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The National Association of Realtors (NAR) announced Friday that it finally reached a settlement with homeowner groups that had been embroiled in lawsuits with the association since 2019. The $418 million settlement effectively ends the current NAR broker commission model, which the homeowners’ claimants alleged forced them to pay excessive commission fees. 

If a federal court approves the landmark case’s outcome, as expected, it could give the housing market its biggest shake-up yet. The commission rule changes the NAR has agreed to could restructure the entire process of buying and selling real estate and could also deliver potential home price declines across the country. 

Here are the changes at a glance and what they could mean for investors and agents alike.

The End of the 6% Commission-Sharing Structure

The most sweeping change introduced by the settlement is the elimination of the current NAR commission-sharing structure. 

Here’s how it’s always worked: Real estate agents who are Realtors are required to offer a share of commission with the buyer’s agent in a transaction, if present. Given the NAR’s dominance on agent designations throughout the United States, this effectively created an industry-standard commission, thus violating antitrust laws, as the plaintiffs alleged. 

NAR guidelines clearly state that the commission rate is negotiable and that “commission rates are set by the market.” But in practice, commission rates are always set by listing agents and almost always at a rate of 5% to 6%. For homes selling for $400,000, this can amount to a commission payout of $24,000.

Because the sellers pay the commissions, the key argument is that it inflates the prices of homes to make up for it. Seemingly, now that the settlement has gone through, we could very well see a reduction in home prices.

Ultimately, listing agents will no longer be required to offer commission to buyer agents, which will bring more competition amongst agents as sellers search for the lowest commission offerings.

It’s anyone’s guess how much commission real estate agents will now charge, but some economists think that we will see a reduction of up to 30%.

The End of the MLS Subscription Requirement 

This brings us to the second sweeping change introduced by the ruling: Real estate agents will no longer be required to sign up for their regional Multiple Listing Service (MLS). The MLS itself will no longer include any information about the commission offered on a sale. This change would end the practice of “steering,” where buyer agents select properties that are more expensive and pay a higher commission. In addition, the new rules abolish the requirement that Realtors subscribe to an MLS in order to perform their services.

This doesn’t mean that real estate investors will no longer need to have relationships with local agents. Agents will compile their own databases of homes for sale—which still will be an important resource for investors, and which agents will likely still charge for. But with the element of open competition thrown into the process, it’s also likely that agents will work harder to scout out properties they know buyers and investors will want to buy.  

One question that remains unanswered is how all these new broker-buyer relationships will be regulated, if at all. The NAR settlement will require any MLS-subscribing broker to enter into a written agreement with a buyer so that they “understand exactly what services and value will be provided, and for how much.” We can only speculate whether buyer-broker agreements will become the norm where there is no MLS access involved.

Kevin Sears, NAR president, said in a statement: “NAR exists to serve our members and American consumers, and while the settlement comes at a significant cost, we believe the benefits it will provide to our industry are worth that cost.” 

These changes, if approved by the federal court, will come into effect in July 2024.

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The National Association of Realtors (NAR) settlement of commission lawsuits nationwide is expected to force mortgage lenders and loan officers to find new ways of approaching listing agents and borrowers, give LOs a more significant role in the home-buying process, and encourage housing professionals to pursue dual-licensing, industry experts told HousingWire.

Mortgage pros have closely monitored the commission lawsuit developments since a Kansas City, Missouri jury determined that NAR, HomeServices of America, and Keller Williams conspired to inflate or maintain high commission rates through NAR’s so-called Participation Rule. These housing professionals have been gaming out the potential impact on buyers’ agents – a significant source of referrals.

Loan officers and mortgage executives expect home sellers and homebuyers to negotiate more aggressively on commission paid to buyer agents, potentially bringing costs down. At this early stage, it’s unclear how such commissions would be paid since buyers could pay their agents out of their pockets or negotiate commissions as a seller concession in the closing costs.

Meanwhile, trade groups representing lenders believe that more details on the settlement are needed to understand its coming impact on the housing market. However, they already worry about some groups of considered vulnerable borrowers who could not pay for the buyers’ agent commission due to affordability challenges. 

On Friday, NAR announced a settlement that includes a $418 million payment for damages and a ban on any rules allowing a seller’s agent to set compensation for a buyer’s agent. Also, fields displaying broker compensation on MLSs must be eliminated, there is a blanket ban on the requirement that agents subscribe to MLSs to offer or accept compensation and buyers’ agents must have written agreements. 

