Jaded New Yorkers will likely shrug at the news that kickbacks to real estate agents by mortgage brokers are alive and well in New York State, according to mortgage industry experts.
But given the slackening demand in housing — at least until recently — the decrease in mortgages issued over the past year, and the ensuing contraction in the mortgage business, the question isn’t “if ” there are kickbacks, but “how much more” often they’re paid, said the mortgage brokers, real estate brokers and other experts The Real Deal spoke to.
Kickbacks from mortgage brokers are the payments that real estate brokers demand before they refer their buyers to the mortgage broker for a mortgage, after or even before the client has decided to buy the property. Those requests are illegal, but they are rising because of the slackening demand in mortgages across the region, said some in the industry.
Eric Barron, president of the Barron Mortgage Group, said real estate brokers approach him demanding a 1 percentage point fee for referring their customers, an amount that they claim is less than the 2 percentage points they charge other mortgage brokers. The problem, he claimed, is worse outside of Manhattan and farther out in Brooklyn, as well as in Queens, the Bronx and Staten Island, where home buyers tend to be less well educated about borrowing and business is scarcer all along the real estate food chain.
Once made, the kickbacks are added to the bottom line points that the client ends up paying, and can increase a buyer’s mortgage interest rate by 1 to 2 percentage points, said experts. The practice has the same negative effect that subprime lending does, driving up the cost of borrowing to consumers.
It’s always hard to gauge the number and extent of illegal mortgage kickbacks, because they are, well, illegal. Yet industry experts said the age-old practice of handing cash over for a mortgage referral goes on the upswing during hard times.
“Mortgage companies have gotten more desperate as the business shrinks,” said Barron. He added that the practice has reached the level of “arrogance” and “expectation,” with brokers demanding kickbacks before mortgage brokers can even consider providing loans to their clients.
“This is a highly glutted industry with over 2 million licensed agents, and only 7 to 8 million [nationwide] sales, so you do the math,” said Steven Browbeck, executive director of the Consumer Federation of America, a consumer advocacy organization. “The person who has access to the purchaser is in the catbird seat and can exercise a great deal of control over all the service providers,” he added.
“During that time period I saw it happen all the time,” said a federal official who works in housing and spoke on the condition that he was not identified. He worked as a mortgage broker for 15 years before joining the public sector. “And I can see how it could increase because of the declining sales market,” he noted.
National mortgage volumes are expected to drop to $457 billion in the first quarter of 2007 from a peak of $763 billion in 2005, according to the Mortgage Bankers Association. The market for home loans has dropped between 20 and 30 percent and the industry has consolidated considerably since then.
Many brokerage businesses have recently filed for bankruptcy, fired employees, put themselves up for sale, or simply gone out of business, according to Steven Schnall, president of the New York Mortgage Company (see story Mortgage biz on borrowed time in the January 2007 issue).
Other mortgage brokers agreed about the prevalence of kickbacks. One who works for a large company and spoke off the record said that kickback demands from real estate brokers was “rampant” in the outer boroughs.
Because he works for a national company, he is unable to operate in those areas, he said, because the risk for a large public company is too great.
Experts say that the incidence of kickback requests increases in neighborhoods with more immigrants, who may not be aware of the illegality of the practice. Indian and Pakistani neighborhoods of Queens, Hispanic homebuyers throughout the city, and other ethnic groups are more vulnerable to the system of bribery and unfair market control. The problem magnifies among African-American home buyers, who are sometimes also magnets for subprime and predatory loans, where higher rates make it easier to mask additional points.
The variation among boroughs is substantiated by some real estate brokers who said that in their robust Manhattan market, they haven’t even caught a whiff of kickback requests, particularly at top-drawer firms that deal with wealthier buyers.
Mindy Diane Feldman, vice president of Halstead Property, said she has never had any knowledge of, or seen any indications of, mortgage broker payments to real estate agents.
“The mortgage brokers I speak to haven’t intimated anything or said anything, or even suggested anything in their voice,” to suggest that a kickback is necessary for them to conduct business, she noted.
But Feldman also has a booming business, and in good times kickbacks are less likely to occur, said Barron.
John Reinhardt, president and CEO of Fillmore Real Estate, which has 500 agents and 20 offices in Brooklyn, said, “We do not allow it.” His agents are told not to accept any payments. Reinhardt also said that many mortgage brokers come to their offices seeking relationships, but that primarily the company already has good working relationships with established banks whose records they are familiar with.
Greg Krauza, president of the New York Association of Mortgage Brokers, said although he knows kickbacks are common in the eastern section of the state, in the upper western area of New York, where he operates, real estate brokers do not expect a kickback.
He says brokers in his sparser, lower-turnaround market have developed “legal and appropriate ways” to work together with mortgage brokers.
“The New York Association of Mortgage Brokers, clearly through their code of ethics doesn’t allow [kickbacks], and it is against the law,” he noted, stating that the practice of handing over cash for a referral and passing the cost on to the homebuyer is against state law governed by the Real Estate Settlement Procedures Act (RESPA). The law was passed in 1974 to end abusive practices that increase the cost to homebuyers, and to shed light on the settlement process for consumers, according to Realtor.org.
“It is the mortgage brokers who allow it to happen,” Krauza noted, placing the blame firmly on fellow brokers. The practice also hurts the consumer, he noted. “It removes one level of security and professionalism that the consumer is supposed to receive.”
Browbeck, meanwhile, laid the blame at the foot of the real estate brokerage business, which he said is dominated by a handful of firms who ” take advantage of the low barriers to entrance for the agents,” where real estate courses that last two to three weeks are all that are needed to qualify as an agent.
Poorly trained agents are lowering the standards for doing business, he said.
“They take on more agents than the marketplace can sustain and then set them into competition with each other,” he said. The kickbacks are “an additional income opportunity for these agents,” he said, adding this is sometimes quietly tolerated by the brokerage company.
Yet industry experts agree that there are plenty of legal ways to take advantage of the close relationship between real estate brokers and their clients.
For one, the real estate agent can also become a mortgage broker and, with a “dual agency disclosure,” can simply tell their clients that they are brokering both the house and the mortgage, said Krauza.
“There is a standard of disclosure, you have to let the consumer know that you are working for both, and that you will be receiving financial remuneration,” he said.
But sometimes playing the dual agent can backfire. Reinhardt said he had recently seen a case where a mortgage officer who is also a registered real estate broker attended a Fillmore open house, then demanded a split fee from Fillmore because he had pre-qualified the buyer of the home. “That’s just an aggressive attack on our industry, and it’s absurd,” he said.
Krauza said another common practice in his region is for mortgage brokers to post a 1-800 number next to a home for sale that will allow them to capture the contact information of potential buyers. The mortgage broker offers to pre-qualify the borrower. “No money is exchanged, simply the professional labor that the mortgage broker is qualifying the client,” he said.
New York State also passed a registration-education law for mortgage brokers in April 2006 that requires they be registered and educated before they operate in the state.
The law went into effect on January 1 of this year, but the state’s banking department has two years to implement new procedures and craft the regulations. After that time, anyone engaging in mortgage loan origination will have to be registered by the state superintendent as a mortgage loan originator. Krauza, whose organization championed the new law, said that the law will require 18 hours of training every two years. He thinks the new measures will help increase the level of professionalism for some mortgage brokers who may be operating at the edge of the law.
“We are counting on it increasing professionalism by putting up some barriers to entry, much like accountants — or teachers and lawyers — need continuing education,” he noted.