How commissions litigation could affect mortgage lending

The shockwaves from the recent real estate commissions verdict are still reverberating, and the impacts to the mortgage industry could be numerous. 

Three major real estate players face at least $1.7 billion in damages after a federal jury this week ruled in favor of home sellers challenging commission rules. Losing parties in the Sitzer/Burnett trial, including the National Association of Realtors, vowed to appeal both the damages and the verdict, and a resolution could be years away.

Tuesday's decision didn't immediately reshape commission rules, but NAR and major brokerages face two more class action complaints and possible scrutiny from the Department of Justice. As real estate agents weigh the future of their business, mortgage experts see both negative and positive outcomes for lenders.

"This has been a long time coming," said Greg Sher, managing director at NFM Lending. "It evens the playing field for all involved. And most importantly, depending on what's created on the back end of this, hopefully it will lead to lower fees for consumers."

Today's rules mandating seller brokers offer compensation, even if it's $0, to a prospective buyer agent for access to a multiple listing service remain unchanged. Any new rules putting the agent commission burden on prospective borrowers could affect low-to-moderate income and first-time homebuyers already facing a historically unaffordable market, experts have warned.

Keefe, Bruyette & Woods recently suggested the Federal Housing Finance Agency and other housing stakeholders are discussing a commission financing workaround which won't disrupt the underwriting and origination process. A buyer could also negotiate a closing credit from the seller equal to some or all of the buyer agent commission in exchange for a higher home sale price, according to their report. 

"I'm confident something will happen whether it's rolling the buyer fees into the transaction or mortgage companies creating tools where they can participate in assisting the buyer," said Sher. 

The Mortgage Bankers Association has yet to comment publicly on the verdict, while mortgage broker groups remained neutral ahead of the trial. 

A potentially weaker MLS system could reduce barriers to entry for alternative home sale methods, such as the iBuying model deployed by publicly traded firms Offerpad and Opendoor, Keefe, Bruyette & Woods said. Leaders of those companies in recent earnings calls said any commission rule changes would have little impact on their expenses. 

Strained housing supply could be unlocked with less commission friction, KBW added. Home builders, who are already offering competitive mortgage rate buydowns, could pass potential buyer agent commission savings to prospective buyers. 

Aalto, a digital housing marketplace which connects sellers to buyers directly, is already seeing a boost with its nontraditional model, founder and CEO Nick Narodny said. The Bay Area startup, which works with its network of third-party LOs, offers customers a rebate around 1.5% of a commission, which borrowers have been using for buydowns, Narodny said. 

"You have to find a loan officer that's willing to do that right, willing to apply a rebate to a 2-1 buydown," said Narodny. "But most are in this market."

Conversely, Realtors marginalized by any structural changes present a counterparty risk to loan officers, experts said. Real estate agents aren't yet fleeing the industry, but firms including Anywhere Real Estate, RE/MAX and Redfin have already distanced themselves from NAR.

"If I'm a top producing loan officer, and I've spent the past 10-to-15 years cultivating relationships with buyer agents, and their role was minimized in any way, shape or form, then there is trailing risk for loan officers," said Matt VanFossen, CEO of Absolute Home Mortgage and board member at the Community Home Lenders of America.

The industry veteran, speaking before this Tuesday's verdict, also raised the possibility of more agents pursuing dual-employment opportunities, or split compensation situations in which they work with a lending team in a bifurcated process.

Lenders with direct-to-consumer models or embedded partnerships could also be an "effective mousetrap" for purchase volumes, KBW also predicted. Its report pointed to Rocket Cos., the industry's largest direct-to-consumer player.

"RKT will need to find ways for its product to better penetrate the homebuyer segment, a strategy it has been focusing on through its Rocket Homes and Rocket Money applications," analysts wrote.

Brokerage investors had a negative reaction to Tuesday's verdict, while mortgage stocks remained largely unaffected. Zillow shares, which fell 10% following the jury's decision, rebounded by Friday afternoon after CEO Richard Barton hinted the company would benefit from a reshaped marketplace. 

If buyer agencies fade, Zillow would "be an odds-on favorite to become the leading digital listings marketplace," he said, before suggesting such dominance would be negative for both consumers and the industry at-large.

Experts suggested the commission news hadn't yet entered the consumer zeitgeist. Loan officers have a short attention span, are too focused on surviving today's market and won't be concerned until fundamental changes arise, Sher said. 

"This is a big opportunity for mortgage companies to differentiate themselves by going out of their way to be a resource for buyers in figuring out what that means," he said. "Because there's going to be a lot of confusion, a lot of uncertainty."