|
Proposed Fed Rules Would Allow Banks into Real Estate Brokerage
|
|
|
Proposed Fed Rules Would Allow Banks into As if the real estate business weren’t already competetive enough, the federal government is moving to make the field even more crowded. A joint proposal of the Federal Reserve Bank and the U.S. Treasury Department would allow banks to get involved in real estate brokerage and management. The new regulation is enabled by the Gramm-Leach-Bliley Act, passed last session of Congress and signed by President Clinton, altering rules enacted after the Depression (the real one), in which banks failed in record numbers, partly because they were involved in too many side businesses. The public has until March 2 to file written comments on the proposal. Details on how to file are at the end of this story. Under the proposed new rules, real estate brokerage and management services would be defined as financial activities in which subsidiaries of national banks could participate. Existing federal and state "anti-tying" laws prohibit financial holding companies from requiring management or brokering contracts with it or its subsidiaries as a condition of financing. This law wouldn’t be changed, the Federal Reserve said. The amount of credit and support that can be extended to a bank’s brokerage affiliate is limited by the Federal Reserve Act, which also requires that mortgage loans to clients of their real estate affiliates be written at market value, the Fed said. But banks and lenders have always figured out ways to skirt laws; it’s the American Way. Real estate brokerage and management professionals have mixed opinions about what the change would mean to the retail real estate industry. Some expressed concern the new opportunity would cloud bankers’ judgment in making loans. "They are a greedy lot, aren’t they?" said William Eshenbaugh, president of bbre/Eshenbaugh. "They (banks) will strong-arm a prospective borrower even to the point where they inject themselves into deals where they didn’t bring anything to it." Similar skepticism was voiced by Leslie R. Sax, principal broker at Uniwest Realty, Inc.: "I think banks ought to concentrate on their business and let the real estate professionals handle their own business," Sax said. "I would ask where the checks and balances are. If they don’t exist, it sounds like a recipe for disaster." Edwin Raskin, chairman emeritus of the Edwin Raskin Companies, was less worried. He said property management would probably be treated like other services that the Fed has allowed banks to sell. "The lenders would have the same opportunity with real estate as they do with insurance and they don’t generally try to tie them (loans and insurance) together," Raskin said. "They may reserve that right to broker and manage for defaults." But Eshenbaugh said his clients have complained to him that subtle pressures to take advantage of the banks "other" services intensifies when financing is involved. "The banks are buying insurance agencies, then banks lean on the borrower for policies on the properties they are trying to refinance." Others are concerned that banks may not have the expertise needed to serve consumers in the industry. Faith Hope Consolo of Garrick Aug Worldwide said market experience will be critical to bankers’ success in the industry. "If they are knowledgeable in the very fast changing market, then I don’t see an issue," Consolo said. "It will be just like the stock brokering they can do now, but everyone has the fear of the unknown." Raskin said the new rules could be a boon for real estate professionals already affiliated with banks but not able to operate under the bank’s aegis. "The banks will use the same CREs and CPMs as they do now, that work as advisory staff," Raskin said. "Those people, in general, are not as entrepreneurial as those in management companies." "As a laissez-faire capitalist, I have no problem with them entering the business, but that doesn’t mean that they will do it well," said Ken Simon of KFS Properties. "This is a relationship business and there will continue to be a place for boutique business." Some brokers don’t see the market as a profitable one for banks. A healthy dose of sarcasm was administered by Barry Endelson, executive vice president of Aries Deitch & Endelson Inc.: "They should all pay their 20 year-old associates six-figure salaries and big benefits to deal with my generous and credit-worthy clients and customers who without objection pay those fat commissions so promptly. Surely that is the road to riches for the financial community." James Schutter, vice president of retail brokerage at M&J Wilkow, Ltd. said the complexities of retail real estate as compared to residential may steer banks toward concentrating on homes. "Not all banks have that retail expertise in house right now," Schutter said. "It could have a larger impact in the residential sector, but I don’t see it working that well for commercial. The bigger companies may have people that are very sophisticated and experienced in retail brokerage but they are swamped." The structure of banks concerns some in the industry. Quick decisions and changes in details are often the difference in whether a retail space is leased or remains vacant. A management company that has to wait to push details through a bank’s committees would be at a serious disadvantage, according to some in the industry. Opinions vary on the scope of change for business in general. Robert K. Futterman, chief executive officer of Robert K. Futterman & Associates, said the addition of banks to the real estate business won’t change the relationship of brokers to tenants and property owners. "Their entry will cause further consolidation in the services business," Futterman said. "But the relationship of the bank as lender to the owner is and will be separate from the broker’s services. It makes our brokerage services more valuable." Raskin thinks competition will be hurt with some existing management outfits being absorbed by banks. "The banks will probably buy some management companies and that will reduce some of the competitive situations in the management industry," said Raskin. "But there are some individuals who will not work for banks, they will seek other fish to fry. On the whole, it will reduce competition like it did on mortgages. Commercial mortgages are a good example and some commercial mortgage companies have done well enough to buy banks." While some buying and merging will take place, the overall effect may not be that large, Simon said. "It could turn out to be similar to the scare of the REITs," Simon said. "There were people saying, ‘If you don’t work for a REIT now, you will,’ but that just didn’t happen." Gerald Divaris, chairman/CEO of Divaris Real Estate said energies would be better spent clarifying and enforcing anti-tying laws than worrying about banks entering the market. "The government seems intent on allowing everybody to do everything. Letting the banks do real estate work, while it is not the best use of their time, is acceptable but the real issue is the potential conflict of interest," Divaris said. "Rather than fight it and lose anyway, the better thing is to control it. It should be made sure that there are rules to protect the consumer. If a banker becomes the lender on a center where it has over 50% interest in the management company, then that company should be precluded from managing that center." The Fed has set a March 2 deadline for comment on the rules. All comments should reference docket number R-1091 and be mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW, Washington, DC 20551. Comments may also be mailed to Real Estate Brokerage and Management Regulation, Office of Financial Institution Policy, U.S. Department of the Treasury, 1500 Pennsylvania Avenue, NW, Room SC 37, Washington, DC 20220. Send email to: regs.comments@federalreserve.gov or financial.institutions@do.treas.gov.
|