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Phillip C. Querin
Partner - Portland, Oregon Office
philquerin@dwt.com
(503) 241-2300
Events and Trends
[February 2005]
Last year saw several events occur which could directly
or indirectly have an impact on the real estate industry. Additionally,
certain trends took shape in 2004 and will likely receive more attention
in 2005. This article addresses some of those events and trends.1
Fannie Mae. Without exaggeration, Fannie
Mae (or FNMA, the Federal National Mortgage Association) is one
of the primary reasons Realtors® are able to make a living in
the real estate brokerage business. At nearly a trillion dollars
in assets, it is the biggest player in the residential secondary
mortgage market, which is the market to which conventional lenders,
i.e. banks, package and sell their loans. In so doing, these lenders
can “recycle” the money they loan in order to lend it
again and again. Fannie Mae securitizes the mortgages it buys, repackages
them, and sells stock (i.e. “mortgage backed securities”)
to the public to generate more money to buy more loans. It is a
very sizeable business. Fannie Mae is the second largest U.S. financial
institution behind Citigroup, Inc.2
Since it is a government sponsored enterprise, FNMA enjoys many
advantages over its competition because it is exempt from many of
the regulations that apply to federal banks and from the securities
oversight that applies to other publicly traded companies. It also
enjoys a preferred tax status and can borrow directly from the Federal
treasury at a cost lower than conventional lenders can obtain money.
This special status has enabled Fannie Mae to make trillions of
dollars in mortgage loans, thus giving the opportunity of home ownership
to ordinary Americans. Over the years it has been the darling of
Wall Street and has been regarded as an overwhelming success in
its mission of expanding home ownership. However, because of its
size and political clout, it has also escaped significant governmental
oversight.
In 2004, Fannie Mae got into in trouble for accounting irregularities
and earnings manipulation that resulted in overstated profits and
understated expenses. One consequence was that by presenting a rosier
financial picture, its senior executives were able to secure millions
of dollars in bonuses. Because of the depth and breadth of the irregularities,
it has now been reported that Fannie Mae may be required to restate
approximately $9 billion in profits. This has resulted in shareholder
lawsuits and criminal investigations. Fannie Mae’s CEO and
CFO have stepped down and its independent auditing company has been
replaced.
2005 will bring FNMA into the regulatory spotlight as governmental
hearings commence. Some critics would like to entirely eliminate
its favorable government-backed charter, forcing it to compete in
the private sector like other banks. Other critics are demanding
that – at the least – it be much more closely regulated
and accountable. For the Realtor® industry, the hope is that
Fannie Mae’s troubles do not create a ripple effect in the
housing market causing the availability and liquidity of mortgage
funds to tighten up to the point that low and moderate income Americans
are unable to qualify for home loans.
The Sandicor Case. For the past several
years, the case of Freeman v. Sandicor
has been winding its way through the California judicial system.
At issue was the relationship between regional MLS shareholder Realtor®
associations and their MLS participants. In Sandicor, the
Realtor® associations charged their MLS participants a uniform
fee for support services which included enrolling new members, billing
and collection, enforcing rules compliance, etc. In 2004, the Ninth
Circuit Federal Court of Appeals held that this business model violated
the federal antitrust law, and that the San Diego Regional Counties
MLS had conspire with the participating associations to fix these
service fees, thus resulting in some associations having to pay
inflated fees. The Sandicor case is not over. Issues of
whether it can be certified as a class action, the amount of damages,
if any, attorney fees, etc., all remain to be resolved. Eventually,
the matter will likely end up before the U.S. Supreme Court.
In 2005 we will see increased scrutiny of how MLSs deliver services
to their participants. Locally, the Sandicor ruling will
have little effect, as the RMLS™ does not operate on the Sandicor
model.
Banks And Real Estate Brokerage. For
the last several years, large banking conglomerates have sought
permission from the Federal Reserve and Treasury Department to get
into the real estate brokerage and property management business.
The adverse consequences of this effort to the brokerage community
are obvious, and if successful, could result in a major dilution
of the services Realtors® bring to the table for consumers.
As a result, the banks’ effort has been strongly opposed by
the National Association of REALTORS®, the Building Owners and
Managers Association (“BOMA”), CCIM Institute, Institute
of Real Estate Management (“IREM”) and a host of other
real estate industry organizations.
