Real estate commission change may hurt borrowers, brokerage argues

If a change in how real estate agents earn commissions went into effect, mortgage payments will become less affordable, a paper funded by HomeServices of America said.

Right now, real estate commissions are paid from the sellers' proceeds at the closing table, with the buyer's agent and the listing agent splitting the money.

But some groups, who have filed suits against the National Association of Realtors and others, claim this leads to outsized commissions. They argue that the buy and sell side should each pay their share separately, also known as decoupling, which would spur negotiations about them and ideally lead to lower fees overall. 

But having the buyer pay the commission out of pocket will have a detrimental effect on Black, Hispanic/Latino, first-time, and low- and middle-income buyers, claims the paper authored by Ann Schnare, Amy Crews Cutts and Vanessa Gail Perry. Schnare is a former Freddie Mac executive while Cutts and Perry were economists at the company. Cutts is also the former chief economist for Equifax.

Consumer groups and the government are challenging the fee structure via antitrust litigation. A year ago, the Justice Department withdrew from a Trump-era settlement with the National Association of Realtors related to it. 

"Changing the current compensation structure could affect potential buyers' ability to qualify for a mortgage and purchase a home," Schnare said in a press release accompanying the report. "Requiring buyers to pay their agent's fee directly would result in reduced homeownership opportunities for cash-constrained families and lower net proceeds for many sellers. These outcomes would create negative ripple effects across the entire housing market."

Furthermore, many homebuyers struggle to raise down payment and closing cost funds.

"These cash constraints are more prevalent among first-time home buyers and racial minority groups," said Dana Strandmo, chief administrative officer at HomeServices of America, which is part of Berkshire Hathaway. "That is a factor that must be considered in any conversation about changing how buyers' agents are typically compensated."

It is also probable with decoupling that the commission would not be able to be funded through the mortgage, the authors said.

During the underwriting process, lenders have significant challenges in determining the appropriate amount of buyer broker commission allowed in the transaction as federal regulations limit how much of the total purchase price buyers can finance, the paper said. Some buyers could no longer qualify for a loan while others would have to pay additional fees every month in mortgage insurance premiums if they couldn't put 20% down.