“Being uninsured poses a potential threat not only to individual homeowners but also to communities and our national housing stock,” CFA explains in EXPOSED: A Report on 1.6 Trillion Dollars of Uninsured American Homes. “Being uninsured can foster deeper economic precarity for millions of homeowners across the country, especially those with lower incomes, and it is an important contributor to racial inequality. Inequalities in who has homeowners insurance will likely widen the long-standing racial wealth gap, as uninsurance disproportionately impacts Hispanic, Black, and Native American homeowners. Over time, insurance access is likely to become a key decider of who can fully reap the benefits of homeownership, including maintaining their home and building wealth.”

Using data from the American Housing Survey and American Community Survey, CFA found:

• One in thirteen American homeowners are uninsured—approximately 7.4% – living in about 6.1 million homes.
• Homeowners earning under $50,000 per year are twice as likely to lack insurance compared to homeowners in general. Among lower-income homeowners, 15% are without coverage.
• Certain demographics of homeowners are disproportionately at risk. 22% of Native American homeowners, 14% of Hispanic homeowners, and 11% of Black homeowners have no insurance.
• 35% of owners of manufactured homes and 29% of homeowners who inherited their homes lack coverage.
• Rural homeowners, those living in the metropolitan areas of Houston and Miami, and in Mississippi, New Mexico, and Louisiana are most likely to not have homeowners insurance.
• In 2021, an estimated $1.6 trillion in property value of homes lacked coverage. This includes $339 billion of uninsured Hispanic-owned homes and $206 billion of uninsured Black-owned homes.

“Many consumers are struggling to afford rising premiums and must go without homeowners insurance,” said Sharon Cornelissen, PhD, CFA’s Director of Housing and co-author of the report. “That puts them at risk of losing everything. One storm or wildfire means they have to go into deep financial debt to repair their home, live with unsafe and inadequate housing, or even become homeless.”

The report concludes with the following recommendations:

• State insurance regulators should collect more data to track homeowners insurance gaps and inequalities in insurance markets. Despite decades of proposals, regulators have consistently failed to collect granular and timely data needed for research, and so information and analysis about homeowners insurance is in its infancy.
• Problems in the homeowners insurance market pose a systemic threat to housing markets, and solving them will require extensive investments in mitigation. States and the federal government need to substantially increase investments in community risk reduction, home fortification and loss mitigation, and develop strategies to reduce insurers’ overreliance on unregulated, global reinsurance.
• Regulators should collect more information about racial homeowner insurance gaps. Historical work about racial discrimination in insurance markets has demonstrated the broad incidence of insurance “redlining,” similar to the denial of mortgages in Black and Hispanic communities. Insurance companies have not been held accountable for this; more research should be done and regulators should use existing Fair Housing laws to investigate these gaps, and if needed, to correct them.

“Insurance is an essential part of homeownership, financial security, and community resilience. When millions of American families simply cannot find or cannot afford insurance coverage for their home, we are all exposed,” said Douglas Heller, CFA’s Director of Insurance. “Not only are uninsured families unprotected, but the economic fabric of entire communities is also at risk if significant portions of residents cannot rebuild after a disaster. Our study should be a wake-up call for lawmakers, insurance and housing regulators, and the nation’s emergency management agencies.”

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Today many consumers struggle to afford steeply increased premiums, while others find it difficult to obtain insurance in the private market altogether. Concerns are growing that many American homeowners are forced by financial realities to forego homeowners insurance, sometimes called “going bare.” But going bare puts consumers at risk of accruing significant financial debt to repair their homes, having to live with unsafe and inadequate housing conditions, or moving from homeowner to homeless after disaster strikes.

Based on an analysis of 2021 American Housing Survey data from the US Census Bureau,
this report finds that:

• One in thirteen homeowners across the United States are uninsured (7.4 percent),
equivalent to 6.1 million homeowners.

• Homeowners making under $50,000 a year are twice as likely as the general
population to be uninsured (15 percent).

• Homeowners of color are disproportionally at risk, with an estimated 22 percent
of Native American, 14 percent of Hispanic, and 11 percent of Black homeowners
having no homeowners insurance.

• Over one third (35 percent) of owners of manufactured homes, as well as 29 percent
of those who have inherited their homes, have no homeowners insurance.

• Homeowners living in rural areas and those living in the metropolitan areas of Miami
and Houston are most likely to not have homeowners insurance.

• Even with conservative estimates, an estimated $1.6 trillion in property value of
uninsured homes was at risk in 2021: this includes $339 billion of uninsured Hispanic owned homes and $206 billion of uninsured Black-owned homes.

We conclude by offering research and policy recommendations:

1. More data are needed to track insurance gaps and pre-existing and emerging
inequalities in insurance markets.

2. The precarity of the homeowners insurance market poses a systemic risk to our
nation’s housing markets. Fixing this will require both investing in risk reduction and
reducing insurers’ overreliance on unregulated reinsurance.

3. Unavailable and unaffordable homeowners insurance continue to impact the racial
wealth and homeownership gaps. We need more research that examines racial
discrimination in insurance markets

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The nonprofit, nonpartisan consumer organizations issued the following statements:

Birny Birnbaum, Executive Director of the Center for Economic Justice, said:

 “Reforming the title insurance industry is an essential component of addressing home buying and homeownership affordability.  Iowa is the only state that has created a low-cost alternative to title insurance.  While a few states have made some efforts to address the anti-competitive practices in title insurance, state insurance regulators have failed to rein in excessive title insurance premiums.  We’re hopeful that these new federal initiatives will jump start action at both the federal and state level.”

Douglas Heller, Director of Insurance for Consumer Federation of America said:

 “The title insurance market has been broken for decades, and homeowners and new homebuyers have paid the price. At the moment when consumers are finalizing a consequential financial decisions – buying or refinancing a home – they are forced to purchase title insurance to protect the lender in a market built on kickbacks to the agents who direct consumers toward an overpriced title insurance policy. The insurance industry and the agents who steer consumers to these insurance companies have lobbied relentlessly to block reforms that would create substantial savings for consumers, so we are very encouraged that the President is shining a light on this broken system.”

Sharon Cornelissen, CFA’s Director of Housing said:

 “It is encouraging to see the White House look at potential reforms of the title insurance industry. Unnecessarily expensive title insurance has added to the upfront costs of buying a home, creating barriers for first-time homebuyers. Excessive costs like this have no place in a housing market that is facing its worst affordability crisis in decades.”

As a background on problems in the title insurance market, the consumer groups highlight CFA’s 2013 testimony to the New York Department of Financial Services and Birny Birnbaum’s 2005 Analysis of Competition in the California Title Insurance and Escrow Industry.