NAR said that the changes, if approved by the court, will go into effect in mid-July 2024.

Getting referrals and cozying up to the sell side 

Mike Kortas, CEO at NEXA Mortgage, sent a clear message to the over 2,300 mortgage LOs at his mortgage brokerage: “Keep your eyes open, keep your ears open, listen for opportunities that are going to present themselves, and be ready to assist more buyers. You should be finding buyers before real estate agents anyway.”

NEXA has always been focused on purchase loans, which means some of its LOs do significant business with buyers’ agents. Kortas believes that good buy-side agents will remain highly relevant and garner more business as competitors wash out. Thus, LOs will have to find ways to connect to listing agents or directly with buyers, who will need more guidance during the home-buying process. 

These efforts include having open house programs to help seller agents and co-marketing home listings with these professionals, using social media to reach borrowers, and sometimes buying leads, according to Kortas. He said he’s also interested in seeing where homes will be listed since they will no longer be required to be in the MLS system.

Matthew VanFossen, CEO at New Jersey-based Absolute Home Mortgage Corporation, believes that the NAR’s settlement was probably the best outcome to the trade group as it focuses on consumer choice and disclosure. It also avoids new copycat lawsuits, uncertainties, and further potential showdowns with the Department of Justice (DOJ).

On average, about 50% of referrals to a retail LO come from buyers’ agents, VanFossen said. However, with the NAR settlement, listing agents may start dealing directly with homebuyers. That’s a problem because mortgage LOs traditionally have not “forged as deep of inroads” with sellers’ agents. 

“Originators may have to pivot by developing better relationships and ways to assist listing agents,” he said. “You may see buyers’ agents still be relevant, but LOs need to find vehicles to educate their buyers’ agents, educating them on how to use seller concessions, for example, to finance buyer-paid broker fees.”

Assisting homebuyers and their agents adds more to an LO’s plate.

Nick Caccia, a Greenville, Rhode Island-based producing sales manager at CrossCountry Mortgage, said that it’s hard enough getting a loan to the closing table, especially with the rates where they are. Having to be somebody’s confidant and advisor on the real estate part would be “tough.” 

Caccia said that 80% of his business comes from buyers’ agents. He shows up for open houses and teaches courses at real estate brokerage firms, which allowed him to build relationships with agents throughout his career. 

Because most of the agents he works with are full-time, dedicated professionals, he’s not expecting a decline in business as a result of the settlement.

The hybrid LO-agent?

On another front, VanFossen believes that due to the commission lawsuit, LOs may start getting real estate licenses and/or real estate buyer agents may become LOs. It would “bridge the gap in lower commission” by these professionals “starting to take both sides of the deal.” 

According to VanFossen, that’s a “definite potential outcome that a lot of mortgage lenders are looking at, legally and in a compliant manner,” including Absolute Home Mortgage, which is doing tests with this dual-licensing structure. The company had 274 LOs and 38 active branches as of Friday, per the National Mortgage Licensing System (NMLS). 

However, since real estate agents would transition to lenders, the dual-license trend would also have an “unintended consequence” for marketing servicing agreements (MSAs) between mortgage companies and real estate brokerage firms. 

Another consequence could be the emergence of real estate agents creating their brokerages and forming joint ventures with lenders, he said. 

It would also inevitably lead to even more dark grey areas in RESPA compliance.

More negotiations, lower commissions 

Per the terms of the settlement, MLS participants working with buyers must enter into written representation agreements before touring a home. 

Consequently, mortgage industry executives believe buyers will pay agents out of pocket or ask sellers to pay their agent fees through concessions. As negotiations are in place, the expectation is that the commission will be reduced. An average real estate transaction typically pays 5% to 6% in agent commissions, including 2% to 3% to the buyer’s agent. (LOs on average get about 1%.)

Kevin Leibowitz, CEO of broker shop Grayton Mortgage, expects that “commissions will get squeezed,” and some buyers’ agents will exit the industry. He has been focused on getting referrals from prior clients and online. Thus, he expects the settlement will impact his business far less than LOs who rely on buyer agents as referral partners. 

Ryan Tomasello, managing director at Keefe, Bruyette & Woods, agrees that more negotiations may happen. Of course, the devil will be in the details, and there are a number of questions about how these written representation agreements will work. 

