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Some agents are reading too much into guidance issued by mortgage giants Fannie Mae and Freddie Mac this week that confirms sellers can continue to pay buyer’s agents’ commissions, Lamacchia Realty broker-owner Anthony Lamacchia warned Thursday.
If sellers decide that they want to pay the buyer’s agent’s commission, that will not count as a seller concession, Fannie and Freddie said in an April 15 bulletin to lenders.
The guidance from Fannie and Freddie — and a March 28 bulletin issued by the Department of Housing and Urban Development (HUD) staking out a similar position for FHA loans — had been eagerly awaited by an industry grappling with pending changes to the rules governing agent commissions as outlined in a proposed $418 million settlement that the National Association of Realtors agreed to last month.
But as Lamacchia pointed out in a YouTube video Thursday, Fannie and Freddie haven’t changed their policies. Sellers’ commission payments to listing brokers, which are typically split with the buyer’s broker, have never been considered seller concessions.
Fannie and Freddie currently limit “interested party contributions” (IPCs) — concessions offered by sellers, builders, real estate agents or other “interested parties” who may benefit when a home sells for the highest price possible — to between 2 percent and 9 percent of a property’s value.
“Nowhere in here does it say the closing cost credit allowable amounts have been increased — that agents can just take their total commission and just plop it on top all of a sudden,” Lamacchia said, parsing the language of Freddie Mac’s letter to lenders on YouTube. “No, it’s not that easy.”
“So folks, my real opinion … is nothing’s changed here,” Lamacchia said. “Nothing’s changed. All they did is clarify that [sellers’ payments to buyers’ agents are] not going to start to count towards [the IPC cap]. Well, it didn’t count towards it before.”
Furthermore, Lamacchia said, there’s some fine print in the guidance from Fannie and Freddie that points to issues that have yet to be resolved.
“Buyer agent fees have historically been fees customarily paid by the property seller or property seller’s real estate agent, and, as such, they are currently excluded from these financing concession limits,” Freddie Mac’s letter to lenders states. “If these fees continue to be customarily paid by the property seller according to local convention, they will not be subject to financing concessions limits.”
That’s a big if, because NAR has agreed that in the future, listing brokers will no longer be allowed to make offers of compensation to cooperating buyer brokers through multiple listing services (MLSs).
While the settlement would still allow sellers and listing brokers to set buyer broker commissions outside of the MLS, the Department of Justice has signaled that it wants to see commissions “decoupled” — meaning buyers would negotiate pay directly with their brokers.
“But now there’s more states like New York, for example, that are saying sellers are going to pay the buyer agent commission, not listing brokers. Yay,” Lamacchia said sarcastically. “Does everyone feel safer now?”
If commissions are decoupled, the big question that has yet to be answered is whether regulators will explicitly allow buyers to finance their agent’s commission into their mortgage.
One reason for limiting concessions by sellers and other interested parties is to protect lenders (and investors in mortgage-backed securities that fund most loans) who are at greater risk when homebuyers borrow more than a home is worth.
When buyers have some equity in their homes, they’re less likely to end up in foreclosure. And if lenders do have to foreclose on a home, they lose money if it sells for less than what they’re owed.
That’s why it’s unlikely — and would not be in consumers’ best interest — that buyers will be allowed to finance their commissions into their mortgage, a spokesperson for the Mortgage Bankers Association told Inman in a statement.
“Currently, Fannie Mae, Freddie Mac and FHA do not allow commissions to be added to the balance of the mortgage, so buyers wouldn’t be able to add that cost to their mortgage and would have to pay their own agent’s commission (if a seller declined),” the MBA said.
“Investors will only lend against the asset they can take back and sell in a foreclosure. In other words, an investor would not be able to take back and sell a commission, which is why financing commissions is unlikely and really not best for a consumer,” especially one putting down little or no downpayment, as is the case with many VA buyers, the MBA said.
But many argue that commissions are already “baked in” to asking prices because sellers adjust their asking price knowing that they’ll pay 4 percent, 5 percent or 6 percent of the proceeds to the listing broker.
That’s the view of Stephen Brobeck, a senior fellow at the Consumer Federation of America.
“Economists and other experts agree that buyer agent commissions are now included in list prices,” Brobeck previously told Inman. “If the commissions are removed so that buyers can negotiate them before they are financed, lender (and) investor risk should, if anything, diminish.”
Brokeck said one proposal that merits “serious consideration” would be to allow Fannie, Freddie and FHA to guarantee loans that slightly exceed a home’s appraised value — as long as the excess funds are used exclusively to pay non-recurring closing costs such as agent commissions.
But until the new rules governing agent commissions are finalized, it may be difficult for regulators — and lawmakers, if legislation is required — to agree on how mortgage lending should adapt.
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