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The report for the third quarter of 2023 provides a simplified presentation of key data points for easy reference, and an overview of the FHLB financial drivers, including:

• A simple business model with one primary line of business (advances).
• Record profits in 2023 driven by higher interest rates and the earnings from the investment of capital.
• Operating costs that may seem efficient, but should be better explained for a business with fewer than 7,000 customers.

The Need for Enhanced Periodic Reporting for Policymakers and the General Public

The FHFA already provides regular reporting on some aspects of the FHLBank System, such as an annual report to Congress. Their recent report, FHLBank System at 100: Focusing on the Future, calls for enhanced reporting. The CFR applauds this recommendation and calls on FHFA to go even farther with the reforms. FHFA could improve FHLB transparency by providing quarterly reporting on each of the Banks and the System as well as making this data easily available to any user.

For comparative purposes, insured depository institutions must file quarterly Call Reports with the FDIC.  FDIC provides detailed reporting on these numbers each quarter through the publication of the Quarterly Banking Profile. The reports are available to the general public for download and further analysis. Additionally, each FHLBank files periodic disclosures to the SEC. Anyone interested in a more comprehensive disclosure must go through the filings individually to compile basic performance information or a comparative analysis within the system. Because each FHLBank takes a somewhat different approach to its disclosures, it is challenging to assess the entire system.

Going forward, the CFR will focus on building an analytical foundation based on key information about the System, all taken from publicly available documents. The CFR will update the data and analysis on a quarterly basis. This work will be posted on the CFR website, helping the general public, media and advocates to hold each FHLB accountable.

Please contact Katie McCann at kmccann@consumerfed.org with all inquiries.

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Join us to learn about Federal Home Loan Bank reform, and how you and your organization can help!

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What are FHLBanks?

Today, the FHLBank system comprises a system of 11 regional banks that together manage over $1.2 trillion in debt obligations of just over 6,500 members, who include commercial banks, credit unions, and insurance companies. The FHLBanks function as a kind of “bank for banks,” as they give members access to cheap liquidity sources (in the form of discounted loans called “advances”). Their government-sponsored status allows FHLBanks to borrow at near-Treasury rates in the capital markets and pass on that discount to their members. While FHLBank leadership likes to compare their banking system to private sector financial institutions, the FHLBank system is very different in that it is a government-sponsored enterprise (GSE). As such, it receives sizable direct and indirect public subsidies in exchange for fulfilling a public function. The estimated value of this subsidy ranges between $4.7 billion and $6.4 billion dollars a year, as cited in the FHFA report: the bulk of this public subsidy comes from the value of the implicit government guarantee in capital markets, while the FHLBanks also enjoy exemptions from local, State, and federal taxes.

The Evolving Role of FHLBanks in Housing

Despite being founded on a public mission to support housing and receiving sizable public subsidies, the FHLB system has strayed from this founding mission over time. FHLBanks have moved away from helping Americans get housed, to providing liquidity to members without conditions. The FHLBank members and the FHLBanks are enjoying strong profits with little risk, since their advances are covered by collateral and a super senior lien on their members’ assets. But the system is doing relatively little to alleviate our tight housing markets today.

How did this happen? Its membership has significantly evolved. While early members were predominantly savings and loan associations (thrifts) and insurance companies active in the mortgage market, 1989 reform of the FHLBank system opened up membership to commercial banks and credit unions that financed mortgages. But at the same time, housing finance including its main players and sources of mortgage liquidity have significantly evolved – even just over the last decade. Today Fannie Mae, Freddie Mac, and Ginnie Mae dominate the mortgage securitization market and in doing so help inject significant liquidity in the mortgage market. Meanwhile, commercial banks – who are the main users of discounted advances within the FHLB system,  using 58 percent of all advances in 2022 – have largely moved away from the mortgage business over the last decade. As a result, liquidity use by FHLBank members, while supporting members’ profitability, has become disconnected from a focus on addressing unmet housing credit needs.

Key Housing Recommendations in the FHFA Report

The FHFA report offers key recommendations to help the FHLBank system live up to its founding public mission of supporting affordable housing and community development. These reforms would help this system meet the evolved needs and challenges of today’s housing markets. The four most promising reform recommendations to support affordable housing include:

• Issuing a regulation to clearly define the FHLBanks’ mission and mission-consistent activity. This includes linking FHLBank liquidity and housing.
• Helping expand the usefulness and accessibility of FHLBank advances and other services (such as secondary market access) for small community banks, credit unions, and CDFI’s. This includes critically reviewing the highest costs of advances for small CDFI’s, addressing membership barriers, and making sure services are accessible to these smaller institutions. Mission-driven advances and secondary market access can support affordable housing construction and non-traditional mortgage products (such as small-dollar mortgages and Special Purpose Credit Programs).
• A recommendation to Congress to double the required minimum funding for Affordable Housing Programs (AHP). Currently FHLBanks are required to devote at least 10 percent of their annual net earnings to AHP, which often support low-income housing construction. Ten percent is only a drop in the bucket relative to America’s housing needs, though, and relative to the public subsidies and advantages that FHLBanks receive as a GSE. Of note is also that in 2021, only 10 percent went to AHP, while over fifty percent of annual earnings were paid out to member institutions as dividends.
• Ensuring on an ongoing basis that FHLBank members adequately support housing and community development activities (rather than only assessing whether they meet a 10 percent threshold when they become members).

The Consumer Federation of America supports reforms that seek to reconnect FHLBanks back to their founding mission and use their powerful tools to help alleviate housing supply shortages, mortgage unaffordability, and persistent racial inequalities in housing across the country.  CFA Senior Fellow Barry Zigas participated in the first Roundtable convened by FHFA in November, 2022, and some of his recommendations, as well as those of many others who participated in FHFA’s extensive public hearings and outreach, are reflected in this new report.  As a member of the new Coalition for Federal Home Loan Bank Reform, we will publish more blogs that help illuminate potentials for reform from a consumer point of view.

The post Reforming the Federal Home Loan Bank System Can Help Address Our Affordable Housing Crisis: A Reaction to the New FHFA Report appeared first on Consumer Federation of America.

CFR founding members made the following remarks:

Don Layton, former CEO of Freddie Mac: “The FHLBank system, in nearly a century of changing markets, has moved far away from its original public policy purpose. In particular, the large subsidy it receives from the taxpayers goes far too much to big banks, rather than the community institutions the FHLBanks were historically intended to serve.”

The Reverend Luis Cortes, Co-founder and President of Esperanza, Inc., a nonprofit CDC serving the low-income minority community of Hunting Park in North Philadelphia: “FHFA Director Sandra Thompson’s leadership initiating the first-ever comprehensive review of the FHLBanks’ mission is timely. In 1932, homeless families lived in shanty towns that became known as Hoovervilles. FHLBanks were established to create liquidity for housing. That statutory mission has become an after-thought to address that crisis. 90 years later Hoovervilles are arising again with the homeless living in cars, in tents and worse. This rental housing crisis will not wait to ruin lives, disrupt families, and weaken low-income minority communities across the country. We need reform now.”