“Key questions include whether these agreements must stipulate compensation terms, as well as if any permissible compensation offers from listing agents and sellers are prohibited from being higher than the original compensation terms already agreed to by the buyer and their agent,” Tomasello said in a report on Friday. 

“In KBW’s view, the combination of mandated buyer representation agreements and the prohibition of blanket compensation offers made by listing agents and sellers should result in significant price competition for buyer agent commissions,” Tomasello added.

Disadvantaged borrowers? 

According to mortgage trade groups, if the settlement can reduce buyer agent commissions, it can also make some underserved borrowers more vulnerable. 

Borrowers trying to buy with a mortgage from the Department of Veterans Affairs appear to be at the biggest disadvantage. 

Under current policy, fees or commissions charged by a real estate agent or broker in connection with a loan from the VA may not be charged to or paid by the veteran-purchaser. It’s unclear whether the VA or the Department of Housing and Urban Development (HUD) will be able to alter the policy by mid-July.

Seller concessions for VA borrowers are also capped at 4% of the home’s purchase price or appraised value and can also cover some closing costs, including the VA funding fee and prepaid taxes. And under existing FHA rules, sellers can contribute up to 6% in concessions to FHA borrowers to cover closing costs, prepaid expenses and discount points.

This could be a key part of the equation for borrowers with VA or FHA loans, as they’re typically using discount points to lower their mortgage rate, paid by sellers.

“Agent commissions have never been a closing cost from a buyer perspective,” Ryan Grant, co-founder and division president of Neo Home Loans, told HousingWire in November. “We don’t even know if the buyer’s agent fee would be an allowable closing cost because they might not even be a material necessity to the transaction.”

If FHA borrowers, for instance, used all 6% of seller concessions towards paying their agent’s commission, “you’re taking away either temporary or permanent interest rate buy-down opportunities,” Brian Covey, EVP of Revolution Mortgage, said in November.

In a December letter to federal housing agencies, the Community Home Lenders of America, which represents small lenders, wrote that “traditionally, lenders financed buyer’s agent commissions as part of the mortgage financing process, reflecting the fact that 100% of brokerage commissions were incorporated into the sale price.”

But its members noticed “many real estate agents are already writing sales contracts that require the buyer to pay the buyer’s real estate commission.” CHLA said the new model could potentially leave buyers to cover the commission out of pocket or forego representation.

On Friday, the trade group said that the NAR settlement will impose challenges mainly to underserved, veteran, and minority borrowers with low down payment capabilities “who must be protected with respect to underwriting rules, so they are not disadvantaged by changes to commission structures.”

“CHLA continues to engage Congress and federal regulators to immediately draft solutions to ensure homebuyers are not adversely impacted – especially those with limited funds to apply to the mortgage purchase process,” Scott Olson, executive director at CHLA, said in a statement. 

The Mortgage Bankers Association (MBA) added, “While full details of the apparent settlement are not yet public, MBA will monitor the outcome as well as the likelihood of new approaches to buyer agent commissions that develop as a result.”

“We will also continue our engagement with the Federal Housing Administration, Department of Veterans Affairs, and Fannie Mae and Freddie Mac about any possible guideline changes that may be needed in the future,” the trade group said in a prepared statement. 

Caccia, the LO at CCM, expects homebuyers to request a closing cost credit to cover their agents’ commissions. He believes it could be more common among first-time homebuyers, “who don’t have the cash for a down payment plus commission payments on the purchase of their homes.” However, concessions are more challenging to get in competitive markets.  

“In a market like ours, where there’s not a lot of inventory, it’s tough right now to buy a house, no matter what. A lot of my FHA buyers, the bond programs, don’t have enough for the down payment, to get through the guidelines, and to throw another 2% of the cash up front [for the agent commission],” Caccia said. 

“I would think some of them would just go directly to the listing agent, but I don’t know if that’s a sustainable model,” he added. 

VanFossen said there are talks about the “mortgage industry figuring out methods to finance the buyers’ real estate agent commission.” 

“As lenders, we are avidly against that. We do not want to, as we already have a vehicle through the sellers’ concession. We should not be putting borrowers in a place to finance 2% to 3% additional of the transaction over the period of 15, 20 or 30 years in the terms of a mortgage. And we don’t feel that our regulators, such as FHA and FHFA, are too keen on that either.”  

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Let’s face it: joint ventures (JVs) and affiliated business arrangements (ABAs) are all the rage in the residential real estate space right now. And why not? In times of depressed revenue, it makes sense to seek any and all reasonable paths to revenue.

