This week Congress introduced a bill titled, "Community Choice in Real Estate Act," to permanently ban banking conglomerates from entering real estate brokerage or property management. This is because some of the larger banking conglomerates have requested permission from the Federal Reserve Board to sell and manage real estate. Pretty much every major organization in the real estate industry is backing the bill against banks in real estate.
To be honest, the name of the bill sounded a bit Orwellian to me. My first thought is, “how does prohibiting competition (i.e. the banks) give me the consumer a greater choice?” It's easy to assume that real estate industry giants are just trying to keep a potential competitive threat out of their business in much the same way the local mom and pop retailers will do everything possible to keep new Wal-Marts and Home Depots from being built next to their stores.
Then I started thinking about this a bit more. If Bank of America, CitiBank, and the rest of the national banks were allowed into the industry, what would really happen and who would benefit the most from it? Would it give us more or less competition? What would it mean to the average Joe who just wants to buy or sell a home?
That's when I realized it really would eliminate competition and hurt the average consumer. Why? Because a bank like Bank of America wouldn't just go rent a small office space with a couple of employees downtown and try to build their business from the ground up- beating the Prudential's, Coldwell Banker's, and Remax's of the world on better service. No, a Bank of America would enter the market by throwing out Billions in cash to buy out the largest real estate chain they could land. Heck, they might even buy a couple of them! Not to pick on Bank of America, but where I live that is how they became a bank here - by buying out one of our local chains?
If this bill were passed, it would undoubtedly start a feeding frenzy of banks buying out real estate companies to capture the largest amount of market share they could capture as quickly as possible. Once the first few deals were done, there would be tremendous pressure on other banks to follow suite. Ironically, the real estate industry giants trying to keep banks out of real estate would probably fare quite nicely selling out their businesses!
Doing a quick Google on the nation's largest banks, I discovered that the largest, Chase Manhattan, is worth $270 Billion dollars. What I found interesting is that Banker's Trust, the nations 5th largest bank, is only worth $95 Billion- or roughly 1/3 the size of Chase. There's a huge drop off once you get past the first four banks (Morgan, the number four bank, is worth $173B or almost twice the size of Banker's Trust). So which four banks do you think will succeed in buying out the largest real estate companies? What do you think will happen to the Banker's Trust's of the world when a Chase or a Bank of America gets 5-6 times their size instead of 2-3 times? You guessed it, another round of bank mergers!
So now we've established what will happen- mass acquisition and name changes; fewer banks and real estate companies. But what about the average Joe who just wants to buy or sell a home? Realistically, a change probably wouldn't change the number of real estate agents on the street. Unlike other industries, agents are basically self-employed- so their numbers are regulated by the supply and demand of sales, not by the large companies looking to get into the business.
But fewer agencies tied to a bank will undoubtedly mean an increase in overall expenses to the consumer. How? By supplying all the services you need to buy a home, the banks would be able to reduce the competition the consumer could get in areas like finance and insurance. Real Estate basically becomes a bank's way to capture your business in much the same fashion as buying a photocopy machine locks you into buying toner and supplies from the company that made the photocopier.
Although there would be laws prohibiting a bank from “requiring” a home buyer to use only the bank's services, there could be extreme pressure put on an agents to deliver a portfolio of services to their buyer. Since many consumers rely on their agent to line up financing for them, they could be lulled into higher rates and greater fees. Think about this, since the banks began merging a few years ago, what has happened to free checking, free ATM use, and other formerly free services at your national banks?
However to see the biggest threat to the average Joe from a real estate/banking merger you only have to look at the Savings and Loan crisis from the 1980's. The Savings and Loans went wild in the real estate industry writing one bad loan after another in an attempt to grab more sales. In the end it cost tax payers Billions to bail them out.

About The Author

Sid Cameron currently works for the STLagent Team of Real Estate Professionals in St Louis, MO. His website is http://www.stlagent.com
Sid publishes the St Louis Real Estate Blog at http://www.stlagent.com/blog/blog.html
He also moderates the St Louis Community Forum Message Board at: http://www.stlagent.com/forum
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scameron@stlagent.com