Sharon Cornelissen, Director of Housing, Consumer Federation of America (CFA): “We applaud the FHFA for publishing this timely report examining how the FHLBank system can be reformed to better fulfill its public mission of supporting affordable housing. We believe reform is especially crucial seeing today’s housing crisis, where millions of Americans are priced out from buying their first home, and Black and Hispanic families continue to own homes at much lower rates than white families. The FHLBank system can do so much more to address these dire needs.”

Michael Stegman, former Treasury and White House senior housing finance policy advisor: “Congratulations to FHFA Director Thompson for starting the journey to comprehensive housing finance reform by returning the FHLBank system to its historical mission of providing liquidity to its member institutions for the sole purpose of expanding the supply of affordable mortgage credit for American families.”

Bruce Morrison, Chairman, Morrison Public Affairs Group, former Chairman, Federal Housing Finance Board, former Member of Congress: “The FHLBs need a reformed mission focus. Their products should promote equitable access to affordable housing and community development. Most of what they do now does not meet that test.”

The Coalition for Federal Home Loan Bank Reform is a non-partisan organization that brings together a wide variety of stakeholders to discuss, educate and shape reform of the FHLB system. Organizational affiliations are for identification purposes only.

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This includes:

• Eliminating the loophole that allows services to avoid mandatory meetings if they do not have a branch office within 200 miles (a ruling that needs modernization considering the growing role of independent mortgage banks (IMBs) in government-lending in particular).
• Providing additional guidance on the procedural standards around how to schedule the meeting, offer borrowers’ sufficient notice, and provide inclusive language access.
• Implementing sufficient quality control, to ensure servicers indeed follow this updated ruling.

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The comment letter offers recommendations on how to improve guidance for financial institutions, including their shared responsibility in monitoring potential Fair Housing violations. The letter also offers insights on ways to best educate consumers, to make sure they pay attention to potential evidence of bias or unfair treatment, are aware of their rights to request a Reconsideration of Value, and have an accessible way to submit such a request through their financial institution.

The post CFA Joins Advocacy Groups in Fighting Appraisal Bias by Recommending Improved Guidance for Consumers’ Rights to Request a “Reconsideration of Value” appeared first on Consumer Federation of America.

Life Hack for Saving Time: Pass the FTC’s Auto Dealer Rule

Department of Labor ERISA Council Must Protect Retirees and Workers Pensions

CFA Report Shows That Real Estate Agent Glut Harms Both Industry and Consumers

Tips for Saving Money on Your Auto Insurance

By: Michael Delong, Research and Advocacy Associate

Auto insurance is an interesting product: we are all required to have it if we own a car, but we hope never to have to use it, and we try not to think about it. But as insurance premiums continue to skyrocket, it has probably been on your mind more.  Even though we can face stiff penalties for driving without insurance, many drivers struggle to keep up with the rate increases.  In addition to the price pain, the insurance product itself can be kind of bewildering:  what are all these different “coverages,” which do I need, and (of course) why do they cost so much?

Consumer Federation of America (CFA) and America Saves are here to help. At its most basic, auto insurance covers damage or injury you cause to another car or person while you are driving.  Depending upon your state and the coverage you choose, your insurance policy may also cover your medical bills or damage to your car when you cause a crash, when you are hit by an uninsured driver, or when your car is stolen or crushed by a tree branch.

Every state except New Hampshire requires drivers to have auto insurance—and New Hampshire still requires financial responsibility if you cause an accident, so the overwhelming majority of people there have auto insurance. If you do not have auto insurance, you are breaking the law. And if you are caught you may be fined, have your license suspended and have to pay a fee to recover it, and possibly even face jail time.

Over the next several weeks CFA and America Saves are partnering on a series of articles on auto insurance—how to save money, what consumers should know, and several myths about auto insurance. Please note that these tips are general in nature and may not reflect every reader’s personal needs and situation; you should consult financial advisors and insurance professionals as you make decisions.

You can save money on your auto insurance with these tips:

1. Shop around—and shop around using multiple options. Auto insurers use a variety of driving and non-driving socio-economic rating factors to set your premiums. Driving-related factors include your driver safety record, the number of miles driven, and whether you have been in any accidents or filed any claims. Non-driving related factors include your gender and marital status, your credit score, your education level, your job or occupation, whether and how much insurance you’ve had in the past, and whether you own a home or rent. Insurers also place a lot of emphasis on where you live, often based on your ZIP code and even on which block you live in your neighborhood.

Each auto insurer calculates these factors and their impact on your premium in different ways – some rely heavily on your credit history and never consider your job title or educational history, while others may weigh several aspects of socio-economic status when calculating your premium. It is well worth your time to sit down and get quotes from different insurance companies. If one company charges you $120 per month and you find another company that only charges you $90 per month, that $30 savings per month will add up to $360 saved per year.

Consumers can compare quotes in several different ways:

• Online: You can go to different auto insurer websites, fill out your information, and get the quotes, and you can use comparison websites such as the Zebra, Bankrate, or ValuePenguin. These websites enable you to compare a few quotes more quickly and easily. It is important to note that these companies do not scan the whole market for you, and they get paid by insurance companies.
• Through an agency. You can contact licensed insurance agents to get additional quotes and guidance about insurance generally. There are some agents – known as “exclusive” or “captive” agents who only sell one insurance brand and may have deep knowledge about the offerings of their company. Others, known as “independent” agents and brokers, can scan several insurers’ offerings for you, including some that may not be available online.

We recommend that people shop around through each of these methods to get the best set of options and find the best price.  One note, some insurance sellers, known as “brokers” may charge an additional “broker fee” if you work with them. Unless you have a particularly unique situation – such as a very bad driving record or a very expensive or custom vehicle – we recommend against purchasing auto insurance from brokers who charge a fee.

     2. Consider whether you still need comprehensive and collision coverage. These options on an insurance policy will pay to repair or replace your car if it is damaged by you (such as accidentally crashing into a pole while parking), some natural event like a falling tree branch, or if it is stolen. If you have a car loan or lease your vehicle, these coverages are required, but if you own your car outright, they are optional. “Comp and Collision” are particularly helpful if your car value is still pretty high, but if your car is not worth much anymore, it may be time to consider dropping Comp and Collision. Since these coverages usually come with a deductible – typically $500 – that you have to pay first before any insurance payments kicks in, it may be better to try and set aside a little money each month just in case you damage the vehicle, rather than pay hundreds of dollars in premiums each year for a car worth only a few thousand dollars. As a thumbnail rule, if your car value is less than ten times what you pay for Comp and Collision, you might consider dropping it. That is, if your car is worth $10,000, it might not be worth it to spend more than $1,000 a year on Comp and Collision; if it’s only worth $3,000, think twice about a policy costing more than $300 for those coverages.

