NEW YORK — The financial crisis and housing downturn are proving to be a catalyst for change in real estate brokerage, title insurance and lending that could accelerate if the downturn is prolonged.
For the most part, regulators and lawmakers should let the industry shake itself out rather than impose new conditions from above, a panel of experts said Thursday at the Inman News Real Estate Connect conference in New York City.
In real estate brokerage, "There is a tremendous amount of industry consolidation right now, which is good" for companies that were prepared for the downturn, said Alex Perriello, president and chief executive officer of Realogy Franchise Group.
Realogy has been "preaching since August 2005 that you need to right-size your company," Perriello said. Now, he said, he’s got brokers calling him saying they’ve pulled $50,000, $500,000 or $1 million out of their annual budget, and are kicking themselves because they didn’t do it a year ago and now want to invest in growth.
"There will be a recovery, but you need to be standing when that happens," Perriello said, advising brokers to have a plan B and a plan C in the event that their revenue projections are off by 10 or 20 percent. If those plans are vetted with managers, the plans can be executed if the market goes south and "it’s not a knee-jerk reaction."
In the title insurance and settlement services industry, it’s all about "the four C’s: cost cutting, constricting, consolidation and change," said title insurance veteran Patrick Stone, chairman of The Stone Group.
"I think we’ve seen a lot of the first three," Stone said. "But I would argue the industry still isn’t right-sized."
With the sale of LandAmerica Financial Group’s title insurance underwriting subsidiaries to rival Fidelity National Financial Inc., a business that was an oligopoly has now become a duopoly, Stone said. The acquisition means that just two companies — Fidelity and First American — will control more than 70 percent of the title insurance business (see story).
In mortgage lending, government support for mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae means interest rates on conforming loans are hitting lows not seen in years. But because secondary market investors continue to shun securities that once funded jumbo, subprime and alt-A loans, rates on those mortgages remain higher and many can’t qualify for loans at all.
"It is the best of times for a select group, and pretty bad times for the rest," said Jack Guttentag, a professor of finance emeritus at the Wharton School of the University of Pennsylvania.
Unless borrowers can come up with a 20 percent down payment, have a FICO score of 760 or better, and adequate income they can document, they aren’t likely to benefit from the lower rates, he said — assuming they can get a loan at all.
"We have a kind of paradoxical situation in the marketplace today I haven’t seen in all the years I’ve been following this market," Guttentag said. "The terms available to prime borrowers have never been as good … but only for those who are eligible for them. And the set who are eligible has shrunk, because underwriting standards have tightened."
Guttentag — a nationally syndicated columnist who also dispenses advice on his Mortgage Professor Web site, said it would not be wise to limit the number of loan products available to consumers — market forces have already reined in the use of some higher-risk loan products like pay-option ARM loans, though he noted that they can be appropriate if matched to the right borrower.
As for the real estate brokerage industry, Perriello said consolidation is well under way, and if the downturn continues he expects to see "some real innovation. There is too much brick and mortar in the business."
He said Realogy’s company-owned brokerage, NRT, is working on an online transaction management system that will allow agents and their clients to participate in the process from wherever they have access to a computer and the Internet.
"The consumer can go online and see exactly where their transaction is, and the sales associate does not have to be tied to an office to see files and manage the transaction," Perriello said.
Ideas for reforming the title insurance industry put forward by Inman News readers included prohibiting bundling of settlement services with loans unless consumers savings are demonstrated, and for title insurers to offer low-cost title policies.
Stone said low-cost title insurance policies have been available to lenders doing refinancings for six or seven years, and should be made available for home purchases. He said that while the settlement services industry is consolidating and cutting costs, it still has a long way to go.
"One thing that’s bothered me is the high cost of transacting business in real estate," Stone said. "If you take a $200,000 asset in the form of home, it will cost you 6 to 10 percent of that asset to sell it" after paying your Realtor’s commission and fees to lenders and settlement services providers. That’s a significantly higher percentage than any other significant asset, Stone said.
"As economic stress continues, the consumer is going to push on that," Stone said. "They are going to resent it."
If the downturn continues for a few more years, "I believe you’ll see significant business model changes" in the title insurance industry, Stone said.
Turning it around
Perriello said consumer confidence is a big issue in pulling off a turnaround, and said Realogy has been working with the National Association of Realtors to get lawmakers to include more incentives for buyers as part of a housing stimulus package.
NAR’s proposal includes government subsidies to bring interest rates on 30-year fixed-rate mortgages down to 4.5 percent, removing the payback requirement on the new $7,500 break for first-time homebuyers and making it available for all buyers, and restoring the temporary $729,750 loan limit for Fannie Mae and Freddie Mac in high-cost areas that was in place for much of 2008.
After working with the Bush administration’s Treasury Department for "the last couple months to no avail," Perriello said "the good news is that the administration coming in understands that if the housing sector doesn’t recover, the overall economy will not."
Guttentag noted that mortgage rates for prime borrowers are already nearing 4.5 percent, but said, "That’s not going to do anything for (homeowners) who are underwater, or stop foreclosures." The only way to stop home-price declines is to put a "major dent" in the foreclosure rate, he said.
Guttentag advocates a loan modification program in which the government would share the burden with lenders who agree to reduce the principle on delinquent loans, when borrowers qualify to refinance into a loan with lower monthly payments.
Perriello countered that recent data from federal banking regulators shows that more than half of loans modified last year redefaulted within six months (see story).
"If there’s only so much federal funding available, I’d rather put it on the buy side to stimulate sales," Perriello said. "That not only helps the housing industry, but the overall economy."
Many of the loan modifications tracked by federal banking regulators redefaulted because they were limited in nature, Guttentag said. Instead of reducing a borrower’s principal to make payments more affordable, many consisted of "nothing more than taking the past dues, adding them to the balance, recalculating the payments, and making the borrower current" — an approach that’s likely to fail.
Guttentag said another batch of statistics is expected to be released soon, which will break down results according to the type of loan modification. He expects approaches that create affordable payments for borrowers will have a greater rate of success.
Stone said the breakdown in the process through which mortgages were securitized and sold to investors is "standing in the way of simple solutions," and that he remains "very skeptical about our ability to unravel the mess."
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