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March 2007
Index of all
messages
from the Association President
President's Message - Why is NAR adamantly against banks in real estate?
By Cheri Long
There has been a long standing national policy against mixing banking and commerce (real estate). That has been national policy – not political favoritism given to a trade association.
Without this separation, bank failures, such as that of the Silverado magnitude, could continue to occur, affecting the economy of the nation. Remember when Silverado Banking, Savings and Loan Co. aggressively entered the real estate market during the relaxed environment created by deregulation? They shifted the focus from residential real estate to complex commercial development in the mid-1980s. And then the market started changing.
The economy lost its momentum when the oil and housing markets declined. Banks holding a high percentage of real estate in their portfolios went under, leaving investors and individuals wondering what just happened. Yes, it was a weird set of circumstances that led to the fall, but it happened.
It could happen again, and wisely, NAR is working to keep it from happening again. Why? Are REALTORS® afraid of the competition big banks would pose? Not hardly. After all, REALTORS® compete every day of their business lives. They compete against national companies, huge franchises and single business owners, even their own friends. But why, then, are they reluctant to allow banks in business?
It would create an uneven playing field, not for the REALTORS®, but for the general public. Banks get their money at a much lower rate than what they offer the public for mortgages, a much better rate than what brokerage and management companies can get a loan for. They could utilize their income stream from real estate to offset interest rates as a means to attract customers, or worse yet, offset interest rates by dumping their real estate. What if they offered their own customers rental rates that you couldn’t compete with?
It could also compromise their decisions on lending money to a customer based on whether it could fit into their own portfolio. For example, you bring your client to XYZ Bank with a business plan and a proposal to purchase land. The bank likes the package so well, they deny your client and turn around to place an offer on the land themselves, conveniently financing the package through their own means. How can they be trusted in any aspect, including appraisals, if they are competitors in the same market? Conflict of interest is just one of the problems created if banks are allowed into the real estate business. NAR is simply agreeing to keep the national policy of separating banking and commerce.
However, not everyone is on board with this position. In December 2005, the Office of the Comptroller of the Currency (OCC) issued three legal opinions expanding the authority of banks to engage in real estate development. This was allowed while Congress was on a recess, and no one was overseeing the OCC’s decisions. The three decisions show the “generous” interpretive rulings:
- PNC Bank was allowed to develop a project involving retail space, offices and a hotel, and 32 condos for immediate sale to finance the project.
- Bank of America may develop a Ritz Carlton luxury hotel in which some of the rooms will be used for its own purposes.
- Union Bank of California can own up to 70 percent of the equity interest in windmills and the associated real estate.
Do you wonder who would control the energy from the windmills, or why a bank needs a luxury hotel to conduct business? How many of you need an overnight stay to conduct business at your bank?
Fortunately, in 2006, applications from Wal-Mart and Home Depot drew attention to this loophole and NAR went into action. These were seriously flawed rulings and NAR had to react before more damage was done to the national policy. Fortunately, they have a powerful influence. They brought it to national attention that the OCC was creating law without public notice and comment, without public participation and without publication. Our own Sen. Wayne Allard and Sen. Hillary Rodham Clinton are working on a bill, S. 413 “The Community Choice in Real Estate Act,” which clarifies Congressional intent that real estate brokerage and management are not banking activities.
It is not for the REALTORS® that we watch and wait, but for the consumer, who has so much more at stake, so much more to understand.
You can read more about this if you “Google” national policy banks in real estate. Please go there and educate yourself. Information in this article has been gathered from my attendance at NAR meetings; from NAR Hot Topics - Answers to Current Business Issues; and from other Internet sources including The American Journal of Economics and Sociology, Oct. 1998 by Davita Silfen Glasberg and Dan Skidmore. |
