In a clear departure from the position long held by the federal government -- the view that banks were not allowed to broker tangible assets --banks now want to become real estate brokers. They argue that since a real estate transaction involves the largest investment for most consumers, it's mostly a financial transaction.

This, at least, is the rationale they're using to "breach the wall of separation between banking and commerce," as Rep. Spencer Bacchus (R-AL) wrote to the Federal Reserve.

The Federal Reserve is considering changing the rules which now prohibit banks from owning real estate companies, opening wide the doors for those with all the money to take over a large part -- even dominate -- the real estate industry.

So what's wrong with that?

Plenty. While the American Bankers Association claims that "approving real estate brokerage as a financial activity permissible for financial service holding companies will benefit customers by providing greater choice and more competition for their services," they fail to point out just how it's supposed to benefit consumers.

The federal government has long held that banks aren't allowed to participate in commerce because depositor money should be held in a safe haven, rather than put at risk by extraneous non-banking activities. A recent example of this involves the movement of banks into the insurance business.

The National Association of Realtors reports that "Overall, insurance agencies acquired by banks have had poor performance...The average [non-bank owned] agency is growing at an annual rate of roughly 5 percent in total commissions and fees while bank-owned agencies are actually shrinking at a 0.3 percent rate."

In addition, while banks say they will lower costs of the real estate transaction, NAR says that hasn't been the case with basic bank services. For instance, says NAR, "in the past 10 years, the cost of ATM transactions jumped 34 percent, monthly fees on our interest-paying checking accounts grew by 27 percent and fees for bounced checks increased by 21 percent."

One of the arguments I've heard from those who favor bank-owned real estate companies is this: Many real estate companies now own mortgage companies, so why shouldn't banks be allowed to own real estate companies?

It's not the same. These mortgage broker firms, while owned by the real estate entities, don't put depositor funds at risk or the insurance programs which protect such deposits.

If a real estate company gets sued, goes bankrupt or faces some other financial disaster, the owners of the company are the ones at risk.

That's not the case with financial institutions. We saw that happened in the 1980s when savings and loan associations were first allowed to make commercial loans. They placed depositor funds at risk in a fast-paced real estate market. Once the market went south, the taxpayers were left with a $130 billion bail-out bill.

Please, let's learn from our mistakes -- not repeat them.

M. Anthony Carr is a Washington-based author who has written about real estate issues for more than a decade.

Published: July 13, 2001

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

Mr. Carr has covered real estate since 1989. He is the author of Real Estate Investing Made Simple. Got a personal real estate issue? Post your questions and comments at Anthony’s blog: commonsenserealestate.blogspot.com.