Good morning, Mr. Chairman and members of the Subcommittee. My name is Howard W. Hanna, III and I am President and CEO of Howard Hanna Real Estate Services, a family owned and operated full service real estate brokerage company headquartered in Pittsburgh, Pennsylvania.
Howard Hanna Real Estate Services has 65 residential and commercial real estate brokerage offices doing real estate sales and leasing in Pennsylvania, Ohio, West Virginia and New York State, and a mortgage banking company. Hanna Financial Services, which is licensed in those 4 states and also Illinois, Maryland, Colorado, Wisconsin, and North Carolina.
Our firm has 1500 associates and employees, of which 1128 are members of the National Association of Realtors, and I am proud to be a 32-year member of the Realtors Association of Metropolitan Pittsburgh, the Pennsylvania Association of Realtors, and the National Association of Realtors.
I currently serve as Vice Chairman of The Real Estate Services Providers Council, Inc. (RESPRO®) and I am a member of The Realty Alliance. I represent both organizations today.
RESPRO® is a national non-profit trade association of approximately 200 residential real estate brokerage, mortgage, home building, title, and other settlement service companies who united in 1992 to promote an environment that enables providers to offer diversified services for home buyers and owners (one-stop shopping) through strategic alliances across industry lines.
Approximately 55% of RESPRO®’s members engage in residential real estate brokerage, either directly or as a franchisor. Most of our real estate broker members are what I will refer to as "integrated" real estate brokerage firms, which means we also offer mortgage, title, and/or other settlement services to our customers.
The Realty Alliance is a national organization of 45 regional, residential real estate brokerage firms that provides its members with idea sharing venues, industry forecasts and analysis, financial benchmarking, and technology information.
Together, RESPRO® and The Realty Alliance members who are in the real estate brokerage business have closed over one million residential real estate transactions for a sales volume of over $1.8 trillion, utilizing over 300,000 sales associates and over 78,000 employees in over 50,000 offices nationwide.
I. Position of RESPRO® and The Realty Alliance Position on Bank-Real Estate Affiliations
Both RESPRO® and The Realty Alliance have formally decided, on a vote of their respective Boards of Directors, to support the 2001 proposal by the Federal Reserve Board (Fed) and Treasury Department to allow financial holding companies and national bank subsidiaries into the real estate brokerage and related businesses by declaring these activities to be "financial in nature", and to oppose legislation (S. 1839, H.R. 3424) to block this proposal.
All available evidence shows that home buyers like one-stop shopping, and that realty-based one stop shopping offers potential consumer benefits such as convenience and lower costs. RESPRO® and The Realty Alliance believe in free enterprise and a competitive marketplace that would allow any company to offer consumers these benefits, regardless of its industry or affiliation.
II. Today’s Realty-Based One Stop Shopping Programs
According to a 1999 study conducted by the independent consulting firm of Weston Edwards and Associates, the top 350 real estate brokerage firms closed $22 billion in mortgage loans in 1998, and realty-based and builder-based lending accounted for about 10% of all purchase money mortgages that same year. Edwards estimated that this amount would double to 20% within three years.
Edwards also found that 66 to 69% of the 250 largest residential real estate brokerage firms in the country offer mortgages, 31% offer title, closing or escrow or personal insurance in 1996.
III. The Potential Consumer Benefits of Realty-Based One Stop Shopping
Since real estate brokerage firms have entered mortgage and other financial services businesses, there have been several consumer surveys and economic studies to assess their impact. All have conclusively shown that realty-based one-stop shopping programs in today’s marketplace offer many potential benefits to the home buyer.
The most recent survey of consumer attitudes towards realty-based one stop shopping, which is attached to this testimony, was performed in March of this year. Harris Interactive, the parent of Harris Poll, surveyed 2052 recent and future home buyers and found:
The Edwards study I mentioned earlier found that mortgages offered by realty-based one stop shopping programs are competitive in both price and service. It concluded that real estate agents prefer using outside lenders unless the in-house mortgage service is exceptional, and that they only recommend the in-house product to the home buyer when the loan product is within 1/8th of a percent of the best rate and when he or she believes the service is superior to outside mortgage products. The Edwards study also found that 96% of realty-owned mortgage brokerage operations use multi-lender systems, in order to give their real estate sales force and their customers a choice of mortgage lenders.