     3. Check your credit score for errors and try to improve it as well. We hate to make this recommendation, because it is ridiculous that this should impact your insurance premium. But, until politicians stand up to insurance companies and stop this practice (it is already prohibited in California, Hawaii, and Massachusetts), it is one of the biggest drivers of your auto insurance premium. Our research indicates that consumers with a perfect driving record and poor credit scores pay on average at least twice as much for auto insurance compared to consumers with a poor driving record and excellent credit scores.

The first thing you can do is examine your credit report for errors, which are unfortunately quite common, and demand that any errors be corrected. You can get a copy of your credit report at this link. If you find errors, contact your insurer and demand that they re-run your “credit-based insurance score,” re-price your policy if appropriate, and refund any excess they charged by using a faulty score. Over time, you can work on improving your credit score by following the credit score improvement strategies described here.

CFA is fighting to ban auto insurers from charging consumers more based on their credit; if you are interested in learning more or getting involved, email us at mdelong@consumerfed.org.

     4. Make sure your insurer knows how much you drive. Many companies charge lower prices to low-mileage drivers. If you are driving less (because you are working from home, out-of-work, or retired) than you used to, you may be paying more than you should. Find out how many annual miles the insurer is estimating for you when they set your premium and correct them if they are rating you based on out-of-date information.

     5. Improve your driving by taking a driving improvement course. Auto insurance companies charge far higher premiums if they believe you are a risky driver, since that increases the chances of your being in a crash and the insurance company having to pay a claim. If your driving record is checkered or you would like to save on your insurance, some auto insurers will offer you a discount if you take a defensive driving course. Check with your insurance company or agent to see if you qualify for a discount if you take this course, some of which can even be taken online.

     6. Pay your auto insurance premium in full instead of monthly. If you’re struggling to cover the cost of insurance, then you are probably paying in installments. It may be hard to imagine paying it all at once, but it’s worth calling your company and asking how much you would save if you did. With some companies it can be 5-8% or even as much as 12%. If you are on a six-month policy (where the pay-in-full amount is much less than an annual policy), and you pay a significant installment fee, consider paying all at once.

     7. Look for additional discounts. Many auto insurers offer further discounts if you meet certain conditions. Possible benefits include: discounts for having a paperless policy, a student discount, a discount if your car gets an anti-theft device, an automatic payments discount, or a discount for veterans/members of the military.

Auto insurance is required in most states, and it is also a crucial tool for financial security and economic mobility (as well as actual mobility in most places). Some of the reasons for high prices have to do with unfairness in the marketplace and company greed – CFA is working on improving laws and regulations to better protect consumers from these problems – but being a savvy insurance shopper and consumer can help. We hope that this will help you save on your auto insurance.

Life Hack for Saving Time: Pass the FTC’s Auto Dealer Rule

By: Erin Witte, Director of Consumer Protection

The Federal Trade Commission sells its Motor Vehicle Dealer Rule short when it estimates that consumers will only save $30 billion over ten years. The $30 billion number is the dollar equivalent of the time savings (on average: 3 hours per transaction) for consumers because the rule would prohibit dealers from advertising deals that are not available, and from wasting consumers’ time by making them call or physically go to a dealership to haggle over the price of the car. It is hard to imagine that anyone will be unhappy about having to spend less time at a car dealership – $30 billion is just icing on the cake.

But time savings, significant as they are, are only one small fraction of the ways consumers would save money with this rule. Dealers would not be able to sell worthless add-on products or deceive consumers into buying them. If the FTC’s cases against Passport and Napleton are any indicator, the cost savings here will well exceed the $30 billion estimate. Napleton alone allegedly charged over $70 million in deceptive and unauthorized add-ons. With over 45,000 dealers in the U.S. generating hundreds of thousands of complaints to government regulators, it is safe to assume that Napleton and Passport are not simply “bad apples.” Implementing safeguards to help prevent these and other deplorable practices will only put more money back in consumers’ pockets, stimulate competition, and make the process of buying a car slightly less painful.

Enter the lobbying powerhouse National Automobile Dealers Association (NADA), smelling blood in the water for dealers’ substantial profits, and predictably dipping into its well-funded coffers to generate a fearmongering survey and report about the FTC’s rule. Before asking a single question, the survey spends three pages striking fear in the hearts of dealers about expanded liability, exposure to significant monetary penalties, and “increase[d] consumer confusion and frustration.” It is no surprise that this “representative sample” of 40 dealers (out of “roughly 60,” handpicked by NADA) who managed to fully complete the survey (and “nearly fifteen” who were interviewed) want us to believe that the rule will cost consumers more than it saves. This simply is not true.

Perhaps it’s time we asked the people who rely on and pay increasingly high amounts for cars what they would like to see. Thousands of consumers responded to the FTC’s rulemaking, sharing horror stories and pleading for its passage. The least we can give them is a measly 3 hours and $30 billion back.

Department of Labor ERISA Council Must Protect Retirees and Workers Pensions

By: Micah Hauptman, Director of Investor Protection

On July 18^th, CFA’s Director of Investor Protection Micah Hauptman testified before the Department of Labor’s Advisory Council on Employee Welfare and Pension Benefit Plans, known as the ERISA Advisory Council. The purpose of the hearing was to help the Department determine whether it should update its longstanding guidance for pension plan fiduciaries in order to ensure that their decisions to transfer worker and retiree pensions to annuity providers are in the sole interests of workers and retirees.

Hauptman stated that in recent years many of the largest companies in the U.S. have transferred their pension obligations to insurance companies that provide annuities to workers and retirees. When companies do this, they shift risks onto insurance companies that, if not carefully controlled for, could undermine insurance companies’ abilities to fully pay those annuities to workers and retirees.

At the same time, insurance companies’ business models are evolving in ways that may increase risks for insurers, Hauptman stated. For example, private equity firms have become increasingly involved in insurance markets, introducing new sources of risk, complexity, and opacity to insurers’ businesses — risks that may undermine insurance companies’ ability to pay annuities to workers and retirees.

While state-based insurance guarantees may offer a partial backstop against the risk that insurance companies may not pay their annuity obligations, those guarantees are not as robust as the insurance guarantees that are provided under federal law by the Pension Benefit Guaranty Corporation (PBGC), Hauptman stated. Thus, the workers and retirees whose pensions are transferred to annuities are at risk of losing valuable benefits if the insurance company providing their annuity were to fail.

