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this post was submitted on 15 Mar 2024
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The really fucked up thing is the origination fee. Banks charge like 1% to do the loan paperwork. Why does the paperwork for a $400k house cost more than a $250k house? Don't the banks make enough money on the interest?
Not to mention PMI, which should just be illegal. Oh you don't have 20% down? Great credit score? Doesn't matter. We're charging you another 2%.
Home sales are a greasy business.
That 20% down payment in today's market is just atrocious. We're getting ready to sell our home and we will profit maybe 80k, and that's still not enough for a detached 3-bedroom home in our area. We'll likely need to dip into our 401k to get up to 20% to avoid PMI
I think that the system for determining down payments and mortgage rates is probably okay. That market should be competitive -- if a lender is demanding an unreasonable amount, a buyer can go somewhere else, same as any other market.
https://www.forbes.com/advisor/mortgages/how-many-mortgage-lenders-should-i-apply/
In such an environment, I'd expect that it's hard for there to be collusion to artificially drive fees up. They'd have to have some way of preventing competing lenders from entering the market.
The down payment discourages a buyer from defaulting, so I suppose if lenders expect high down payments in a given situation, they expect a high risk of default. Maybe they assess the risk of the post-sale price falling as high, for example. Saying "I want 20% down" is the lender saying "I think the price might fall 20% and if so, I don't want to be the one left holding the bag. You, the buyer, can eat the first 20% of price drop, and only after that will I start to be exposed."
I think that if lenders are wary of lending to buy something without a large down payment, I might be wary of buying it too, as a potential buyer.
Might be interesting to see what the correlation is in historic spread in offered mortgage rates for various down payments with historic price movements of houses over some subsequent fixed period of time. If a lender can do a good job of predicting price movements, then one would expect them to have a higher down payment more-significantly reduce lending rates prior to situations where the price of the property falls.
Lenders these days lack nuance and are beholden to large corporate rules that are there to protect them. What you are saying is good but I don't think it exists.
But I have not been able to afford to buy a house so I have no idea.
My take is that having a percentage fee of the total sale price for the realtor makes little sense. The realtor might be able to get a more-favorable price, sure. But the effort and return there aren't linear in the price of a house. If one wants incentive to reflect what the realtor's involvement actually does, I'd expect to do something more like have a commission based on how far the price differs from an appraisal or something.
Sure, there are different issues with gameability there, but let me put it a different way. Say you are selling or buying a ~$500k piece of property. Say the price can go up or down $50k based on what your agent does. Do you want to have the realtor mostly incentivized to get that swing in your favor, or incentivized to get more throughout? As things stand on our hypothetical sale, there's a percentage of that that goes to both the buyer's agent and seller's agent.
As things stand in our hypothetical example, 80% of the seller agent's incentive is to just close the sale. If they have to put in double the amount of work to get the best possible price rather than the worst possible price, it makes no sense for them to do so -- they'd rather focus on doing another sale.
I remember thinking "it'd probably be a good idea to outright offer something like a 50% split on sale above some fixed level to the agent, if you're selling real estate, even in addition to the existing commission, because as a seller, you want them focused on driving that number up, and the current system doesn't much do that".
As the existing structure has it, the real sales job that the seller's agent is incentivized to do isn't getting a favorable price for the seller, but rather selling the seller on having them, rather than a different realtor, represent them.
On the side of the buyer's agent, the existing incentive is even more curious, because they get rewarded by having a higher price, not a lower price, which to the degree that they respond to incentives to have a different price, aligns their interests with the seller, not the buyer that they are hypothetically working for.
That being said, I understand that percentage commissions aren't uncommon in the sales world. Just that usually, a salesman isn't selling a fixed amount of product for the party that they are working for -- you're trying to incentivize them to sell a larger amount. And while I don't know how procurement agents are typically compensated, I doubt that it's normally tied to having a higher price. Any system is going to have its own degree of gameability, but the current set of incentives seems to me really removed from one that makes sense for the buyers and sellers involved.
This is why everyone seemingly has a real estate license. Low barrier to entry and no cap on income. I am guessing the barrier will increase now so the top producers get even more quantity to make up for the lower per transaction deal and push out the smaller fish.
Without PMI, if you don't put 20% down, they just won't give you the loan for that amount. Outlawing PMI would just screw the consumers who can afford the payments, but just don't have the 20% to put down. Which was the case for me when I bought my first house.