Subprime Crisis May Not Affect Real Estate Agents or Mortgage Brokers

Below is an exerpt from the Real Estate Agents, Mortgage Brokers Could Leave Subprime Crisis Unscathed article our own Steve Sargenti co-authored in Property and Casualty Insurance News.

"Not every firm connected with residential real estate and poor credit borrowers faces catastrophic exposure to subprime mortgage losses. Front-line professionals far removed from the aggrieved investors are in much better shape.

For example, mortgage brokers and real estate agents face relatively little exposure to the subprime crisis because their direct relationships are with buyers and sellers.

By contrast with lenders and mortgage banks, mortgage brokers are arrangers of credit. They do not render investment advice nor underwrite buyer credit quality. These front-line professionals facilitate or arrange deals between willing buyers and sellers of real property.

Real estate and mortgage brokers do not face direct liability from the largest aggrieved class: the investors who own mortgage-backed securities. These front-line professionals are much safer bets to survive the subprime crisis for at least three reasons:

(1) The legal nuance that all real property is unique.

Essentially, there is no material fact to misrepresent because home value is established by the convergence of a willing buyer and willing seller. Real estate agents face borrower claims that they overpaid for their house, or did not understand the
financing, but arrangers are not responsible for truth-in-lending disclosures.

(2) Difficulty in establishing damages.

An aggrieved investor will face a number of hurdles tracing liability back to a front-line professional. For example, many states have remedy and anti-deficiency laws that require the owners of most loans secured by real property to make a difficult choice should they not be getting paid.

The choice is to forego the security (the house) and sue the borrower on the note, or obtain the proceeds via exercise of a power of sale. In short, lenders can either get a money judgment or the house, but not both.

The economy and security of foreclosure is far preferable to abandoning the security and obtaining an uncollectible judgment. What is usually left is a lender that bids the full value of their note at public sale. Successful or not, this “full credit bid” is an admission the property was worth at least the loan amount. Voilà—no damages.

(3) General unwillingness of mortgage lenders to bring direct actions against real estate and mortgage brokers.

Most mortgages are still originated through independent channels. Lenders are heavily dependent on the retail and wholesale distribution channels and are therefore reluctant to alienate these key partners."

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