Compliments of
Alan Van Zee
President | NMLS #: 297154
Hawaii Mortgage Company, Inc.
Company NMLS #: 232582
Alan Van Zee is one of the top producing Mortgage Originators in the state, originating over $2,000,000,000 to date. He has written and published this weekly newsletter for the past 16 years. It is the most widely read mortgage publication in Hawaii.
Hawaii Mortgage Company celebrates its 24th anniversary providing mortgages to the people of Hawaii and is proud to continuously earn an A+ rating from the BBB of Hawaii.
Mortgage Market News and Insight
For the Weekend of August 17th, 2024
Hawaii’s Most Read Mortgage Publication for 16 Years
Volume 16 – Issue 46
Paying the Buyer’s Agent
The changes dictated by the lawsuit and settlement by the National Association of Realtors will go into effect this weekend. If you are a buyer and engage the services of a buyer’s agent, expect to have some additional forms to sign. But most important is how your agent is going to get paid.
The class action lawsuit that has brought the biggest change to real estate in decades had a simple claim: If the seller is forced pay the commission earned to both the seller’s agent and the buyer’s agent, those costs would impact the seller’s final price to sell by inflating the purchase price to cover those fees. The lawsuit claimed that the higher price is ultimately paid by the buyer by way of a higher purchase price. The lawsuit claimed antitrust violations because the buyer had no say or way to negotiate the compensation of the agent they hired to represent themselves.
The new changes start with buyers having to sign a contract with the buyer’s agent, agreeing to a certain level of compensation for the work that agent will do on the buyer’s behalf. That compensation is either a fixed fee or percentage of the purchase price. That compensation agreement is signed before you are shown a single property for consideration. Typically, agents earn between 2% to 3% commission. What an agent will earn will now be a point of negotiation between that agent and the buyers they wish to represent.
It is important to note that the negotiated compensation to the buyer’s agent is to be paid to that agent by the buyer. Where the buyer gets the money to pay their agent is our next discussion point.
With the new standard purchase contract, a new section has been added for Seller Compensation to Buyer Broker Firm. This is the part of the contract where the buyer will ask the seller to pay their agent’s compensation. As with all sections of the contract, this is negotiable. This brings up an interesting scenario. What if the buyer has agreed to pay their agent 3% and asks the seller to pay that 3%, but the seller comes back and says they will only pay 2%? Will the buyer walk away? Will the buyer and their agent renegotiate the buyer’s agent commission? In my almost 30 years of doing financing, I can tell you that most buyers don’t have the resources to pay the buyer agent commission themselves.
For years the buyer’s agent has offered their services stating that the seller paid their compensation, so the buyers were utilizing them for free. The lawsuit that forced these changes challenged that concept. In fact, the buyer’s closing statement doesn’t even list the compensation going to their agent, so the buyers never really knew how much their agent made from their transaction.
I believe the buyer’s agent plays a vital role in the world of real estate. It will now be their first job to convey to prospective clients the services they will perform on their behalf – justifying the compensation they are seeking. How much that compensation will be is now decided by the agent and client before moving forward. On a $1-million-dollar home, is a $20,000-$30,000 commission justifiable? It is now up to that buyer’s agent to show it is.
There are also changes on the seller-side of the transaction. Their listing agreement now splits apart the commission they are paying their agent, and the amount, if any, they are willing to pay the buyer’s agent. One of the contentions of the lawsuit was that when the listing information on the MLS also included the amount of compensation the buyer’s agent would receive, that incentivized the buyer’s agent to search for properties paying the biggest commissions. Because of this potential conflict the MLS now prohibits information of what a seller is willing to pay the buyer’s agent. What’s odd is that the new listing agreement doesn’t prohibit a buyer’s agent from calling a listing agent and asking them what the seller is willing to pay. Real estate agents have a code of ethics prohibiting steering their clients to properties they will make more commission on. But I don’t see how the claims in the lawsuit get satisfied if all the agent needs to do is now call to find out the compensation versus reading it in the MLS listing. The one exception to the above is that the seller can opt to not set an amount of buyer representation compensation and make that a part of the offer negotiation.
There has been a lot of criticism about these changes and how most felt the system worked without issue for decades. Agree or not, what the lawsuit and settlement have done is given more control to both the buyer and seller of the amount of compensation their representatives earn. Will that mean lower compensation for agents? It won’t be for those that can justify their compensation.
More on Scammers Stealing Your Title
Last week’s article on home title theft sparked a lot of people to inquire if their home was safe based on their individual situation. I also received some truly horrible stories of those that were victims of losing their property to thieves that cost them large sums to get their property back.
