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Testimony of the
American Homeowners Grassroots Alliance
Submitted to the
Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights
Hearing on
Oversight of the Enforcement of the Antitrust Laws
March 7, 2007
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The American Homeowners Grassroots Alliance (AHGA) commends the Senate
Subcommittee on Antitrust, Competition Policy and Consumer Rights for
holding this hearing on Oversight of the Enforcement of the Antitrust
Laws. AHGA is an independent consumer advocacy organization which
focuses on policy issues that have a significant economic impact on
homeowners and home ownership. AHGA strongly supports the important
mission of the federal antitrust enforcement agencies and the Senate
Subcommittee on Antitrust, Competition Policy and Consumer Rights.
In reviewing the enforcement of our antitrust laws the subcommittee
plays a critical role in assessing antitrust enforcement effectiveness
and priorities. While we believe that both the Federal Trade Commission
and the Department of Justice’s Antitrust Division are doing an
outstanding job of protecting consumers’ interests, given their
resources and constraints on the scope of their efforts, we believe that
additional funding for both of these agencies and a broader mandate for
action is important to enable them to fully protect the interests of
homeowners and other consumers.
The aggressive and successful efforts of both of these agencies to
address antitrust violations in the real estate services sector are very
much appreciated by American homeowners. In particular, we salute DoJ’s
Antitrust Division for filing suit in September, 2005 against the
National Association of Realtors (NAR) to prevent the implementation of
proposed industry rules that would restrict competition from real estate
brokers who use the Internet to serve American homeowners. Because 80%
of home buyers use the Internet in their home searches today, the rule,
if implemented, would have greatly disadvantaged those home sellers who
use Internet-based real estate brokers that often offer real estate
services at a fraction of the cost of traditional full service brokers.
The savings can be substantial - in some cases a home seller can list
their home in the local MLS through a discount broker for as little as
$200. This is a significant savings compared to the traditional 5-6%
commission on the home’s selling price (the median priced U.S. home now
sells for more than $200,000).
NAR’s proposed Virtual Office Website (VOW) rules include an “opt-out”
provision that would allow traditional full commission real estate
brokers to prevent Internet-based competitors from providing the same
listing information over the Internet that other brokers can provide
from their offices. This would greatly diminish the effectiveness of
Internet-based competitors’ business models and help preserve higher
commission rates. DoJ also challenged NAR’s membership rule denying MLS
listing access to brokers offering referral services, which can in some
cases facilitate partial rebates of commissions to home buyers as well
as increasing the Internet exposure of sellers’ homes. The lawsuit is
proceeding.
As a result of the joint efforts of the FTC and DoJ, several state real
estate commissions have lifted bans on commission rebates to home
buyers. A study by the Consumer Federation of America revealed that a
large share of state real estate commissions are dominated by
traditional full service real estate brokers, who are using their
influence to preserve high real estate commissions, despite the
commission’s responsibility to protect the interests of consumers. These
rebates, which can amount to as much as 2% of a home’s selling price are
an excellent inducement to home buyers and can be very helpful to
sellers in the currently weak residential real estate market. The FTC
and DoJ have also sponsored public workshops to educate the public of
abuses in the real estate services area.
The Federal Trade Commission has taken the lead in addressing
anti-competitive practices of local multiple listing services (MLSs). In
2006 the FTC brought eight enforcement actions against MLS’s that
limited the dissemination of the types of real estate listings used by
Internet-based discount real estate brokers. This diminished the value
of those types of listings to sellers by limiting their exposure on the
Internet, to the disadvantage of prospective buyers as well. Thanks to
the FTC’s aggressive defense of the rights of homeowners seven of those
MLS’s have withdrawn the objectionable rules. The FTC is currently
proceeding with the remaining case against Michigan-based Realcomp II.
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Both the FTC and DoJ have undertaken wide-ranging and effective
competition and antitrust initiatives across their respective spectrums
of responsibility. Nevertheless, there remain other problem areas
affecting American homeowners that are either outside the scope of the
agency’s authority, or beyond the capability of their thinly-stretched
resources.
Although state antirebate regulations have been withdrawn by state real
estate commissions under pressure from DoJ and FTC, some state
legislatures have enacted the identical proposals into law. Proposed
“minimum service” regulations requiring home sellers to pay for real
estate services they neither want nor need have also been withdrawn by
state real estate commissions under pressure from DoJ and FTC. These
regulations raise the home seller’s cost and undermine the
Internet-based business model. As in the case of antirebate laws, some
of these withdrawn regulations have been enacted into law by state
legislatures.
