The Community Home Lenders of America (CHLA) this week submitted a letter to the Federal Housing Administration (FHA) that urges the agency to “provide comparable down payment treatment for FHA borrowers, regardless of whether or not the seller is willing to pay the home buyer broker commission,” according to an announcement by the organization.
The letter is being sent in response to a series of real estate commission lawsuits and the recent $418 million settlement by the National Association of Realtors (NAR), with the association also agreeing to abolish the “Participation Rule” requiring sell-side agents to make an offer of compensation to buyer brokers.
CHLA contends that the settlement is “likely to result in a shifting from the home seller to the home buyer of the financial responsibility to pay buyer Realtor commissions,” and cites three key concerns in its letter addressed to FHA Commissioner Julia Gordon.
The first is a contention that large swaths of first-time homebuyers, who already face major challenges to enter the housing market, will not be able to meet higher down payment thresholds necessary to pay the buyer’s agent commission when using FHA financing.
“We believe that FHA borrowers should not have to make a much higher down payment merely because the seller is (arbitrarily) unwilling to fund the buyer agent commission,” the letter stated.
The CHLA also raises concerns about preexisting biases that may impact borrowers using FHA financing, a bias they contend has been demonstrated in the past.
“Existing (and well documented) home seller biases against buyers with FHA loans will be exacerbated, because of concerns over the buyer’s ability to make higher down payments,” the letter stated.
The third highlighted concern stems from the potential for inflated sales prices based on commission impacts, with CHLA contending that sellers “may use their leverage over the higher down payment levels to extract a higher sales price in exchange for agreeing to pay the buyer agent commission.”
The letter provides a series of prototype loan scenarios that could spin out of the settlement, illustrating CHLA’s arguments. Among the scenarios is one that CHLA hopes will become standard practice, in which “every home seller will be willing to pay the buyer agent commission, as a courtesy and without extracting a higher price in exchange for doing so,” the letter stated. “However, we do not have confidence that this will be the case.”
FHA borrowers are particularly vulnerable to sellers who may try to leverage a higher sales price, since “paying cash for their agent’s commission may not be economically feasible [for FHA buyers],” the letter read. “Having spent several years building up cash reserves for the down payment, the homebuyer will thus have to wait a few years longer to accumulate the cash necessary to fund this amount.”
Late last month, FHA addressed a common question the agency had received from interested stakeholders, who asked how the proposed settlement agreement will affect the treatment of seller-paid buyer broker fees in transactions that use FHA-insured mortgage financing.
“Under existing FHA policy, if sellers continue to pay buyer-side real estate agent commissions and fees as a manner of state and local law or custom, and if the commissions and fees are reasonable in amount, existing policy would not treat those payments as interested party contributions provided all other requirements are met,” the agency said in an informational notice distributed to professionals via email and published online.
Editor’s note: An FHA statement on a different matter was erroneously included in a previous version of this article.