Given these heightened risks to workers and retirees arising from pension risk transfers to annuity providers, Hauptman urged the Department to preserve the protections in the current guidance for pension plan fiduciaries and offered several suggestions for the Department to consider to strengthen the guidance so as to ensure that any pension risk transfer arrangements do not leave workers or retirees worse off than they would be if they stayed in the defined benefit pension.  These included:

• Preserving the requirement for fiduciaries to select the safest annuity available;
• Requiring fiduciaries to select annuities that are independently reinsured; and
• Not permitting fiduciaries to satisfy their obligations by providing disclosures about the risks associated with the transfer or by accepting written representations by an insurance company that it is complying with state insurance laws.

Hauptman reminded the Department that workers and retirees have earned their pensions and depend on them for a secure retirement. Accordingly, the Department must ensure that those benefits and the protections afforded to workers and retirees are not compromised.

CFA Report Shows That Real Estate Agent Glut Harms Both Industry and Consumers

Earlier this month CFA released a new report – “A Surfeit of Real Estate Agents: Industry and Consumer Impacts” – revealing with industry data that there are too many residential real estate agents compared to the amount of homes available for sale. The report also found that this imbalance burdens consumers with higher commission costs and leaves them vulnerable to inexperienced real estate agents.

There are more than 1.5 million residential agents who belong to the National Association of Realtors and compete for home sales, with costs totaling between $5 to $6 million annually. The costs include:

• economic inefficiencies including an inordinate time spent by agents finding clients,
• relatively low incomes of many full-time agents,
• frustration by these agents and by many consumers who must deal with inexperienced agents,
• reinforcement of relatively high and uniform commission rates, and
• damage to the reputation of the industry.

“A large majority of practicing real estate agents have recently received their license or work part-time,” said Stephen Brobeck, a senior fellow at CFA and author of the report. “These agents usually charge the same commission rates as experienced, full-time agents yet in general offer worse service and deprive experienced agents of needed clients.”

Marginal agents with fewer than five sales a year receive an estimated 25-30 percent of commission income. The report found that the median net income of all sales agents was approximately $25,000, and the median net income of sales agents with less than two years of experience was $7,800. For all brokers and associate brokers, the net median income was $57,100.

“Without 5-6 percent commission rates, even fewer agents would survive financially in today’s marketplace,” said Brobeck.  “Ironically, relatively high rates attract new entrants into the industry, increasing competition for clients and reducing individual income for all.”

A future CFA report will explore the ease with which people can obtain a real estate license compared to the difficulty for most licensees to learn how to succeed as realtors.

“To protect consumers and experienced realtors, the industry should discourage unqualified and insufficiently committed people from obtaining a license,” said Brobeck. “The industry should prioritize making it easier for capable, hard-working licensees to succeed. We look forward to expanding on this suggestion in a future report.”

The post CFAnews Update – July 27, 2023 appeared first on Consumer Federation of America.

Those costs include:

• economic inefficiencies including an inordinate time spent by agents finding clients,
• relatively low incomes of many full-time agents,
• frustration by these agents and by many consumers who must deal with inexperienced agents,
• reinforcement of relatively high and uniform commission rates, and
• damage to the reputation of the industry.

“A large majority of practicing real estate agents have recently received their license or work part-time,” said Stephen Brobeck, a senior fellow at CFA. “These agents usually charge the same commission rates as experienced, full-time agents yet in general offer worse service and deprive experienced agents of needed clients.”

In examining home sales in three cities– Jacksonville (FL), Minneapolis (MN), and Albuquerque (NM) — the study found that marginal agents (with five or fewer sales a year) received an estimated 25-30 percent of commission income.  According to data collected by the industry from Realtors in 2021:

• the median net income of all sales agents was $25,000,
• the median net income of sales agents with less than two years experience was $7,800, and,
• the median net income of all brokers and associate brokers was $57,100.

The report documents complaints by many experienced, full-time agents of the incompetence and/or inattention of other agents that also harm consumers.  And it emphasizes that because of the “surfeit of agents,” real estate agents and brokers feel financial and/or peer pressure to keep commission rates relatively high.

“Without 5-6 percent rates, even fewer agents would survive financially in today’s marketplace,” said Brobeck.  “Ironically, relatively high rates attract new entrants into the industry, increasing competition for clients and reducing individual income for all.”

The report raises the question of whether the industry should make greater efforts to ensure the competence and commitment of new agents.  Such efforts could include more stringent entry requirements and required mentoring of new agents.  A future CFA report will address in depth these two issues.

The post Too Many Real Estate Agents For Too Few Home Sales: New CFA Report Documents the Costs to Industry and to Consumers appeared first on Consumer Federation of America.

This escalating unaffordability affects the long-term opportunities of virtually everyone who doesn’t own a home, and the children of those who do. Some pressures making it so hard for families to buy homes are familiar: increasing household formation, higher interest rates, restrictive local zoning codes, rising building costs.

But recently a new factor is accelerating the problem — massive purchases of single-family homes by larger investors. In Texas, for example, major institutional investors bought 28% of the single-family homes sold in 2021. Nationally, institutional investors are buying over 13% of homes, and that share is increasing. The share of homes being bought by families has dropped from 83% to 72% in the last three years, while the share by investors owning more than 100 properties has more than doubled.

More important still, institutional investors are overwhelmingly purchasing entry-level homes, averaging 26% below the median state sales price. This greatly reduces the inventory of the homes that first-time buyers would normally seek.

Black Knight’s national analysis shows too that institutional purchases are highly concentrated in areas with minority families, limiting their ability to become homeowners. While institutional purchases are only one of the factors (albeit the new one) driving unaffordability nationally, their impact is especially intense in these neighborhoods.

These investors aren’t paying more for homes than families, but their all-cash, as-is, bulk purchases swoop up much of the inventory out of the hands of aspiring homeowners. Significantly reducing the number of entry-level homes that families are competing to buy inevitably forces them to bid up the share of disposable income they have to pay.

The impacts are felt by renters as well as potential buyers. With fewer families able to become homeowners, they remain in the rental market instead, pushing up the rents that landlords can charge in general. The largest owner of rental homes raised rents 12% last year and sees the potential to keep boosting rents to a higher percentage of tenants’ disposable income. This cycle feeds itself as families — desperate to escape higher rents — stretch even further to buy the limited inventory of homes available to them.

This feedback loop explains why surging institutional purchases can’t be dismissed as simply shifting stock from ownership to rental — and thus having no overall impact on affordability, even if they limit opportunities for homeownership. The impact of these purchases on available inventory is what matters.

Dramatically reducing the relatively small number of units for sale to homebuyers at any one time increases the prices of those that remain. Shifting those homes to rentals has little impact on the nine times greater stock of units available for rent each year. Obstacles to homeownership drive unaffordability for buyers and renters.

This kind of big money first began washing over the single-family home market more than a decade ago. But that spate of money has now become a flood, and is only expanding as major investors eye rental single-family homes as a hedge against inflation.

