View From The Top: Industry Leaders Speak Out

Last April at the Realty Alliance meeting in Dallas we debated, voted, and ultimately took no position on Banks entering the real estate business. While there were strong concerns on both sides, the issue seemed distant and mostly academic. While we debated the impact of a new competitor on our business, none of us believed these events could have a significant impact on our abilities to offer diversified service to our customers.

The situation has changed. NAR has recently introduced Legislation in the House and in the Senate that will directly prohibit Banks from engaging in the real estate business. While on the surface this would seem to be a positive development the ramifications for each of our companies are significant and profound.

The ABA (American Bankers Association) is a strong organization and lobby. There now exists a significant fear that if banks are prohibited from entering real estate, they could turn around and prohibit us from being in the mortgage, title, insurance, etc businesses. (See Real Trend Dec 14th, 2001). Since a great majority of us have built our companies by diversifying into other businesses, our inability to continue in these businesses would be a huge blow, both financially as well as strategically.

While we were concerned by NAR’s position last April, we didn’t think it was that important either way. Today our membership has a huge concern that this debate may cripple our ability to build our companies currently and in the future.

The following is a brief summary of why we believe Banks should be allowed to enter our business. There are two other good discussions of the debate. They are “ Dear Mr. Greenspan”, by Steve Murray, Real Trend, February 2001, and “Real Estate confronts the Banks” by Stefan Swanepoel.

Open Competition is the American Way

As the real estate industry has changed, brokerage companies have looked to diversify and enter new businesses (mortgage, title, insurance, etc). Just as we should be able to compete in these businesses, so should any other industry be able to enter and compete with us. Open competition is the American way. Today, more than at any time in history, it should be apparent that open, free markets are superior to closed, controlled, or regulated markets. Real estate brokerage should be treated no differently that any other industry.

There are certain areas of our business that could use a greater level of competition. With large financial institutions entering the business, there would be more competition for the largest entities. Today Cendant, Prudential, and GMAC have little true competition. Large Banks could only create more competition at this level, which would certainly benefit the industry as a whole.

Capital is Good for Our Business

Residential real estate has always been a capital-short industry, and we should encourage efforts to bring more capital to our business. We have struggled for many years to find enough capital to expand our businesses, to innovate, to do research and development, and to grow our companies. Many of us have been faced with the inability to raise capital or borrow money to finance our growth plans. With an open market, capital would most certainly be more available.

Furthermore, capital provides liquidity for those owners who are interested in selling. Many large, significant capital players have entered our industry over the years – Sears, Merrill Lynch, Prudential, and Cendant, to name a few. They certainly have not destroyed or taken over our business. They have competed with us shoulder to shoulder with varying levels of success. Some would even argue that they have had a positive impact on the industry as a whole.

Many owners of real estate brokerages who sold their companies in prior years would argue that these large capital sources provided them excellent exit strategies. Banks and financial institutions are a new source of capital and, therefore, a potential buyer. Their entry into the industry would mean that all companies are worth more. A rising tide raises all boats. Who would not like their company to be worth more?

Capital can enter our business in many ways. The ability to joint venture or create partnerships to grow our businesses or expand into new businesses has been a successful strategy for many real estate companies. By having new capital resources available combined with our entrepreneurial abilities, the future possibilities are endless. In other industries (insurance, and securities) banks have typically partnered with existing companies more often than employing any other strategy.

Competition Will Make Us Better

Competition makes us all better. The argument that banks would be “anti-consumer” makes no sense. How could real estate brokerage be less competitive and anti-consumer if there are more companies offering new and different services? Some argue that the banks’ only interest is to sell other financial products. If this were true, it would only emphasize the positive services that we, as realtors, provide to our customers.

Even though they are working hard at relationship management, banks are not known for their customer service. When they entered the insurance business, their performance lagged significantly behind existing insurance brokerages. The negative reaction to raising ATM fees in California and in other states is another example. Our owners would much rather compete with a large financial institution than a small, local, entrepreneurial brokerage that is smart, aggressive and competitive. And if the banks improve their customer service, it raises the bar for all of us.

It Will Affect the Prospects for RESPA Reform

Most importantly, our industry will be facing RESPA reform in the near future. RESPA reform will have a significant impact on how we practice our business and on our ability to build and grow our companies. How can we go to Washington and ask for the things that we feel are appropriate in RESPA reform and at the same time proclaim that banks and financial institutions cannot be allowed in our business? Not only would our credibility be questioned, but also our ability to lobby on future issues would be significantly compromised.

This is the area of the greatest danger. The ABA could easily attempt to limit our abilities to be in other businesses if they are not allowed to be in real estate. Fair is fair. If banks cannot be in real estate then real estate companies should not be in mortgage, title, insurance, etc. This is a powerful argument.

We Should Welcome New Players

Our industry has succeeded for many years by maintaining an open, competitive marketplace where all players can compete on an even footing, and we should welcome new entrants whomever they may be. When we erect regulatory boundaries or prohibit others from joining our business, it hurts us in the long rum. Over the years many companies have come into our industry with new ideas and new ways of doing things. Meanwhile, we have changed and prospered. The challenges only make us stronger and better

They Will be There Anyway

In the long term it is highly unlikely that banks will not be in the real estate business. They can always find a way if they think there is enough opportunity. According to the Conference of State Bank Supervisors, the Association of State Bank Regulators, the following states and the District of Columbia, permit their state chartered banks to engage in real estate brokerage either directly or through a subsidiary. Those states are as follows: AL, AZ, CA, CT, DE, DC, FL, GA, ID, IN, IA, MA, MI, NE, NJ, NM, NC, PA, SD, TN, TX, WA, WI, WY. Also, Federal Savings Associations are authorized through service corporation subsidiaries to engage in real estate brokerage activities. The Federal/Treasury Proposal cites the authority in their proposed rule at 12CFR559.4(e)(4) and OTS letter dated July 16, 1997 (1997 OTS Lexis 3). This would mean that Federal Savings Associations such as Washington Mutual, for example, could get into the real estate business today.

We already compete with large financial players (Cendant, Prudential, GMAC) and we see no difference between them and a large bank or a Federal Savings Bank. Why should we waste political capital and risk our current way of doing business, if they are going to enter the business anyway?

Let’s not let the National Association of Realtors® speak for us and ruin our business. NAR does not represent us on this issue. We need to stand up as a united force and be counted. Please contact your congressman and/or senator and explain your view to them as soon as possible.

Published: February 25, 2002

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