A 1994 economic study commissioned by RESPRO® and conducted by Lexecon, Inc., a national economic consulting firm, also found that realty-based one stop shopping programs potentially offer lower costs. The study compared title and closing costs between realty-owned title companies and independent title companies in over 1000 home purchase transactions throughout seven states -- Florida, Minnesota, Tennessee, Wisconsin, Mississippi, Pennsylvania and California—and concluded that title and closing costs for realty-owned title companies were not only competitive with those of independent title companies, but actually resulted in a 2% cost savings.
The bottom line is that every consumer survey and empirical study to date has shown that home buyers prefer and potentially benefit from realty-based one-stop shopping programs.
IV. Integrated Real Estate Brokerage Companies Favor Open Competition
As you know, the banking industry has argued that financial holding companies and national bank subsidiaries should be able to compete with integrated real estate firms such as Howard Hanna Real Estate Services, Long and Foster Real Estate, and other RESPRO® and Realty Alliance members. In addition, some participants in this debate have accused the real estate brokerage industry as being "hypocritical" by wanting to be in the financial services business without letting financial institutions compete with us in the real estate brokerage business.
I can assure you that the vast majority of RESPRO® and Realty Alliance members favor open competition and believe that banks should be able to compete with us in our primary business in the same way we compete with them in the mortgage and other settlement service businesses.
Over the last 20 years, a number of financial conglomerates have entered the real estate brokerage business, with varying degrees of success: in the 1980s and early 1990s, Sears Roebuck owned Coldwell Banker, Metropolitan Life owned Century 21, and Merrill Lynch owned Merrill Lynch Realty. Today, General Motors Acceptance Corporation (GMAC) owns GMAC Real Estate, Prudential Insurance Company owns Prudential Realty, Cendant Corporation operates the Century 21, ERA and Coldwell Banker franchises, and Warren Buffet’s Berkshire Hathaway owns Home Services of America, Inc.
Initially, these companies appeared to have significant competitive advantages over traditional real estate brokerage companies, such as national distribution outlets, consumer marketing lists that made it easy to reach everyone, valuable data about buying habits, and tremendous name recognition. Sears even had access to federally insured deposits through its affiliate Sears Savings Bank.
Their entry into the business real estate brokerage business concerned many independent real estate brokerage firms at the time. In fact, in 1981, the long range planning committee of a national network of large regional independent brokerage firms issued a report to its members that stated that Merrill Lynch and Sears were the two greatest threats to the solvency of real estate brokerage firms ever faced by the industry.
But this prediction was unfounded. Sears, Merrill Lynch, and Metropolitan Life have since left the real estate brokerage business. While Prudential, GMAC, Cendant, and Berkshire Hathaway remain competitors, their presence in the real estate marketplace has not changed the basic character of the real estate brokerage business. In fact, we believe that their entry contributed to the development of a wider range of services and caused traditional real estate brokerage firms to become more efficient and more consumer-focused than they were before.
Federally-insured financial institutions also have entered residential real estate markets over the years. This is not surprising, since over 50% of financial institutions (state-chartered banks in 26 states, federal savings associations, and credit unions) can currently engage in real estate brokerage.
Metropolitan Financial Corporation owned Minneapolis-based Edina Realty from 1988 to 1995, Sears Savings Bank was affiliated with Coldwell Banker, and Twin Cities Federal (TCF) and Great Western at one time owned real estate brokerage firms. Savings institutions or state-chartered banks have also acquired real estate brokerage firms in Connecticut, Pennsylvania, Delaware, Texas, New York and in Florida. But over time, most of these financial institutions sold their real estate brokerage businesses and retreated from the marketplace.
Finally, it’s important to remember that real estate brokerage firms would have the ability to acquire federally-chartered financial institutions if the Fed-Treasury rule is finalized. Earlier this month, a bank in Pittsburgh with 25 offices and assets of $800 million that Howard Hanna Real Estate Services had a close working relationship with was sold to another bank. This was a bank that our real estate company would have been interested in purchasing if we were allowed to do so under federal law.