The White House itself in May 2022 highlighted how “Large investor purchases of single-family homes drive up home prices for lower-cost starter homes, making it harder for aspiring first-time and first-generation home buyers, among others, to access wealth-building opportunities from homeownership.”

This is not just a problem for individual families, including many Black, Hispanic and other families of color. Widespread opportunities for middle-class homeownership has long been foundational to American society, and ownership has been key to the stability of neighborhoods.

It is natural for investors to want to capitalize on an opportunity. But government subsidies are helping institutional investors beat out aspiring families — making the American Dream less attainable, rather than more.

Tax policy today enables these investors to deduct the full cost of interest on an unlimited amount of funds they borrow to acquire single family homes. This lowers their funding costs, encourages leveraging private equity with debt and substantially increases such investors’ after-tax rate of return.

But what if these same tax subsidies were redirected toward encouraging major investors not to buy up tens of thousands of existing single-family homes to rent out long term but to re-sell them to families??

A simple change would limit the amount of deductible interest on debt used to acquire existing single-family homes. Setting a cap at $75 million of such debt — 100 times the limit available to any owner-occupant — or a similar level, would have no impact on mom-and-pop landlords and small aggregators operating at the local level, who have long been active in owning single-family homes.

But it would at once raise the effective costs to major investors who are changing the market.

This same tax change could allow these lost deductions to be carried forward and utilized when homes are sold to owner occupants. Major investors would thus recover these tax benefits, including those who play an important role in buying and fixing up deteriorated homes and selling them to families, and in lease-to-purchase programs. Moreover, there would be no cap on investors building new rental homes, which add to the housing supply.

This tailored tax change would thus shift government’s role from encouraging Wall Street to own and rent vast swathes of single-family homes to instead encouraging home ownership.

Would this change be enough to totally stop this trend? Probably not. But it could slow it down and make it harder for institutional investors to squeeze out families trying to buy homes thanks to a federal tax subsidy. And it would shift the federal government’s role to encouraging homeownership.

Changing the tax treatment of debt used for housing is nothing new. Congress only recently restricted the amount of mortgage debt on which an individual can deduct interest. It has amended the tax code many times over the years to influence investments into different kinds of rental housing, as well.

American families face plenty of hurdles in buying a home. Unaffordability is already at record levels. They don’t need federal tax policies continuing to making things worse by subsidizing the debt costs of Wall Street housing investment funds.

Gene Slater is chairman and founder of CSG Advisors, a leading national advisor on affordable housing; during the financial crisis, he helped design what became Treasury’s program financing 110,000 first-time homebuyers. 

Barry Zigas is a Senior Fellow at Consumer Federation of America, former SVP for Community Lending at Fannie Mae and former President of the National Low Income Housing Coalition. 

Originally published on HousingWire here.

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CFA estimates that, under the proposal, roughly 12,649,337 descendants of African-American veterans would be eligible for VA-financing and, as a result, able to access homeownership without making a down payment. The paper goes on to explain how the proposed transfer would disproportionately benefit descendants of African-American veterans based on the nation’s history of using racially discriminatory policies to prevent  those veteran borrowers from accessing the VA home loan benefit and, as a result, accumulate the generational wealth needed to assist their descendants in their efforts to buy a home.

“Historically, racially discriminatory polices supported by the federal government deprived many African-American veterans of the ability to buy homes using their VA home-loan benefit. As a result of those barriers, the current down payment requirement for home financing has especially disadvantaged African-American borrowers due to their lack of transferable generational wealth,” said Mitria Wilson-Spotser, CFA’s Director of Housing Policy and author of the report. “This proposal would rectify that challenge by righting a historical wrong that left so many African-American veterans without the ability to purchase homes and accumulate transferable wealth to leave to their families in the first place.”

The report is available here.

Contact: Mitria Wilson Spotser, 202-387-6121 x1019

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1. Don’t Panic. The most important thing you can do right now is not let fear or anxiety cause you to avoid talking to your mortgage servicer. Speaking to your mortgage servicer jumpstarts the process for developing a plan that can help you remain in your home, so its important not to avoid calls. If you haven’t heard from your mortgage servicer, take the initiative to call them and let them know that you want to discuss your options after forbearance.
2. Know Your Options. There are generally 4 ways that you can make up the mortgage payments that were missed during the forbearance period and resume current payments:

a. Repayment Plan. A repayment plan is the right option for you if you can afford to increase your monthly mortgage payments for a while in order to make up the amount that you did not pay during forbearance.

b. Payment Deferral. If you can afford to resume your mortgage payments, but don’t have the money to pay extra in order to catch up the payments missed during forbearance, a payment deferral may be the right option for you. Under payment deferral, the servicer will add the missed payments to the end of your loan term in order to make up the difference.

c. Mortgage Modification. For consumers who cannot afford to resume their mortgage payments at the same amount, you may qualify for a mortgage modification. A modification can reduce your monthly payment to an amount lower than your previous payment so that your mortgage is affordable for you by extending the length of your loan to address any missed payment or reduction.

d. Lump Sum Repayment. A lump sum repayment requires you to pay all of your missed payments back immediately after the forbearance period ends. For the majority of consumers in the United States ,whose home are backed by the federal government, a lump sum repayment is not required in order to remain in your home.

The availability of each option depends upon your specific financial situation and mortgage type. That’s why its so important for you to contact your servicer as soon as possible. By law, your servicer is required to tell you the date when your forbearance period ends and what options are available to you.

3. Get Help. If you still have questions or would like additional help interacting with your mortgage servicer, get help by reaching out to a HUD-Certified Housing Counselor. These counselors are approved and specifically trained by the federal government to help people who are having trouble paying their mortgages. They know the law and your options. And they will help you for free. To find a HUD-certified Housing counselor in your area, click here.

Click Here for Print Friendly Version

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The pandemic laid bare the deep inadequacy of our existing housing support system, especially in California, where a million people are homeless (more than a third of the nation’s unhoused) and more than 5 million households struggle to make rent or pay the mortgage. As have other states, California has had to step up with eviction moratoria and short-term rental aid to keep lower-income families in their homes. The proposed federal aid package is a more rational approach.

The House and Biden administration proposals combine a significant increase in rent subsidies with new investments to build new and protect the existing supply of affordable homes. This is groundbreaking.

Increasing housing funding — particularly direct subsidies that ease crushing financial burdens on low-income renters — is essential, as demonstrated in the Terner Center for Housing Innovation’s 2021 framework titled “Building a Better Ladder of Housing Opportunity in the United States.” Without a larger attack on the fundamental obstacles that prevent the housing supply from expanding and increasing access to high-opportunity neighborhoods, however, we risk merely pumping more money into an already constrained market. This would push up prices further and reinforce historic patterns of racially inequitable development.