First, a little more on companies that offer title monitoring. These companies cannot stop someone from fraudulently transferring the title of your property. Basically, these companies periodically check the title of your property with the county clerk to see if there have been any changes. If there are, they will notify you. Yes, that’s after the fact. Some do offer paying to get the fraud reversed, but that fee is significantly higher than the basic monitoring service monthly fee.
I wrote last week that the mortgages lenders place on your property contain a provision that they must approve any change to title so long as their mortgage is in place. That too will not stop someone from fraudulently conveying your title. In several of the responses I received, readers said they had a HELOC recorded against their property with a zero balance and wondered if that would be any protection.
Let’s talk about why the lender’s lien won’t protect you. In most cases a buyer would require all liens of record be removed in order to obtain a clean title. In the case of a lien with a zero balance, the scammer will instruct the escrow/title company to simply close the HELOC. I got another response in which someone did get their property stolen even though they have a recorded first mortgage in place. They had a very small balance of around $20,000 remaining. The scammer paid that lien off. The only way they found out about the theft was a letter from their mortgage lender thanking them for paying off their loan.
Think of it this way. If you own a million-dollar property with a $100,000 mortgage recorded against it, you have $900,000 in equity. That’s mighty enticing for a criminal.
I don’t want to scare everyone now thinking they will get scammed and lose their home. This type of fraud, while growing, it still relatively rare. The best way to protect yourself is to tie up your loose equity. As I suggested last week, form a family trust or LLC. Have a lien recorded against your property for the free equity you have. In the example above, record a $900,000 lien against your property. Now if a scammer were to try and steal your property, there’s no economic incentive to choose your property. All the equity is tied up in liens. Just like no one could fraudulently use your credit card if you had your balance maxed to the limit. And when you ever need to do something with your property you can always remove the lien without the need to actually transfer any funds.
One last note I got from many real estate agents. The example I gave last week about a scammer on the mainland impersonating an owner and seeking to list and sell property, the real estate community is very aware of these scams. Most real estate brokerage firms now have in place strict procedures to help prevent incidents like this happening. If a seller is off island, they now require a registered letter be sent to the address listed at the tax office to be returned with a notary certification, along with other identification checks.
Again, no system is 100% foolproof. If a bad guy is smart enough, determined, and were to impersonate your identity, it would be hard to stop them. The good news is that fraud can be reversed. It unfortunately is expensive to do so.
And now the week’s economic news…….
Mixed Economic Data
The major economic reports released this week contained some good news and some not so favorable news for mortgage markets. The inflation data was lower than expected overall, but consumer spending was a strong surprise to the upside. These results were roughly offsetting, and mortgage rates ended the week with little change, remaining near the lowest levels of the year.
The Consumer Price Index (CPI) is one of the most widely followed inflation indicators. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors typically look at core CPI, which excludes the food and energy components. In July, Core CPI was 3.2% higher than a year ago, down from 3.3% last month, and the lowest annual rate of increase since April 2021.
Although this annual rate has fallen from a peak of 6.6% in September 2022, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed. One big reason is that shelter (housing) costs remain elevated and again were responsible for the largest portion of the increase. By contrast, used vehicle prices dropped 2.3% from June and were down 11% from a year ago. Other categories which posted declines in July included medical services, apparel, and new vehicle prices.
Another significant inflation indicator released this week which measures costs for producers was lower than expected. The core Producer Price Index (PPI) was 2.4% higher than a year ago, down from an annual rate of 3.0% last month and far below the consensus forecast of 3.0%. Of the two major inflation reports, investors tend to place less weight on PPI, since it reflects a smaller slice of the economy than CPI.
After several months of relatively weak readings, investors were becoming increasingly worried that higher prices were finally slowing consumer spending. The latest data greatly eased those concerns, however. In July, retail sales surged a full 1.0% from June, far better than the consensus forecast of just 0.3% and the largest monthly increase since April 2022. Looking at individual categories, motor vehicles, electronics, and appliances showed the strongest gains, while clothing stores and sporting goods displayed a bit of weakness.
Mortgage applications benefited from lower rates again this week. According to the latest data from the Mortgage Bankers Association (MBA), applications to refinance surged 35% from last week, the strongest gain since May 2022, and were an enormous 118% higher than one year ago. By contrast, purchase applications rose just 3% from the prior week and still were down 8% from last year at this time.
Next Week
Investors will continue to look for Fed officials to elaborate on their plans for future monetary policy after another round of relatively tame inflation reports. The detailed minutes from the July 31 Fed meeting will come out on Wednesday. It will be a very light week for economic reports, with attention focused on the housing data. Existing Home Sales will be released on Thursday and New Home Sales on Friday.
Until next week….
