be more than a drive for a profit "bump" at work here ? maybe they'd like to silence anyone who'll get in the way of closing a deal.

The Ohio Association of Independent Title Insurance Agents is suing the Director of the Ohio Department of Insurance for "the spread of kickbacks and referral schemes in the real-estate industry." Take a look at the press release.

Back to Mr. Heaven's column, I just cannot resist the reference to not making much money.

Let's break this down, housing prices have soared through the roof over the years and for the most part, the six percent commission has remained the same. In addition to the commission earned, brokers are charging anywhere from $275 to $495 to buyers and sometimes also to sellers. These administrative/broker services/conveyancing fees cover the services that the real estate agency traditionally performed for their clients without charge. More than a few real estate agents are embarrassed to charge this fee to their clients but in most cases have no choice.

And I strongly question that the builders have not made any money from sales. In fact, until last year, investing in home builders was one of the best bets in the stock market. I'm sure that didn't arise from title and mortgage fees.

Affiliated and Controlled Businesses are not good for the consumers, the independent business owners, the E & O providers, and the title insurance underwriters (don't let their silence fool you, either they have yet to realize it or have and are not letting on). HUD should be asking where the claims in this industry are coming from and WHY. I don't have concrete data, but I have my suspicions.

We can only hope that more consumers will continue to file related complaints and HUD will see the importance of changing RESPA by ending any form of Affiliated or Controlled Businesses.

To read Al Heaven's complete story go to Builder, buyer, lender, law.