The Build Back Better package would make existing programs, such as housing choice vouchers, HOME housing block grant and public housing, more cost-effective.

For instance, the package was to include $4.5 billion to increase housing supply by underwriting efforts by state and local governments to overhaul and reform land use and zoning rules. This would incentivize states and local governments to rewrite or remove the regulatory barriers that have contributed for decades to the acute shortage of housing across the price spectrum. (House negotiators were working on a final bill Sunday.)

Also, $7.5 billion for a new U.S. Housing and Urban Development Department-administered Community Restoration and Revitalization Fund. This would  support community-led projects seeking to stabilize neighborhoods and encourage equitable development. There also is $500 million set aside for community land trusts and shared equity homeownership.

Such discretionary grants and support projects will help overcome the effects of years of housing disinvestment. Coupled with provisions to amend restrictive zoning, this funding could be a powerful tool to reduce housing inequity and increase access to quality homes in good neighborhoods.

The historic $90 billion in renter assistance includes:

— $15 billion for Project Based Rental Assistance to prevent displacement of low-income renters from rapidly gentrifying neighborhoods.

— $500 million for supportive  services to help households that qualify for housing choice vouchers to apply.  Project-based rental subsidies preserve existing homes for extremely low-income residents.

— Housing choice vouchers that could hit the street within 12 months of legislation enactment.

These are exactly the kinds of long-term support programs California desperately needs to leverage the billions of dollars of state funds signed into law earlier this fall. The state funds provide capital to accelerate affordable housing production and convert hotels and commercial buildings to long-term housing for the homeless.

When the political negotiations in Washington focus solely on total numbers, new efforts to underwrite neighborhood housing development and tackle local regulatory obstacles are at risk. Negotiators must not miss the huge opportunity to invest in needed housing. They need to retain the key components of the House and Biden administration proposals. Failing to take an integrated approach to housing needs risks squeezing one part of the economy at the expense of another.

This blog was first published on CalMatters, as an op-ed on October 25, 2021. You can view the original reporting at this link here.

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“This is a critically important move for expanding access to mortgage credit,” said Mitria Wilson-Spotser, Director of Housing Policy for the Consumer Federation of America. “Considering rent will allow more consumers to demonstrate a responsible payment history and, as a result, decrease their risk assessment as part of the home buying process. CFA strongly encourages the agency to adopt the same policy for Fannie Mae’s counterpart, Freddie Mac.”

“Because rent is the single largest monthly payment for many households, timely payment should absolutely be included in underwriting calculations”, said Wilson-Spotser.

The update to Fannie Mae’s underwriting systems is effective immediately. FHFA’s announcement is available here.

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In May of 2021, CFA released a new report by independent researcher Kanav Bhagat entitled, Avoiding COVID-19 Related Foreclosures by Implementing Cost-Effective Mortgage Modifications for Federally-backed Loans, specifically recommending that FHFA drop the loan-to-value ratio restriction to allow borrowers with more equity in their homes the chance to restructure their loans. This will help borrowers weather the economic hardships caused by the pandemic. Under the previous rules, borrowers with more equity in their homes were blocked from seeking payment restructuring.

“The prior rule put borrowers with greater home equity in a tenuous position by forcing them to either sell their homes or risk foreclosure if they were no longer able to afford their existing payments as a result of an economic hardship caused by COVID-19,” said Mitria Wilson-Spotser, Director of Housing Policy at the Consumer Federation of America.“

“Allowing homeowners to receive an interest rate reduction as part of their mortgage modification regardless of their loan-to-value ratio will help families suffering from COVID-19 related financial hardship keep their home. By taking this step, the FHFA and the GSEs will be able to offer more homeowners with a GSE-backed mortgage deeper payment reductions that create affordable monthly payments and avoid foreclosures,” said Kanav Bhagat, author of the paper.

Contact: Mitria Wilson-Spotser, 202-387-6121

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Executive Summary

Full Report

The post Avoiding COVID-19 Related Foreclosures appeared first on Consumer Federation of America.

• Providing temporary payment relief to homeowners facing a financial hardship due to COVID-19 that interferes with the ability to make mortgage payments, regardless of whether the loan is federally-backed;
• Placing a temporary moratorium on foreclosures and similar actions while a homeowner is in forbearance or seeking post-forbearance repayment arrangements;
• Requiring that all homeowners, regardless of mortgage loan type, be offered an opportunity to resume regular payments, or obtain a more affordable payment where needed, after a temporary payment halt and before any foreclosure begins;
• Requiring that homeowners who are at least 60 days late on their mortgage payments be provided an automatic forbearance;
• Ensuring that all homeowners receive notice of their options if they are facing a COVID-19 hardship, including in-language communications for borrowers with limited English proficiency and information about housing counseling;
• Enacting policies that encourage the mortgage industry to offer broad access to safe and affordable credit; and
• Establishing a mortgage assistance fund to help homeowners who need emergency financial assistance to stay in their homes.

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The letter noted that “A single point of entry for consumers specifically focused on housing, integrated into the www.coronavirus.gov platform and prominently displayed on the landing page, could serve as the primary vehicle for the dissemination of up-to-date and accurate information for renters and homeowners.”   It also noted that there was a coordinated effort during the 2008 financial crisis to provide consumer information through a variety of channels, including a toll-free hotline, print, electronic and others.

CFA Senior Fellow Barry Zigas noted that “this broad coalition of groups shows there is widespread agreement that helping consumers reach information through a single point of entry on the government’s primary COVID-19 information website would help millions of consumers trying to get the most accurate and up to date information.

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Our nation’s comprehensive COVID-19 response must include a strong paid sick leave policy and protecting consumers by ensuring affordable access to communications services, preventing utility shutoffs, mortgage foreclosures, student loan defaults, negative credit reporting effects, overpriced insurance, and making sure that airline and hotel customers’ rights are protected in any financial bailout of these industries.

The Consumer Federation of America has identified critical consumer protection issues that must be addressed as part of a comprehensive response to this crisis. Many of these items are focused on protecting those hardest hit by the economic fallout. Doing so is not just a matter of economic justice; it is the best way to stabilize the economy.

CFA and it’s over 250 national, state and local organizations are committed to working with policymakers at all levels to implement a “Comprehensive Consumer Agenda to Address the COVID-19 Crisis”.  For the details behind the following agenda, please see our LINK March 20, 2020 letter to the President and Congress.

A Comprehensive Consumer Agenda to Address COVID-19

1. Create a comprehensive national paid sick leave policy to reduce the spread of the disease. Lack of paid sick leave encourages tens of millions of workers to continue working when they are sick, which can nullify the critically important benefits of social distancing.

