Financing Broker Fees
A Response from Ken Fears, NAR Director of Conventional Finance and Valuation Policy
Ken Fears specializes in finance and valuation issues. The following is a post in response to a thread by a member entitled "Banks Need to Change Rules to Allow Broker Fees to Be Financeable" on the NAR member and staff portal, The Hub. The original thread can be found here.
As part of the normal due diligence, NAR's Advocacy group explored possible outcomes of agency changes, and this is one angle that we investigated. We have also met with bank and finance regulators as well as other lending trade associations to understand their perspectives.
In short, financing commissions is not feasible under the current structure of the residential mortgage finance system, and there is no clear short-term legislative or regulatory fix.
- Banks would treat such a loan as a personal loan that would have higher rates and they would limit access to those loans to borrowers with better credit profiles. Furthermore, that personal loan would add to the buyers' liabilities and make it harder to qualify for a loan.
- Fannie Mae, Freddie Mac, and FHA do not allow commissions to be added to the balance. Simply put, investors will only lend against the asset they can take back and sell in a foreclosure. An investor would not be able to take back and sell a used service like real estate brokerage.
- Finally, there are significant limits to adding commissions to the mortgage rate. Several rules that make up the foundation of mortgage finance would need to be changed by the regulators and Congress. Those rules took years to develop, implement, and refine, and changing them could take years, potentially a decade or more.
Keep in mind that even if commissions could be financed, this outcome could be financially worse for buyers as they would likely end up paying both the commission and nearly the same sale price.
Note, that Fannie Mae, Freddie Mac, and FHA allow interested party contributions from sellers who contribute to a buyer's closing costs. Those, too, would need to be adjusted, but that topic is different from those agencies allowing a buyer to finance the commission. Fannie Mae, Freddie Mac, and FHA all have caps on how much can be contributed to the buyer from "interested parties". Since sellers often contribute to buyers' closing costs and even buying down rates in the current environment, adding commissions would likely exceed those caps. However, this alternative is far more promising than financing commissions and it's something we continue to investigate. In addition, it would preserve affordability for the consumer if sellers' continue to pay commissions.
We realize that many pundits have asserted in blogs and articles that commissions can be financed. I would note that none of them are experts in banking or finance.
Again, this effort is one of many that Advocacy is looking at as part of our due diligence. We are currently looking at other issues in the finance space such as how shared equity may impact buyers or how the transformation of the market for mortgage-backed securities impacts both the level and volatility or mortgage rates and what can be done about it.
