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Keep Banks Out of Home Sales

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With examples as recent as Japan's financial crisis 10 years ago, history teaches the vital importance of a sound and stable national banking industry to the economy as a whole. Japan's woes, as well as the dozens of bank-born panics and depressions throughout American history, were not lost on Congress when it wrote into the Financial Services Modernization Act in 1999 a strict prohibition against federally chartered banks' engaging in commerce. The risks to taxpayers who help insure deposits and to the nation's economy are simply too great to allow the institutions underlying our system of finance to stray too far afield from their core competencies.

A little-noticed regulation recently proposed by the Federal Reserve and the Treasury has rekindled concern that Washington may not remember the dangers of mixing banking and commerce. The proposed regulation would allow the nation's large financial-services holding companies to enter real-estate brokerage and property management.

This is a bad idea for many reasons, not the least of which is the threat it poses to the welfare of the banks themselves. Bank-owned real-estate brokering is nothing new; 17 states give state-chartered banks complete or partial authority to help customers buy and sell property. Unitary thrifts had the same rights before enactment of the new financial-services act. Yet, over the years, neither state banks nor thrifts have made discernible inroads into the business. Few bank brokerages prospered and most of the financial-services firms that dabbled in real estate found it to be a bad fit.

The proposed Fed regulation would let banks enter real estate on a scale never before contemplated. But size and scale don't make the fit between realty and banking any better. Big bank failures in real estate could have a major impact on the financial health of our banking system.

In the late 1980s, two economic researchers at the Federal Reserve Bank of Minneapolis, John Boyd and Stan Graham, studied the profitability and risk of allowing bank-holding companies to merge with other firms. They found that mergers with securities and real-estate firms are the riskiest, while those with insurance firms are the least risky. In a later study, the economists concluded that, "If the objective of public policy is to minimize the risk of bank failure, then our results suggest that bank-holding companies should be permitted to acquire life and property/casualty insurance firms, but be prohibited from acquiring securities and real-estate firms."

In addition to the risk involved, the prospect is not very great that real-estate fees will make the positive impact on bank-holding companies' bottom lines that the mega-banks lobbying for the new rule anticipate. "The grass always looks greener on the other side of the fence," wrote Daryl Jesperson, president of RE/MAX International, in his comment letter to the Federal Reserve. "It's only after you're on the other side of the fence that you realize that the lawn needs mowing, trimming, watering, weeding, fertilizing, etc."

Pressures on brokerage fees are increasing. The Internet is making the home-buying process more transparent and accessible to consumers, who demand lower costs from all principals in the real-estate transaction. Real-estate professionals are making the leap from being providers of information to being online interpreters of information, and have introduced new efficiencies into home buying through innovations like Realtor.com and the coming e-commerce transaction management platform, eRealtor.com.

But most of the more than 20 steps necessary to get homes ready for market and to complete the transaction remain the same -- fixing leaky roofs, showing the properties, placing ads and of course winning and keeping customers' trust to handle the purchase or sale of what is usually an individual's or family's largest financial asset.

Bigness won't help big banks much in the real-estate marketplace. Banks' marketing resources and brands will matter little to the real-estate consumer; homebuyers and sellers tend to hire agents, not companies. In real estate, companies of the size contemplated by the mega-banks benefit very little from economies of scale.

There's a good reason that most real-estate firms are small, single-office operations or franchises.

Real estate, by its nature, is the most local of businesses. In fact, smaller firms that aren't saddled by multiple offices and overseeing large staffs tend to be more efficient.

Chances are those banks interested in entering real estate already know they're not going to get rich from real-estate fees. In fact, they may not care much about fees at all. Some may be planning to accelerate their entry by discounting fees significantly.

They understand the proposed Federal Reserve rule gives them the opportunity to climb to the top spot in the home-buying food chain and control the transaction from beginning to end, opening up new opportunities to sell mortgages, mortgage insurance, homeowners' insurance and other proprietary products consumers may or may not need.

They will have to be careful. Under federal law, bank-holding companies with financial interests in real-estate brokerages are precluded from offering incentives to the brokerage's agents in order to refer clients to the bank. Should the Federal Reserve decide to move ahead with the rule to allow banks into real estate, these rules may be strengthened to create "firewalls" between banks' mortgage departments and other financial services and the bank-owned real-estate brokerage.

Today, realty brokerages are where banks would like to be -- at the center of the real-estate transaction. Every day, they refer new customers to banks for mortgages, personal accounts, automobile loans, savings accounts, new commercial accounts and other financial services. Asks Jesperson: "Do banks really think that real-estate brokerages will continue to do business with them once they have become a competitor? Not likely. Will current brokerages redirect their mortgages to non-competitors? You bet."

If brokerage fees and the opportunity to cross-sell promise limited returns, it's fair to ask why the National Association of Realtors is concerned about the proposed regulation.

First, like all other businesses, we rely heavily upon a sound and safe banking system, and we would not like to see it weakened.

Second, we worry about what unfettered bank acquisitions will do to our business. There's good reason to worry. We fear banks will pay more than they should for real-estate companies and the investments never will pay off.

That's the pattern banks followed when they entered insurance brokerage, a field where banks have been active for decades. Today, the average agency is growing at an annual rate of roughly 5% in total commissions and fees while bank-owned agencies are actually shrinking at 0.3% a year.

Third, we're concerned about the potential impact on consumers when lenders and real-estate brokers become the same. Questions of conflicts of interest, threats to consumer privacy, customer service and a host of other issues arise.

Whether you're a taxpayer, employee,bank shareholder, bank customer or homeowner you have a stake in helping to save banks from bank-holding-company strategic thinkers who've never shown a house or stuck a for-sale sign in a lawn.

Richard A. Mendnhall is president of the National Assn. of Realtors

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