NAR lawsuit settlement could mean more costs for buyers

Changes from the settlement may also shake up how the mortgage industry operates

Most say it’s still too early to know what impact the National Association of Realtors settlement will have more broadly on the business of buying and selling homes.


There remain a number of unknowns about how the National Association of Realtors settlement reached late last week will shake up the housing market.


The NAR on Friday said it had reached a $418 million settlement to end a number of class-action lawsuits targeting its commission structure. The lawsuits alleged a conspiracy between the NAR, multiple listing services and brokers to keep commissions high by largely requiring home sellers to pay buyer-broker commissions, and to require those commissions to be listed on listing services.


There is still a great deal of uncertainty about how the settlement will play out — among the actions still needed is a judge to approve it.


But one of the proposed changes, as part of the NAR’s agreement, is that buyers must enter formal representation agreements with MLS members so they’re aware of what their agents will charge for their services. The NAR also said it has agreed to put in place a new MLS rule that prohibits offers of broker compensation on the MLS. These changes are expected to go into effect in July.


While the biggest reform may be around how real estate agents get paid, most in the industry say it’s still too early to know what impact it’ll have more broadly on the business of buying and selling homes. That the shift is a significant one is obvious, but whether that will affect how buyers and sellers operate within the market — and when — is debatable.


“Real estate is always supply and demand,” said Brandon Brittingham, CEO of The Maryland and Delaware Group of Long & Foster Real Estate in Salisbury, Maryland. “A lot of things cause people to buy and sell a house. If there are structural changes to more cost being put on the buyer, I think that negatively affects the buyer and positively affects the seller.”

But, he continued, what’s still up in the air is how many buyers will ultimately be paying agent commissions, and how much. With a move to a more negotiated fee commission, that doesn’t necessarily mean the standard regime — a 6% commission split between the buyer and seller brokers, and paid for by the seller — will go away entirely.


Brittingham said it’s frustrating that the litigation was intended to protect consumers but some changes could ultimately end up hurting them. Most tracking the lawsuits have said, though, the homebuying process will become more transparent with the reforms.

In the wake of the settlement announcement, there have been a lot of myths about the 6% commission going away entirely, Brittingham said. Sellers may decide to continue offering to pay a buyer agent’s commission, he said, as a tactic to draw more potential buyers — and the more people interested in buying that house, the more money you could potentially get from selling it.

“For first-time homebuyers, it’s always a struggle for them from a financing standpoint, especially in a competitive market,” he said. “If they have to pay the commission, they’re going to get squeezed out of the market.”


Affordability has been a signature challenge of the pandemic-era housing market, especially in the wake of rapidly rising mortgage rates that began after the Federal Reserve started to hike interest rates in 2022. Zillow Group Inc. (NYSE: ZG) recently found buyers need to make more than $106,000 to comfortably afford a home, an 80% increase from the $59,000 needed in 2020.


If there’s even a perception that buyers — especially cash-strapped first-time buyers — will now have to pay another fee to close on a home, it could serve as one more deterrent to enter the housing market, some in real estate say.


Suzanne Seini, founder of Innovate Realty Inc. in Irvine, California, said in an emailed statement if a buyer’s agent fails to negotiate their commission with the seller, they will have to contract and arrange compensation to be paid by the buyer. That can then strain first-time buyers, in particular, who may already be exercising their maximum budget to buy a home in the price point and area they desire.


“This additional financial strain could potentially bump them out of their purchase price tier to cover buyer agent commission,” Seini said.


Although the spring housing market is already seeing more listings than last year, which is then predicted to lure more buyers into the market, it’s possible the recent headlines will detract would-be buyers.


“If somebody is on the fence, they may sit on the fence a little bit longer,” said Phil Crescenzo Jr., vice president of the Southeast division at Marlton, New Jersey-based mortgage lender Nation One Mortgage Corp. “If they’re ready to buy, then they’re going to do it — if interest rates aren’t going to deter them, (this won’t). It’s so case by case.”


There might be a perception, especially early on, among buyers that an agent commission is yet another fee to be paid on top of already high housing costs. But that amount can be negotiated, Crescenzo said, and will vary with market conditions.


“You’re going to see maybe stronger offers if they want to move a property,” he continued. “But (this is) all new. There’s no context to draw from.”


Mortgage industry impact


Questions have arisen, too, about how the mortgage industry may be affected by the upcoming changes.

The Mortgage Bankers Association in a statement to The Business Journals Tuesday said it was monitoring the outcome of the settlement, including the likelihood of new approaches to buyer agent commissions. An MBA representative wasn’t available for an interview by deadline but Bob Broeksmit, the association’s president and CEO, spoke briefly about the situation this week at the MBA’s National Advocacy Conference in Washington, D.C.


“There will be market reactions to this settlement, and it will create openings for other business models where we want the buyer represented, but the seller may not want to pay 3% for a buyer’s agent,” Broeksmit said at the conference. “One of those models could be that you, as lenders, license your loan officers as real estate agents and offer the buying agent service for less than a 3% fixed-fee point. And some of you will say, I want nothing to do with that. Others of you will say, that is a great retention opportunity for my loan officers and the market will figure all this out.”


A spokesperson for the MBA said it would continue its engagement with the Federal Housing Administration, Department of Veterans Affairs and Fannie Mae and Freddie Mac about any guideline changes that may be needed in the future.


The association continues to advocate that, if any buyer-agent commission is paid directly by the seller (rather than indirectly through the listing agent), that it not be included when calculating maximum seller contributions for conventional or government loans, the spokesperson added.


Many mortgage lenders share leads with a real estate brokerage in exchange for a fee — and a lot of lenders get referrals from buyer agents. But those practices might change with the buyer agreement requirement and commission structure shakeup, so there could be less reason to spend thousands of dollars a month in marketing agreements, Crescenzo said.


“That’s something as lenders we haven’t had to think about,” he continued. “That’s a change that we’ll have to monitor.”


Marty Green, a principal at law firm Polunsky Beitel Green, which specializes in serving mortgage lenders, said the possibilities that buyer broker costs will be passed on to the buyer may impact government-backed loans for veterans and first-time homebuyers, which often place limitations on what expenses buyers can incur.


While it is still too early in the process for mortgage lenders to craft definitive policies around these industry changes, it isn’t too soon for mortgage companies to start having discussions with government agencies on how to implement any needed changes once the dust settles, Green said.


Ultimately, some loan programs may be revised so that buyers can roll their broker costs into the home loan amount —essentially getting it financed. 


“Absent such an adjustment in underwriting guidelines, the affordability of home ownership, which is already stressed, will simply become out of reach for many Americans,” Green said.

That is especially so for Veterans Affairs loans, which allow service members to purchase homes with no down payment, but with limitations on out-of-pocket costs. 


“Without a change in VA loan guidelines, VA loans could become particularly tricky if the seller is unwilling to pay the buyer’s agent because of current limitations on what the veteran is allowed to pay in terms of expenses in the transaction,” Green said.



By Ashley Fahey and Andy Medici – Denver Business Journal