In the past few days a major hubbub has emerged within the real estate and financial communities regarding a basic question: Should bankers sell real estate?

This is a short question which raises a number of complex issues. Let's try to puzzle them out.

On December 13, the Treasury Department and the Federal Reserve Board asked a question: Are real estate brokerage and management "financial services"? Are they "in nature or incidental to financial activities"? If yes, should not "financial holding companies" be allowed to sell and manage real estate?

The National Association of Realtors has taken a stance which strongly opposes bankers-as-brokers.

"No longer," says NAR, "would the real estate broker be the first point of contact for homebuyers and sellers. Banks, with their extensive customer databases and deep pockets, will become the first point of customer contact. Banks will discount their brokerage services to out-compete independent brokers. They will cross-subsidize their real estate operations with profits from taxpayer-insured operations."

Some argue that NAR's position is absolutist and also that it is wrong; that allowing banks to sell real estate would increase competition and more competition is good for both consumers and the real estate industry. The result of this debate is that we now have three general areas to consider::

• Is NAR's position reasonable?

• Should banks sell real estate?

• What happens if banks with hundreds of billions of dollars in assets do, in fact, become realty brokers, either directly or through subsidiaries?

How Washington Works

NAR is not only a trade association with 750,000 members nationwide, it's a trade association which must function in Washington. The association has enormous clout because members are in every state, city, and community. As well, it has sophisticated lobbyists who understand how Washington works and -- not unnoticed in the nation's capital -- it has a political action fund and the ability to mobilize members.

Alternatively, banks also have a presence in Washington. They too have members everywhere and yes, they also have political action funds. And by every possible measure the Treasury and the Federal Reserve, which are considering the banks-as-brokers issue, exist in large degree to help the nation's bankers, the theory being that healthy banks are necessary for a strong economy and smooth financial transactions.

And the Fed and Treasury have done a very good job nurturing those they oversee. In 1999, says the Federal Deposit Insurance Corporation, commercial bank net income totaled $71.7 billion -- up from profits of $61.8 billion in 1998 and $48.7 billion five years earlier, in 1995.

In comparison, some 5 million existing homes were sold in the U.S. during the year 2000 with a median price of $139,000. The total value of these properties was about $695 billion. Gross income to the real estate industry with average fees of 6 percent -- what HUD pays to sell its properties -- was $41.7 billion. Add commissions from new home sales and management fees and the conclusion is that brokerage industry profits are microscopic -- a small percentage of gross revenues -- when compared with the net income bankers enjoy. And in Washington, where people can count, such distinctions are important.

In effect, to think that the question of bankers-as-brokers is being decided before an impartial panel -- or that two parties of equal size are embroiled in a dispute -- is simply not realistic.

What we have is a situation where banks are seeking to extend their professional territory into areas long held by brokers. If you're NAR --or any trade association -- you want to protect member turf and so you must strongly oppose any effort by others to offer services now provided by your members.

The fact is that every profession and trade does exactly the same thing. Lawyers, for example, work hard to assure that no one but attorneys can offer "legal advice." Doctors say that no one but physicians should be allowed to "practice medicine" without a license. Ophthalmologists have long opposed the right of optometrists to use drugs. Unions and business groups both exist to protect member interests.

The list goes on but the basic point is this: Adam Smith was not entirely right when he said we are each motivated by the "invisible hand of self-interest." In Washington, self-interest is totally visible. Every profession, bureaucrat, politician, and industry seeks to protect its own, so NAR's posture is both reasoned and expected. In the poker game that is Washington, NAR is simply holding its cards and attempting to extract as much as possible from other players before showing what it has. With a little luck, it might even win and not have to show its hand.

If you're a Washington trade association faced with new rules which may diminish your territory and take business opportunities from your members, your public position must be one of total opposition. Such positioning may enable you to raise such a hue and cry that you can stop an agency or department before it issues an assortment of rules, regulations, and guidelines -- red tape which is likely to become progressively more expensive and complex over time. No less important, if you don't defend your turf in Washington, you'll be easy pickings the next time a rival group or agency wants a piece of your territory.

If this seems illogical or unfair, consider the alternative: If NAR said, "you know, we like bankers so why shouldn't they sell property? We could use the competition" imagine the outcry from Realtors. It would be obvious that the association failed to defend either its turf or its membership, regardless of where those members are located, what they charge, the form of representation they prefer, or company size.

The Definition Game

Treasury and the Federal Reserve say they want to know two things:

• Can real estate brokerage and management be categorized as a form of financial services?

• Are real estate brokerage and management services within the in nature or incidental to financial activities"

What, exactly, is not a financial service? If we're going to play the absolutist game, is not any transaction which involves the use of cash or checks "incidental" to financial services. Are not these terms so broad, elastic, and expansive that they can include virtually any activity? Is buying a boat a financing activity? Why not? What about groceries, gasoline, or SUVs?

Treasury and the Federal Reserve will dutifully collect public comments until March 2nd and then -- barring a political miracle -- will solemnly declare that after much thought and great deliberation, why yes, banks can broker and manage property.

Can the Treasury and Fed stumble? Can there be a political uprising which will cause them to rule against members of their own community?

It's possible that the public and Congress could be so enraged by the effort to expand bank activities that the proposal will die. There are, after all, huge armies of people who dislike banks, especially big banks with high fees, closed branches, and little local control. And, also, there's a new Administration in town, one which may not be thrilled with an initiative from the last regime. The catch is, none of this will happen unless someone argues the case for real estate.

Can loud opposition work? You bet.

As an example, under the Debt Collection Act of 1996, the government decided that it would stop issuing most paper checks after January 1, 1999. Instead, most recipients would be required to set up accounts with banks so the government could deliver money electronically.

Strongly supported by the Treasury Department, this law would have been a fabulous deal for banks because it effectively required the establishment of millions of new accounts with an ongoing array of fees and charges. But wait, don't most people already have bank accounts? Not only is the answer "no," the government and the banks know that millions of people are "unbanked." A January, 1997 Federal Reserve study showed that 13 percent of all households -- representing about 35 million people -- simply had no bank accounts.

Today, even though the law is on the books, it has almost no impact because it was opposed by seniors, veterans, minorities (there aren't many bank branches in "historically underserved" areas), people who wanted tax refunds delivered to their homes, and people who believe the government has no business demanding that they set-up bank accounts. In the face of widespread opposition, assorted rules and regulations now exclude just about everyone from required participation.

Of course, the easier way to solve the mandatory bank account issue would have been to stop it before it became law -- just what NAR is now trying to do with the bankers-as-brokers issue.

Wednesday: Should Banks Sell Real Estate?

For more articles by Peter G. Miller, please press here

Published: January 23, 2001

Use of this article without permission is a violation of federal copyright laws.

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .

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