2. Protect those hardest hit from economic hardship by:

• Providing forbearance to economically distressed mortgage borrowers. Any homeowner experiencing economic hardship because of the virus must have access to 180 days of forbearance on mortgage payments.
• Halting evictions and foreclosures. There must be a 180 day moratorium on evictions of tenants experiencing economic hardship because of the virus, with support provided to property owners who suffer rental income losses.
• Canceling student loan payments for the duration of the crisis. It is not enough to pause monthly payments, the government must make tax free payments on holder’s behalf so millions of Americans can continue to make progress reducing their student debt as the economy struggles.
• Suspending debt collection. Debt collection activities, including legal proceedings, garnishments, repossessions, and debt selling, must be prohibited during the state of emergency.
• Curtailing high-cost lending schemes: A rate cap of 36% must apply to high-cost credit, such as payday loans, refund anticipation loans, and car title pawns to ensure that vulnerable consumers aren’t trapped by overpriced debt.
• Placing a moratorium on negative credit reporting. To protect consumers’ credit records during the pandemic, there must be, at least, a four month moratorium on negative credit reporting.
• Maintaining consumers’ access to affordable communications services. As remote communications become critically important, service providers must abandon pricing practices that maximize revenues, suspend overcharges for “excess” data usage, terminate service cut-offs, and increase network availability to the public.
• Requiring big data platforms to promote the public interest. Big data platforms must remove misleading information. Their big microphones must promote the public interest, not the corporate bottom lines. Non-commercial pandemic information from public health, safety and governmental entities must be given a prime location on all screens.
• Preventing misleading advertising and price-gouging. Advertisers, and the media carrying ads, must ensure that claims related to the coronavirus are completely accurate. Online marketplaces must reject products and services making misleading claims or that offer basic necessities at unfairly inflated prices.

3. Ensure that consumers’ interests are protected as industries seek federal financial support by:

• Mandating fairness in the skies. Airlines must waive cancelation and change fees for all consumers during the federal state of emergency. As a condition of an airline bailout, Congress must require price transparency, make future fees for cancelations, changing flights, and checking bags proportionate to actual costs, lift state preemption, and provide consumers with private rights of action.
• Accommodate hotel customers. As organizations and individuals heed requests to limit non-essential travel and cancel events, some hotels have continued to charge consumers and organizations. As a condition of a hotel bailout, Congress must require hotels to honor requests for room and event cancelations without penalty and to refund deposits until the federal state of emergency is suspended or travel limit recommendations are lifted. Going forward they must provide full price transparency on charges and extra fees.
• Reduce auto insurance premiums to reflect reduced driving. Insurers should be required to offer discounts to people driving less due to COVID-19.  Miles driven, a key factor in claims costs, will drop dramatically as workers are laid off, switch to telework, or self-isolate. This should be a consumer benefit, not an insurer windfall. See CFA’s letter to Insurance Commissioners.

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The report was based on:

• Study of all 263 agent and broker websites (listed by Google) in four cities.
• Conversations with 200 agents in 20 cities.
• A national survey of over 2,000 representative Americans.
• Review of published research on the subject.

For most major consumer services, it is relatively easy for consumers to access information about prices.  This is not the case for an estimated $100 billion in real estate commissions that are charged home sellers each year. Traditional firms and agents:

• Do not advertise their commissions.
• Do not include information about their commissions on their websites.
• On these websites, rarely mention that commissions are charged.
• In response to general phone inquiries, usually do not provide information about full commission levels during the call.
• In conversations with a prospective home seller, in response to a query about seller costs, usually do not quickly provide information about commission levels (though eventually, nearly all did).

Moreover, the industry restricts the ability of buyers to learn what portion of the commission (“splits”) their buyer agents receive.

“The reluctance of traditional real estate agents and firms to provide information about commission levels helps explain why there is so little price competition in the industry,” noted Stephen Brobeck, a CFA Senior Fellow.  “It also helps explain why most consumers, even recent home buyers and sellers, do not know that nearly all commissions range between five and six percent.”  In a national on-line survey of 2009 representative adult Americans undertaken by Engine Group (formerly ORC International) for CFA, only 32 percent of respondents, and 44 percent of recent home buyers and sellers, knew that a typical commission is five or six percent.

The report also outlines the costs to consumers of this price opaqueness.  In general, agents face little pressure to reduce commissions that represent a relatively large consumer expenditure – usually $15,000 to $18,000 on the sale of a $300,000 home.  Sellers pay this commission but, according to CFA conversations with 200 agents in 20 cities, if the sellers inquire about its level, they are typically informed by listing agents that:

• If the seller offers a commission (“split”) to buyer agents that is below the typical local level (usually 2.5% or 3%), these agents are less likely to show the home.
• Most listing agents (73%) refused to negotiate down their own portion of the commission.

When buyers ask their agents about commissions, they are typically told that the commission is paid by the seller, so buyers do not inquire further.  Moreover, nearly all local Multiple Listing Services (MLSs) restrict buyer access to information about the commission split to the buyer agent.  This lack of information potentially disadvantages buyers in two ways:

• If buyers were able to negotiate down the commission split, sellers would be more willing to lower the sale price of the home (without a loss of net income).
• Buyers who do not have access to information about commission splits are vulnerable to steering by buyer agents away from low-commission properties. This steering has been documented by academic research and was mentioned by a number of agents we interviewed.

The information gathered from the conversations with 200 listing agents supported earlier research that commission levels are highly uniform in most local markets.  A large majority of all the rates quoted by these agents (70%) were for six percent.  Most of the remaining rates quoted (19%) were for five percent.  In local markets, there was even greater rate uniformity.  In five of the 20 areas, all agents quoted a six percent rate.  In ten other areas, seven to nine agents (out of ten) quoted the same rates.

The conversations with listing agents also revealed that only 27 percent said they would be willing to negotiate their rates.  Those agents charging the highest rates in an area were most likely to be willing to negotiate, and vice versa.  A typical response of the industry to inquiries about commission levels is that “they are negotiable.”

The report suggests ways that real estate commissions could become more transparent:

• In initial interviews with listing agents, if more home sellers asked about commission levels and the willingness of agents to negotiate them down.
• In initial interviews with buyer agents, if buyers asked about commission splits and whether they would be shown homes with relatively low splits.
• Consumer groups, journalists, and other third parties provided more information locally about commission levels and their negotiability.
• The U.S. Department of Justice continues to investigate the lack of price competition related to commission splits and then requires remedial action.
• Other MLSs join the Pacific Northwest MLS in permitting brokers to make available to home buyers commission splits offered on individual properties.

“The industry is beginning to feel more pressure from litigators and regulators to increase price competition,” noted CFA’s Brobeck.  “We believe that more visible pricing would not only lower costs for consumers but also increase consumer confidence in agents who play a critical role in most home sales,” he added.

Contact: Stephen Brobeck, sbrobeck@consumerfed.org

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