I must say that despite the many issues that I have with the "wild west" type of atmosphere often found in the real estate industry, even I was surprised to read this recent Jen Benepe article from The Real Deal regarding mortgage broker kickbacks to real estate agents. My surprise seems warranted as most of this behavior seems to be occurring in the outer boroughs, but still amazing to me.
Kickbacks from mortgage brokers are the payments that real estate brokers demand before they refer their buyers to the mortgage broker for a mortgage, after or even before the client has decided to buy the property. Those requests are illegal, but they are rising because of the slackening demand in mortgages across the region, said some in the industry.
Eric Barron, president of the Barron Mortgage Group, said real estate brokers approach him demanding a 1 percentage point fee for referring their customers, an amount that they claim is less than the 2 percentage points they charge other mortgage brokers. The problem, he claimed, is worse outside of Manhattan and farther out in Brooklyn, as well as in Queens, the Bronx and Staten Island, where home buyers tend to be less well educated about borrowing and business is scarcer all along the real estate food chain.
I can say without hesitation that I have never seen anything like this in my 15 years in the industry. I have however seen mortgage brokers offer savings to my clients if I decided to refer them for loans. One such mortgage broker has agreed to pay all bank fees for my clients and another has agreed to go a step further and pay those fees plus refund $500 at the closing to the client. But that’s all I have ever seen. To think that real estate agents are actually demanding illegal kickbacks that would ultimately affect the cost of their buyer’s loan is disgusting.
Once made, the kickbacks are added to the bottom line points that the client ends up paying, and can increase a buyer’s mortgage interest rate by 1 to 2 percentage points, said experts. The practice has the same negative effect that sub prime lending does, driving up the cost of borrowing to consumers.
It reminds me of when I started in the rental business in 1992 and landlords required "key money" from tenants to secure a rent controlled or rent stabilized apartment. Not the same thing at all, but equally as disgusting. Worse yet, this practice is most prevalent in areas with large percentages of immigrants.
Experts say that the incidence of kickback requests increases in neighborhoods with more immigrants, who may not be aware of the illegality of the practice. Indian and Pakistani neighborhoods of Queens, Hispanic home buyers throughout the city, and other ethnic groups are more vulnerable to the system of bribery and unfair market control. The problem magnifies among African-American home buyers, who are sometimes also magnets for sub prime and predatory loans, where higher rates make it easier to mask additional points.
It seems that the big players in the mortgage business are much less likely to partake in this type of activity.
Other mortgage brokers agreed about the prevalence of kickbacks. One who works for a large company and spoke off the record said that kickback demands from real estate brokers was "rampant" in the outer boroughs.
Because he works for a national company, he is unable to operate in those areas, he said, because the risk for a large public company is too great.
Advice to Buyers:
Consider a big company when obtaining a mortgage and always get more than one quote on rates and fees.
Use the competitive mortgage environment to your advantage by seeking multiple rate and fee quotes.
Be certain that nothing is happening behind the scenes to inflate the cost of your loan by reading all documentation including your Good Faith Estimate prior to signing anything.
Make sure you are working with a real estate agent whom you trust won’t jeopardize the cost of your loan for their own benefit.
If your real estate agent refers you to a mortgage broker, ask for more s/he to refer more than one and consider getting a quote from a mortgage broker from a separate source (i.e. friend or colleague) as well.