Neither the FTC nor the DoJ are currently empowered to address these
state laws, which have been authored and/or promoted by state real
estate associations. These laws are no different than the regulations
that the agencies have been addressing most effectively, and they are
costing American Homeowners millions of dollars every year. We urge the
Subcommittee on Antitrust, Competition Policy and Consumer Rights to
hold additional hearings on this problem and consider ways to address
these anticompetitive state laws which the FTC and/or DoJ have been able
to eliminate in their regulatory form.
There are several other areas of real estate services that also deserve
the subcommittee’s scrutiny and the scrutiny of DoJ and FTC. Last year
the House Financial Services Committee held hearings on real estate
title insurance industry practices. Title insurance is very expensive,
and only 2-4% of premiums collected are paid out. The current primary
title insurance industry business model involves the payment of
substantial, and usually undisclosed, referral fees to mortgage brokers
or other real estate service providers. Surprisingly, until very
recently there was no Internet-based or other vehicle for consumers to
buy title insurance directly from insurers, and we believe that title
insurance is still not available directly from insurers in most of the
country. If you went to the websites of major title insurance companies
there was no mechanism for a home buyer to elicit a price for title
insurance from them. This is particularly curious given the availability
of such direct business-to-consumer vehicles on the Internet for other
real estate services as well as many other consumer services and
products.
Another anticompetitive real estate services practice is “dual agency”.
Home buyers and sellers have inherently opposing interests. Home buyers
want the lowest price and the most favorable terms from their
perspective, and home sellers want the highest price and most favorable
other terms from their perspective. Historically most real estate
brokers exclusively represented home sellers. Both the broker and agent
who represented the seller, and the broker and agent who worked with the
buyer were all paid by the seller and owed a fiduciary duty to the
seller. The buyer was not represented by any agent or broker.
This imbalance changed with the advent of “exclusive buyer agency” in
the 1990’s. These brokers and agents represented only buyers, never
sellers. As a result home buyers using an exclusive buyer agent/broker
were able to achieve equality in the process. Like the seller, the buyer
now had a broker and agent adviser who owed their fiduciary duty only to
the buyer.
Unfortunately the growing practice of exclusive buyer agency was
undermined by state real estate associations who successfully sought
changes in state laws and/or regulations to allow the same broker, and
in some cases the same agent, to simultaneously represent both the buyer
and seller of the same home. This is akin to a single law firm
representing opposing parties in a civil lawsuit, and calls into
question the ability of the real estate broker and/or agent to carry out
all of their fiduciary responsibilities to both parties. We urge the
subcommittee to study these state laws to determine whether they are
anticompetitive and to undertake remedial action if appropriate.
There are related compliance problems with state real estate consumer
disclosure regulations, which are intended to help make home buyers and
sellers aware of potential conflicts of interest in dual agency and
other areas. Although these regulations require that home buyers be told
whom the agent represents, less than one-third of real estate agents
comply, according to the National Association of Realtors' 2005 Profile
of Home Buyers and Sellers. We believe that as a result many home buyers
mistakenly assume that the real estate agent and broker they are working
with will be exclusively representing their interests and providing the
full range of real estate services, under all circumstances. This
undermines competition; for without that information about the agent’s
and broker’s ability to represent them under all circumstances, a home
buyer is unable fully gauge a critical factor in deciding upon
representation.
NAR’s general counsel Laurie Janik was quoted in the real estate trade
publication Realty Times that “These statistics say that people are
being sloppy. They need to take agency disclosure requirements
seriously; it is a critical element of consumer protection. I don't
think it is good for practitioners or consumers that the trend line is
going down. We aren't going in the right direction -- compliance is
worsening." NAR’s 2005 Legal Scan, an annual compilation of the
thousands of lawsuits related to real estate transactions, also
confirmed the problem – 24% of the lawsuits related to home purchases
and sales were over disclosure issues. Despite the widespread knowledge
of declining compliance with state disclosure regulations, few state
real estate associations, state real estate commissions, or state
legislatures have undertaken aggressive steps to reverse the decline.
Since this problem directly impacts competition, we suggest that the
subcommittee and the antitrust agencies undertake further study of this
issue.
We appreciate the subcommittee’s interest in assuring that the interests
of American homeowners and other consumers are protected from
anticonsumer practices, and wish the subcommittee, the FTC and the DoJ
continued success in their efforts.
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