Settlement Shams: Are You Paying More Than You Should at Closing?
The Dept. of Housing and Urban Development (HUD) brought charges against one of the country’s large, well-known real estate brokerage firms, Coldwell Banker, indicating that some of its offices had “illegally paid higher commissions and provided gifts and other incentives to real estate agents who steered purchasers to an affiliated title agency.” While Coldwell Banker Residential Real Estate, Inc. admitted no wrong-doing they agreed to pay $250,000 in settlement and to “cease the practices the federal government claimed were illegal under a 1974 law that prohibits giving “things of value” in exchange for referrals of settlement business” as reported by Kenneth R. Harney in a recent Washington Post article.
But are referrals to title agencies the only places that large real estate brokerages may be taking advantage of their trusted position with home buyers? Probably not!
According to the Post article, “ownership of settlement and mortgage [companies] is common among the country’s major real estate brokerages. [These companies or] affiliates can be highly profitable, sometimes generating millions of dollars of additional revenue a year for the brokerage, though not necessarily any direct remuneration for individual sales agents.”
While the costs of settlement include items like title insurance, closing agent fees, recording fees and the like, those costs are small in comparison to the expense of getting the mortgage loan for new home. If the real estate agent you’re working with sends you to the affiliated mortgage company, you may be paying more for a mortgage than you should. Why?
Loan originators or officers are similar to sales people. They usually have to build a network to gleen referrals for mortgage loans. When they have a somewhat “captive” audience of referrals from the real estate company that owns them, the loan officer may become more of a paper processor. Such loan officers are not as motivated to evaluate and study a variety of loan programs and/or your particular financial concerns or goals before getting you a loan.
Oddly enough, even though real estate brokerages own mortgage affiliates, the extra profits may not benefit the agent but are left in the hands of the brokerage firm owners and executives. Yet, the agents are “instructed” to send the affiliate their referrals. However, if the agent is the recipient of “perks” such as vacations, free advertisements, reimbursement of MLS fees, etc. for their referrals they are almost guaranteed to direct their clients to the affiliated companies.
What this means to the homebuyer is they may not be getting as good a deal as they could elsewhere and may be paying more in fees than necessary. Federal law provides homebuyers with the right to chose their mortgage company as well as their closing and settlement providers.
Before contracting to buy a home, a prospective buyer should take time to learn about their options and investigate several possibilities. It is better to consult with a mortgage professional to determine how much mortgage and what type loan programs h/she qualifies for before looking for a real estate agent. Prospective buyers should also inform their mortgage professional what their financial concerns and goals are so that the loan officer can offer mortgage options that facilitate those needs.