In fact, there aren’t many mortgage lenders, builders or real estate brokerages that haven’t at least fleetingly entertained the notion. After all, a successful affiliated title operation brings not only the potential for new business but, done well, an opportunity to control more of the transaction, bringing with it the possibility for improved customer experience and better cost controls.

So why aren’t more commercial real estate (CRE) entities – investors, principals, banks, law firms or developers – seeking the same? Market conditions have certainly trended downward for residential or commercial real estate. CRE firms are also suffering through the highest interest rates seen in years. Unlike their residential counterparts, CRE JVs offer a real opportunity for increased profitability, making them an intriguing prospect. In fact, a well-run JV brings with it the very real possibility for a passive, seven-figure profit. One would think CRE businesses would be knocking down the door to harvest new forms of income.  Instead, they’re leaving money on the table.

A significant opportunity

To be sure, there are title agencies eager to partner with CRE principals and funds. Traditionally, joint ventures have been perceived as a means to diversify revenue streams and expand market reach, primarily within the residential sector. However, with residential order volume down and competition fierce, owners and decision-makers are seeking new avenues for growth.

This quest for expansion has led to a pivot towards commercial real estate, where the potential for substantial returns beckons. However, unlike residential ventures, CRE transactions (whether involving a JV or not) involve a myriad of complexities, ranging from regulatory compliance to risk assessment, thereby requiring a nuanced understanding and specialized expertise.

Office buildings, retail spaces, industrial complexes and other CRE properties generally command higher price tags and offer greater revenue-generating potential compared to residential properties. That’s probably why so many title and closing firms have tried their hand at CRE business in the effort to diversify.

Rapidly advancing technology and data analytics have also revolutionized the commercial real estate landscape, offering scores of new avenues for value creation and risk mitigation. CREs need not go it alone. Title firms collecting and making use of advanced analytics and proprietary technologies can provide invaluable insights into housing market trends, property valuations, and risk assessment. They can be, in essence, the “boots on the ground” for investors and developers alike.

And yet, more than a few title agencies taking their shot at entering the CRE space, without proper preparation or experience, have struggled in that sector. Similarly, because of lack of expertise or experience, more than a few ABAs have closed their doors not long after being established. Not only title agencies that were unprepared, but lenders, brokers and builders have learned, the hard way, that building a successful, profitable ABA takes more than a brand name and the announcement that they’ve entered into a JV.

The challenges facing CRE JVs – all title agencies were not created the same

That could be one reason CRE firms hesitate when considering title ABAs. Another could be, quite simply, that they don’t recognize the opportunity. The title business is not truly or widely understood outside of the title industry – even among other real estate-related market segments. And, far too often,  the few commercial businesses that do try to enter into title business don’t put sufficient resources into properly building the JV.

Not to mince words: title is hard. Title agents are tasked with playing the role of central communicator; compliance wizard, data (and fee) collector, project manager and technology curator in every single real estate transaction. Let’s not forget that compliance is not done just at the federal level. It’s a state-by-state; county-by-county and even city-by-city proposition. And it’s the title agent’s job to understand that and master it.

Now, let’s look at it from the title agent’s perspective. After all, while principals, investors and banks may not be clamoring to get into the title business for CRE transactions, not many title agencies do it well, and many of those only know certain markets. The ever-evolving needs of investors and developers seeking to diversify their portfolios and optimize returns only complicates that. Good CRE title firms know their clients; understand their clients’ clients and know the markets where their customers operate.

Right now, we’re generally seeing more mixed-use developments and multifaceted commercial projects. We’re seeing single-family residence investors hesitating as to when to get back into the game, but as we saw in 2021 to 2022. When they do, there will again be serious potential in that sector. Affiliated title firms taking their shot at specializing in CRE joint ventures absolutely must understand the transaction and the market, no matter how complex.

As challenging as a residential real estate transaction can be, there’s no doubt that CRE deals are much more complex. The participants in the process are generally less emotional and far better trained or educated in the process than many of their counterparts (e.g. buyers and sellers) in a residential deal. CRE assets are subject to a myriad of regulatory requirements, zoning laws, and environmental considerations that don’t apply to home sales, requiring thorough due diligence and compliance measures. Additionally, commercial transactions often involve multiple stakeholders with divergent interests and objectives, requiring deep negotiation skills and effective conflict resolution mechanisms.

