RE: Docket No. R-1091(Regulation Y)
Proposed Rule - Real Estate Powers for Financial Holding Companies

Dear Governors of the Federal Reserve:

As president of one of the largest real estate franchise organizations in the world (currently 65,000 members in 4,000 offices), I feel it is my responsibility to share my thoughts regarding the proposed Rule affording financial institutions an opportunity to engage in real estate brokerage, employee relocation and real estate management operations.

While contemplating this matter, we researched the published purpose of the Federal Reserve and found this posted on your Web site (http://www.federalreserve.gov):

The Federal Reserve, the central bank of the United States, was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.

Today the Federal Reserve's duties fall into four general areas: (1) conducting the nation's monetary policy; (2) supervising and regulating banking institutions and protecting the credit rights of consumers; (3) maintaining the stability of the financial system; and (4) providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions. (emphasis added)

From my perspective, the key questions should be: (1) Will this proposed Rule make our banking system safer and more stable? and, (2) Is it prudent for banks to consider entering the real estate brokerage, employee relocation, and/or, real estate management business at all?

It is my firm belief that the banking industry does not have a full understanding of what is required to be successful in the real estate industry. The grass always looks greener on the other side of the fence. It's only after you're on the other side of the fence that you realize that the lawn needs mowing, trimming, watering, weeding, fertilizing, etc.

Let me share a few hard facts about the real estate brokerage industry:

A well-run, successful real estate brokerage averages about $150/month pre-tax net income per agent.

Hard to believe, isn't it? I am concerned that those favoring the proposed Rule are focusing on the "commission" line of the real estate closing statement. This is a very misleading number.

Typically, commissions are "split" between two real estate brokerages. Each company then takes its share and gives the majority of it (up to 100%) to the real estate agent that shepherded the transaction to a successful closing. The commission structure leaves a very small amount to pay the overhead and have something left for profit.

The real estate brokerage industry generates estimated annual profits of $1.3 billion. This figure represents 1.8% of the $71.7 billion in profits for commercial banks as indicated in the Federal Deposit Insurance Corporation's 1999 report. A less than 2% improvement in banks' current operations would represent more than all the profits generated by the real estate brokerage industry.

As an entrepreneur, I can tell you that it is a lot easier improving an existing business than successfully starting a new venture from scratch. Real estate brokerage is a low margin business. Why put current profits into ventures that have lower returns than the business you're already in? Businesses that focus on their core business are generally more successful than those that thinly spread their financial and manpower resources over diverse enterprises.

An established brokerage has 12 to 20 full-time licensed agents.

If you do the math on that, you'll see that an established real estate broker/owner makes a marginal income from operations. That's why most of them also list and sell real estate and constantly seek other revenue streams for additional personal income.

The time frame from opening day of a real estate brokerage office to full agent capacity varies from one year to five years -- usually based on ability of management, but other factors such as local market, national economy, etc., also apply. Few brokerages break even in their first year of operation.

Granted, banks already have the bricks and mortar which might house real estate services operations, but our experience in recruiting real estate agents indicates that just because there is a "location" doesn't mean the agents stampede to work there. Hiring, training and retention of agents is very time-consuming and literally "worlds apart" from the management disciplines of banking.

Every study I have seen indicates that a large majority of buyers and sellers have used, are using, or would use, a real estate agent in the purchase or sale of real estate. The public is obviously happy with the choices now available.

Real estate brokerages typically have two or more accounts at one or more banks and refer untold numbers of new customers to those banks for mortgages, new personal accounts, automobile loans, savings accounts, new commercial accounts and other "financial services" provided by those banks.

Do banks really think that real estate brokerages will continue to do business with them once they have become a "competitor?" Not likely. Will current brokerages redirect their mortgages to non-competitors? You bet.

If a bank provides mortgages today, they have an opportunity to capture 100% of the mortgages in their market. If they open their own real estate brokerage service, they will likely reduce their market share as real estate agents seek alternative lenders that are not competitors. Human nature won't be changed by a new Rule.

It is also not likely real estate brokers will roll over or throw in the towel should the proposed Rule be adopted. Banks should already know that people in the real estate brokerage business are true entrepreneurs by nature and have many battle scars. Brokers totally understand their business, their peers, and most of all their clients and customers. They are trench warriors and have honed great skills in how to survive.

Most importantly, a true real estate professional deeply cares about each client's happiness with the real estate transaction. Years of training and experience have been joined with creative sales and service techniques -- but underlying each transaction is a person who cares about people and their happiness. And, this professional already has an environment in which to offer those creative services. How many of today's "financial services" employees will provide 24/7 telephone and other "availability" to customers who might have a question or a problem on, say -- Christmas Eve, three days before a closing?

It might be interesting to learn why Countrywide Home Loans, one of the nation's largest mortgage providers, has elected not to enter the real estate brokerage business. I suspect they have analyzed it and determined their bottom line is better served by providing mortgage services through brokerages than in competition with them.

Additionally, there must be a reason banks in Canada, after many years of authorization to do so under their Banking Act, have withdrawn from offering real estate brokerage services. Research with our Canadian operations tells us the primary reason was that it was not profitable and was not likely to become so.

It is my opinion the proposed Rule, if enacted, would pose a distinct and very real danger to the banking system by needlessly introducing a de-stabilizing factor.

From the perspective of someone who has been a part of the real estate industry for 27 years, I recommend that you not approve the proposed Rule authorizing banks to offer real estate brokerage, employee relocation and real estate management services. It would surely prove to be costly to them in the long run, upset the stability of our world-class banking system and offer no valuable new services to the public.

I am available to appear before you in person, should you desire additional discussion or information.

Respectfully,  

Daryl Jesperson
President
RE/MAX International, Inc.

cc:
Real Estate Brokerage and Management Regulation,
Office of Financial Institution Policy, U.S. Dept. of the Treasury
Senator Phil Gramm, Chairman,U.S. Senate Committee on Banking, Housing and Urban Affairs
Congressman Michael G. Oxley, Chairman, House Committee on Financial Services
Senator Ben Nighthorse Campbell
Senator Wayne Allard
Congresswoman Diana L. DeGette
Congressman Mark Udall
Congressman Scott McInnis
Congressman Bob Schaffer
Congressman Joel Hefley
Congressman Thomas G. Tancredo
Richard Mendenhall, President, National Association of Realtors
Sue Johnson, RESPRO