Realtors Hold the Power to Clean Up Lending

San Diego Home Blog is on my short list of daily reads.  It is hosted by Scripps Ranch Realtors, Kris and Steve Berg and is one of the best-written real estate sites in the country.  Steve Berg offers a list of suggestions to regulators to enhance the housing recovery.

Here is the interesting part of his article- all of the suggestions are lending related but Realtors have the power to enact corrective action.  The California Association of Realtors can decide to change the future of California real estate.

A few of Steve's suggestions and my advice to CAR about how to enact them:

Prohibit mortgage brokers from acting as real estate agents for the same principal in a transaction (and vice-versa). This is a total conflict of interest.

Separation of these two disciplines allows for objective advice. If CAR prohibited its members from engaging in any type of lending activity, not limited to but including ownership in an affiliated lending institution or brokerage, they would lead the country away from this conflict of interest.  

Establish a separate license for mortgage brokers and require an Agency/Fiduciary relationship with their borrowers.

That law is actually in place.  Mortgage brokers and their agents, licensed under the California Department of Real Estate, require a fiduciary capacity from its licensees for lending related advice.  The California Association of Mortgage Brokers called for separate originator licensing at its convention last summer.  CAR can achieve this objective by contractually requiring that a loan commitment be issued by a CAMB member.  This way, CAR can insure that it's members' clients will receive objective advice from a licensed loan adviser, acting in a fiduciary capacity.

The problem with this suggestion is that it completely eliminates the federally-chartered banks.  Washington Mutual, Bank of America, Wells Fargo, and Wachovia Savings (nee World Savings) would be completely eliminated from retail loan origination in the State of California. 

Require a minimum of 5% down payment (except FHA and VA) unless borrower is Bill Gates or of similar credit

CAR can write the minimum down payment requirement into its contracts.

Eliminate pre-payment penalties or, at a minimum, allow borrowers to purchase, upfront for a reasonable fee, an “escape clause” from pre-payment penalties after the first year of a loan on homes where the loan-to-value is greater than 95%. Yes, an appraisal is needed, but you would need it for a refinance, anyway.

The aforementioned minimum down payment requirement solves that problem.

Absolutely, positively outlaw the use of negative amortization loans. No matter how many times it’s explained to people, most still don’t get it.

I disagree with this because all of my clients with negative amortization loans know exactly how they're used.  They fully understand the risks associated with them and use them as part of a financial plan.  I think if the Realtors cede their advise to the licensed fiduciary lending agent, they won't have to concern themselves with this.  However, if this issue were of great enough interest, CAR can simply instruct its membership to not represent buyers with negative amortization loans.

Steve's other suggestions are targeted at the government sponsored loan programs and legislative loan limits for government-sponsored entities.  He suggests that  loan limits be raised to accommodate California's hyper-inflationary housing economy.   This suggestion is a great one but will have little impact on the real problem for housing in California; the houses are just too darned expensive.  Californians just don't make enough money to support the inflated prices they pay for homes.  Either the median income has to rise in California or the prices will inevitably fall.

CONCLUSION:  The California Association of Realtors, acting as a self-regulating organization, can clean up the lending problems in our state by establishing better practices. Currently, Realtors have the fiduciary capacity to buyers to serve their interests above their own.  CAR has the power to effect change.  The question is, "Will they use it?"

This article is also posted on the Active Rain Real Estate Network.  Click the link to see the comments from industry professionals.