Are Canadian Realtors® Paying for the Banks Legal Costs?

Ever experience one of those "light bulb" moments?

It's the moment that you get the perfect storm happening in your head, creating a surge of electricity, ultimately resulting in the "Wait a minute" verbiage pulsating between your ears. "Wait a Minute" is right!

 

Lenders, Lawyers and Foreclosures

I just experienced a light bulb moment. There was a time, when the Banks had their own foreclosure departments and their own legal professionals. Upon default, the file would be transferred to the Banks collection department and the whole process would start. If it was a High Ratio Mortgage, insured by CMHC, the bank would be paid out and CMHC would put the property on the market through their own Real Estate division, and pay the Selling Agent a healthy "6" percent to sell it. Needless to say, there was always a line up of Agents ready to sell these listings.

CMHC Gets Smart

Then, CMHC (Canada Mortgage & Housing), which was the main default insurance player, got smart to the Banks, because the Banks weren't really taking on too much responsibility in the matter, so they told the Banks that they would be responsible for selling the default properties before they could collect on the default insurance.

Banks get Smart

So, the Banks set up special departments, specifically for foreclosures and start dealing with Realtors directly. But, they didn't want to pay 6% anymore, they wanted to reduce costs a bit, so they offer Realtors® 5.5%. This still wasn't a lot of fun for the Banks and certainly was a costly venture. CMHC actually thought that it would tighten up the Banks underwriting department. That perhaps they would start to be more careful in lending once they had to take some financial responsibility in the sale of defaults. But, the Banks aligned with a couple major Law firms and figured it all out.  The Banks would immediately assign the defaulted property to the Lawyers, thereby not having to have their own "Foreclosure" personnel, and instead of paying their lawyers out of their pocket, they would pay the Lawyers out of the Real Estate Commission they would normally be paying. It was a win/win for the Banks and selected Law Firms.

Realtors® take the Hit

Fast forward to 2011. The Power of Sales continue. The majority are horrific. Remnants of illegal multi-residential units that you wouldn't want your dog to live in, busted grow-ops, dilapidated rentals and properties that are so full of patent defects that it's hard to believe that anyone would ever have bought it in the first place. A clear indication that the Banks are still having an issue with underwriting. They get distributed to hungry Agents at a net commission of 5.5% with the condition that the Real Estate Agent pays the Law firm a 1% referral fee for the listing.

Light Bulb Moment

"Wait a Minute!!!".....Canadian Realtors® are now paying for the banks legal fee's. Smart Banks...time to buy some Bank stock!