Your Mortgage : Battle Over Lucrative Closing Costs on Horizon
Home buyers and sellers are virtually unaware of it, but a bitter struggle is shaping up across the country over who walks away with the bulk of their money from the settlement table. At stake are billions of dollars a year in closing costs, insurance commissions and financing charges.
Independent title companies, escrow agents and attorneys have controlled the lion’s share of this lucrative business for decades. The odds are strong that if you’ve ever bought or sold a house, the escrow closing or settlement process was orchestrated by one of these three independent types of closing-service providers.
In California and other Western states, the business is primarily in the hands of escrow agents. In some parts of the Northeast and mid-Atlantic states, lawyers control many real estate settlements. Elsewhere, independent title companies play significant roles, often in competition--or hand in hand--with settlement lawyers.
But new federal regulations threaten to shake the traditional system to its foundations. The new rules open the entire home sale, financing and settlement process to greater involvement by “affiliated” companies--especially those with direct tie-ins to real estate brokers.
Many large and medium-sized real estate firms are now likely to create, buy or invest in title and escrow settlement agencies, mortgage banking operations, home owners’ hazard insurance brokerages, and other services traditionally provided by independent, unaffiliated companies.
Although some of the biggest real estate firms have had subsidiaries in one or more fields for years, the new federal rules provide guideposts on how employees in those affiliates can be compensated for cross-referrals.
A manager of a local office of a large real estate company, for instance, may receive cash bonuses or other compensation if home buyers obtain their financing through an affiliated mortgage banker, or have their title and settlement work done at an affiliated agency.
Under prior federal rules, direct compensation for in-house referrals was at least of questionable legality--if not banned outright. The new rules expressly allow “employees” to be paid for referrals among affiliated business entities. The rules also require written disclosures to the consumer of any business linkages between the brokerage firm and any mortgage, title, insurance, escrow or other service provider involved in the transaction. In addition, they require that consumers be informed that they have the legal right to shop for alternatives.
The new regulations have triggered outrage among independent settlement-service providers. A Virginia-based group of lawyers and title agents has begun a national campaign to collect enough funds to sue for a federal court injunction to block the rules. Dubbed CRISIS--the Coalition to Retain Independence in Settlements and Services--the group also intends to lobby Congress for reversal of what it sees as “anti-consumer, anti-competitive” federal regulations.
The rules were issued by the Department of Housing and Urban Development (HUD) in October after four years of hearings and study of the settlement-service issue.
Howard A. Birmiel, a Burke, Va., settlement attorney and title company owner, says the regulations “will force thousands of small businesses to close down” by giving control of the financing and closing process to big realtors.
If real estate companies have title insurance, mortgage finance and settlement subsidiaries, asks Birmiel, “Who do you think is going to get the home buyer’s business? Everybody knows that buyers basically accept the advice of their (realty agent) on financing and settlement.”
Once independents are driven out of business from lack of referrals, according to Birmiel, “There’ll be no real competition and no constraint on pricing of services.” Birmiel says costs to the consumer could rise by hundreds of dollars per settlement as a result of the rules.
Not surprisingly, federal regulators and the executives of major real estate firms think the crisis perceived by the settlement attorneys is overblown. HUD officials conducted a “regulatory impact analysis” prior to issuing the rules that concluded that there will be “no substantial impact” on small businesses such as settlement and title agencies. HUD also cited estimates that savings on administrative and marketing costs through the use of affiliated networks of title insurance, financing and settlement service organizations could cut the cost of the average home settlement by 10%.
“The reason (the independents) are screaming is that they--not us--are afraid of competition that could actually lower costs to the consumer,” says Ron Maas, general counsel of the country’s highest-volume realty broker, Weichert Realtors of Morris Plains, N.J. Weichert’s 5,700 agents sold nearly $8 billion in houses last year.
“The (settlement) lawyers talk about conflicts of interest,” says Maas. “What a joke. Some of them do your settlement for a fee, but they make their real money on title insurance”--collecting hundreds of dollars of the home buyer’s title premium “for simply referring the business to a title insurer through their own title agencies, which are shells or dummy corporations.”
George Smith, president of HER Realtors of Columbus, Ohio, largest in its market, says, “There’s no reason why (independent settlement-related firms) should disappear if they’re truly providing good service.”
Even if Smith’s firm creates subsidiaries under the new rules, he says, “Our sales associates aren’t sheep. They are going to recommend that buyers go to the firms that service them best. They’d murder us if we tried to force them to use our own subsidiaries.”