Finally, the financing dynamics of a CRE transaction differ significantly from residential transactions, with larger capital requirements, longer investment horizons, and greater exposure to market fluctuations. Title agencies taking their shot at the CRE space have to understand and navigate the intricacies of commercial financing structures.

The potential return is worth the effort

Despite the inherent complexities, CRE joint ventures offer substantial rewards for title agencies willing to venture into this burgeoning market segment. With the potential for higher transaction volumes, larger deal sizes, and greater revenue generation, CRE joint ventures present a compelling opportunity for title agencies to diversify their service offerings and capture a larger share of the commercial real estate market.

The key to it all is, for CRE partners, to do the deep due diligence required for selecting such an important partner. It’s not enough for a title agency to hire a CRE-focused business development pro and hang out its new CRE shingle. It’s not even enough for a CRE-focused title business with ample experience in, for example, the Miami marketplace to suddenly proclaim itself comfortable with transactions in New York City or Chicago.

It’s also critical for banks, lenders, investors, developers and principals entering into CRE-related ABAs to realize that locating and working with title entities that have the expertise and experience necessary is just the first ingredient for success. All partners should be prepared to invest the capital and resources in the partnership that they would have building any other business from the ground up. It’s not as simple as flipping a switch. The JV will need the resources any other business would need to establish itself in the market and win business.

For title agencies and CRE firms alike, ABAs offer a very real and potentially substantial new revenue stream. While the first step comes with recognizing the potential, success also requires adequate due diligence to locate a partner or title entity that not only knows what it’s doing, but knows what the partner wants to do as well as understanding the markets in which they wish to succeed. Finally, it requires a legitimate commitment by all parties to supporting and sustaining the affiliated operation. Without these ingredients, all of the partners are simply throwing a dart. But with the proper effort and investment, the partners could well realize not only a revenue windfall, but a competitive advantage as well.

Matt Einheber is the driving force behind TitleEQ, a settlement services agency serving clients nationwide, and TitleBox, the developer of technology designed to streamline the settlement process.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story: Matt Einheber at matt@titleeq.com

To contact the editor of this story: Tracey Velt at tracey@hwmedia.com

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The U.S. Department of Veterans Affairs (VA) announced on Thursday its goals to house 41,000 veterans experiencing homelessness by transitioning them into permanent housing, and to ensure that 95% of those who receive such assistance do not return to homelessness during the year.

The VA also seeks to engage with 40,000 additional unhoused veterans and direct them to resources that could help them obtain housing and other services.

“Even one veteran experiencing homelessness is a tragedy,” VA Deputy Secretary Tanya Bradsher said during the announcement of the goals Thursday at the VA Medical Center in Washington, D.C. “We’ve made progress in recent years in tackling this problem, but there’s still a long way to go — and that’s why we’re setting these aggressive goals.”

This is the next step of addressing veteran homelessness, which the VA has called a “top priority” for both the department and the Biden administration. Based on data released by the VA in December 2023, the number of veterans experiencing homelessness has fallen by 4.5% since 2020 and by 52% since 2010.

“Whenever we get into contact with a homeless veteran, our first priority is to get them into the housing they deserve,” Bradsher said. “Then we work to provide them with the tools they need to stay housed — including health care, job training, legal and education assistance, and more. That’s how we’ll meet and exceed these goals in 2024.”

The department also announced goals to minimize or alleviate veteran homelessness specific to the Los Angeles area, including a goal to permanently house “at least 1,605 veterans experiencing homelessness,” and to engage “with at least 2,184 unsheltered veterans to help them obtain housing and other wraparound services.”

In 2023, the VA addressed the challenges in Los Angeles by providing 1,790 permanent housing placements to formerly homeless veterans in the city, which is “the most of any city in America, and exceeded their local goal by over 19%,” the department stated.

Thursday’s announcement follows on the heels of a prior announcement by the VA and the U.S. Department of Housing and Urban Development (HUD) at the end of February. That offered details on more than $14.5 million that will be distributed by public housing agencies (PHAs) across the country in an effort to house veterans. These funds will be distributed by the PHAs through more than 1,400 HUD-Veterans Affairs Supportive Housing (HUD-VASH) vouchers.

While the highest concentration of vouchers are going to Tucson, Arizona; Philadelphia; and Spokane, Washington, the footprint covers a wide range of states, according to the list of recipients.

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