In 2004, legislation was introduced into Congress to permanently
prohibit banks from becoming involved in real estate brokerage and
management. The session ended last year without any action being
taken. This year an identical bill has been introduced. All Realtors®
should be interested in the outcome of this effort, as it could
directly affect their pocketbook.
New Business Models In The Real Estate Industry.
New business models for real estate brokerage have been developing
over the last few years. Perhaps the most well known and ubiquitous
has been the fee-for-services model, which makes a variety of brokerage
services available to the consumer, offering a graduated price structure
depending upon the scope of services selected. This has resulted
in the growth of some brokerage companies which, while making the
entire range of services available, concentrate their marketing
energies on limited service products for consumers. Due to free-market
forces, antitrust considerations and other legal constraints, limited
service brokers will continue to exist and perhaps expand.
The result has been a clash between limited service brokers –
some of whom may provide little more than placing the property on
the local MLS – and traditional full service brokers. The
complaint raised by some full service companies is that when dealing
with sellers whose representation has been contractually limited
with their broker, buyer agents must risk either (a) assisting the
seller and becoming a dual agent, or (b) not assisting and jeopardizing
the success of the transaction.
What looms on the horizon in 2005 is also a potential clash between
limited service brokers and regulators. The Attorney General of
Texas is currently considering whether the Texas Real Estate Commission
has the authority to define a minimum level of real estate services
a consumer has the right to expect from brokers. The Commission
has proposed a rule, which, if implemented, will require limited
service brokers to provide, when appropriate, a minimum level of
services, which would include (a) accepting and presenting offers
and counteroffers, (b) assisting in the development and communication
of those offers and counteroffers, and (c) answering the principals’
questions. The rule also clarifies that delivery of offers or counteroffers
to a represented principal is not, in itself, prohibited under Texas
licensing law. It will also prohibit listing brokers, whose contract
provides for exclusive agency, from instructing or authorizing the
buyer’s broker to negotiate directly with the seller.
The Texas case is being watched closely by real estate regulators.
In 2004 the state of Illinois passed a minimum service law and Iowa
may not be far behind. In 2005 we can expect this issue to gain
momentum throughout the country.
For- Sale- By- Owner Companies. In 2004
another California case was heard in which the California Department
of Real Estate attempted to force a for-sale-by-owner (“FSBO”)
website company to obtain a real estate license in order to advertise
the availability of sellers’ property for a flat fee. The
enforcement action arose out of a California law requiring all such
entities, except newspapers, to first have a license.3
The federal court concluded that the website was within its First
Amendment rights to advertise FSBOs, since the Department could
not justify giving the exclusion simply to print media.
Although the ruling in this case was based upon a law unique to
California, the impact may not be limited to that state. The year
2005 could see the proliferation of national website companies selling
FSBO advertising space – perhaps even a national FSBO MLS.
Already there are several national websites currently selling space
for rental property. National online companies such as E-Bay and
Craiglist currently carry some FSBO advertising. The handwriting
is on the wall. This trend underscores the need for traditional
brokerages to redouble their efforts at touting their professional
services and convincing the consuming public that in today’s
complex and litigious environment, there is far more to selling
a home than simply placing an online advertisement.
Conversely, it will be interesting to see whether online FSBO companies,
in their effort to add value to their own service, do not tread
into the realm of engaging in the type of activity for which a license
is required.
Conclusion. Based upon what we’ve
seen in 2004, 2005 should be an interesting year for the real estate
industry. The courts and legislatures, both state and federal, will
be at the forefront. FNMA may find itself increasingly accountable;
MLSs across the country may have to re-evaluate their business models;
and Realtors® will need to deal with the growth of nontraditional
competitors and business models, if they want to preserve their
dominance and market share in the business of selling homes.
FOOTNOTES
1
This article does not address Measure 37 for two reasons: First,
the substance of the law was discussed in last month’s article.
Second, until the courts – and perhaps the Oregon Legislature
- become involved in interpreting the new law, it is very premature
to say much more about it. By this time next year we may have a
better idea of the impact of the Measure.
2
Business with CNBC. Fannie Mae Management May be Ousted.
The Associated Press, September 24, 2004.
3
While Oregon law regulates when one
must obtain a real estate license, it does not prohibit such fee-for-space
arrangements, regardless of the advertising medium, so long as the
entity or individual does not engage in “professional real
estate activity” as defined in ORS 696.010(13).
© Copyright 2005. Phillip C. Querin,
Davis Wright Tremaine. No part may be reproduced without the author’s
express written consent.
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