V. There Should be A Level Playing Field Between Bank-Owned and Non-Bank Real Estate Brokerage Firms Under RESPA and State Laws
While RESPRO® and The Realty Alliance support the ability of financial holding companies and national bank subsidiaries to enter the real estate brokerage business, we also believe that bank-owned and non-bank real estate brokerage firms should compete under a similar federal and state regulatory environment.
A. The Real Estate Settlement Procedures Act (RESPA)
At the federal level, all settlement service providers, including integrated real estate brokerage firms and our real estate agents, must comply with the Real Estate Settlement Procedures Act (RESPA), which requires that a lender give a Good Faith Estimate (GFE) of the closing costs three days after the application and a HUD-1 Settlement Statement at closing. Section 8 of RESPA also prohibits settlement service providers from giving or receiving referral fees, or "kickbacks".
Integrated real estate brokerage firms also are subject to RESPA’s "affiliated business" restrictions, which requires us, before we refer business to our mortgage, title or other settlement service affiliates, to (1) disclose the nature of the financial relationship; (2) not require the use of the affiliated settlement service; and (3) not give or receive any payments (referral fees) that are otherwise prohibited under RESPA. Under the last requirement, neither the real estate brokerage firm nor its real estate sales associates can accept any "thing of value" from an affiliated mortgage or other settlement service provider for referrals of business.
Financial holding companies and national bank subsidiaries that enter the real estate brokerage business would be subject to these RESPA guidelines, which we believe is appropriate.
But in the near future, HUD is expected to issue a proposed RESPA rule that would exempt providers from Section 8 of RESPA if they guarantee the lump-sum cost of a settlement service "package".
For there to continue to be a level playing field between bank-owned and non-bank real estate brokerage firms, it is essential that HUD allow non-mortgage lenders such as real estate brokerage firms to offer a guaranteed "package" to our customers in the same manner as mortgage lenders. We urge Congress to closely monitor the progress of this HUD rulemaking proceeding to assure that all providers have the ability to compete under any new regulatory environment under RESPA, regardless of their industry or affiliation.
B. State Laws Affecting Integrated Real Estate Brokerage Firms
Integrated residential real estate brokerage firms also are subject to a myriad of state laws and regulations that prohibit or restrict their operations.
In 2001, 37 states had statutes, regulations, or policies that place percentage limitations on the amount of business a title insurer or agent can receive from an affiliate, including an affiliated real estate broker, real estate agent, home builder, mortgage lender, or financial institution. Other states have enacted laws that prohibit a person from receiving a fee as real estate broker or salesperson and mortgage broker in the same transaction.
As you know, the Gramm-Leach-Bliley Act (GLBA) prohibited states from (1) preventing a depository institution or affiliate from being affiliated with any entity authorized by the Act; (2) preventing or significantly interfering with the ability of a depository institution or affiliate to engage in insurance sales, solicitation or cross-marketing; or (3) preventing or significantly interfering with the ability of an insurer or affiliate to become a financial holding company or to acquire control of a depository institution.
Since GLBA passed Congress, some financial institutions have successfully exempted themselves from these state restrictions under GLBA’s state preemption provisions. For example, the Kansas Insurance Department ruled in 2001 that GLBA preempted Kansas financial institutions only from a Kansas state law that prohibited a title agency from receiving in excess of 20% of its operating revenue from an affiliate.
As a result, Kansas financial institutions may own a title company but non-financial institutions, including real estate brokerage firms, may not. If financial holding companies and national bank subsidiaries are allowed to own real estate brokerage firms, then bank-owned real estate brokerage firms could own title agencies but non-bank real estate brokerage firms could not.
RESPRO® and The Realty Alliance members have consistently opposed these state anti-affiliation laws over the years, and we support their preemption or repeal for both financial institutions and non-financial institutions. If the Fed and Treasury approve a final rule, we urge Congress to assure that state laws apply equally to all real estate brokerage firms, regardless of their affiliation. This would better enable all real estate brokerage firms to offer home buyers the benefits of one-stop shopping programs, regardless of whether they are affiliated with a financial institution.
Mr. Chairman, I again thank you for the opportunity to testify, and I would be glad to answer any questions.
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