By Lori Lesko

Some mortgage brokers believe that lenders recruiting and training real estate agents to originate mortgage loans is bad business, leading down a slippery slope toward sham affiliated business arrangements (AfBAs) and RESPA violations.

Besides, many brokers reason, cutting the more experienced and knowledgeable mortgage brokers out of the action will only hurt the consumer – and the industry.

But lenders see advantages in Realtors being able to share in the origination process and believe HUD should make it easier for them to do FHA loans, as well.

Skip Wiley, president of Transcontinental Lending Group in Fort Lauderdale, Fla., has noted,

“One of the growing trends that I believe is not fully understood or accepted by HUD/FHA, is the popularity of the consumer embracing one-stop-shopping services for real estate and mortgage services.”

LoansWorks for Realtors

“Companies like LoanWorks.com (IndyMac) and OnePipeline.com (Everbank), embrace recruiting and training Realtors to originate mortgage loans for their clients,” he said. 

“This trend of one-stop-shopping and its acceptance by the consumer has been documented in several research studies on behalf of the National Association of Realtors (NAR),” Wiley said.

“These studies indicate that the vast majority of consumers love the idea of letting their Realtor take care of every part of the purchase transaction,” he said. “Yet, today it is illegal for a Realtor, or for that matter, any part-time person to work for a FHA/HUD approved lender.”

Yet, due to reduced real estate commissions, the trend today is for many Realtors to add to their reduced real estate income by helping his or her borrower arrange mortgage financing, Wiley said.

FHA loans falter

“This trend will continue — and in light of this trend — HUD should consider eliminating the full-time provision from its guidelines,” he said. “Not eliminating this provision will continue the slow but steady decline in FHA loan origination volume that has taken place over the past decade.”

But Marc Savitt, president of The Mortgage Center in Martinsburg, W. Va. and member of the National Association of Mortgage Brokers (NAMB) board of directors, has a different take.

“With respect to lenders recruiting and training Realtors to originate loans, this is a growing trend,” Savitt said recently. “However, it is also one that does not benefit consumers.

Realtors not ready

“Lenders may be recruiting Realtors, but in most cases, they have very little training and a serious lack of financial knowledge,” he said. “Mortgage brokers are licensed and financially educated professionals.

“Moreover, it is my experience that one-stop shops provide no savings to consumers,” Savitt said. “In fact, they often have higher interest rates and closing costs.

“Furthermore, many consumer groups consider one-stop shops breeding grounds for fraud,” he added.

That’s because “sometimes these relationships are set up as affiliated business arrangements, to capture more business and with little regard for consumer choice,” Savitt said.

Lose-lose situation

And when consumers are locked into bad deals, the brokers are locked out of transactions, he said.

“Brokers are still the choice for most consumers in the market unless they are subjected to unfair and deceptive practices by Realtors and others acting as qualified originators,” Savitt said.

He doesn’t feel his livelihood is threatened by the one-stop-shops – but believes the practice has the potential to give the entire industry a black eye.

“My concern, again, is with the consumer,” Savitt said. “We often refinance well-qualified consumers out of deals they never should have been placed into by real estate agents/originators whose main goal is to get the deal closed, so they can get paid.”

Buyers beware

“Many of them don’t care what kind of deal the buyer gets,” he added.

“These very situations support NAMB’s position on licensing or registration for all originators – including pre- and continuing education,” Savitt said.

 “Having once taught mortgage financing in a real estate school, I can tell you the focus of some is mainly on products – not qualifications,” he said. “These courses in no way prepare or train for originating loans.”

Consumers need to ask themselves: “Is your real estate agent qualified to originate your loan?” Savitt asked. “Are they licensed and educated as mortgage professionals?”

Pipeline to loans

The trend began several years ago.

One of the first to open the door to other real estate professionals was EverBank which in 2002 announced the acquisition of the OnePipeline brand, “the national leader in third-party loan origination technology that allows real estate professionals, homebuilders, financial advisors, insurance agents and others to originate mortgage with the nation’s leading lenders.”

Robert Clements, president of EverBank Financial Corp., said then that “OnePipeline complements EverBank’s core strategy of providing high quality mortgage services to our various business partners.

“Clearly, consumers want a one-stop home buying experience,” Clements said. “With OnePipeline technology, EverBank can now provide consumers its value-added mortgage expertise through real estate and other advisors.”

The more, the merrier

David Broadbent, president of OnePipeline, added, “Consumers have come to rely more and more on guidance from Realtors, financial service professionals and other trusted advisors in obtaining mortgage financing.

“The OnePipeline system continues to represent the ideal compliance solution to allowing these professionals to not only perform these valuable services for homebuyers, but be legally compensated for their work,” he added.

Wendi Allen, president of Red Door Realty of Jacksonville, Fla., told Mortgage Technology in 2004 that she was involved in seven or eight originations with OnePipeline.com.

The additional income was not a factor for her, Allen said. The biggest benefit was control in “not having to wait on other people to finish” the transactions.

EverBank for Everyman

EverBank knows how to present data to meet the criteria of the underwriter and the customer, she said, adding, “I do not hesitate to recommend this mortgage service to any real estate agents seeking to increase their profits and gain greater control of the transaction.”

Jacqueline Behr, a Realtor associate with the Jacksonville, Fla. office of Williams Realty added, “I think EverBank is a good thing. A lot of agents hesitate getting involved because of RESPA, but EverBank has done the right thing making sure users get things done in the proper way.”

In February 2005, columnist Kenneth Harney wrote an article discussing a 2004 NAR strategy to explore multi-service packaging.

“For example, Countrywide Home Loans and MetroCities Mortgage Corp. have created dozens of successful joint ventures with realty brokers that provide customized loan services to home buyer clients, while sharing loan-related revenues with participating brokers,” Harney said.

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Recent loan innovations allow home buyers to put little money down and make low monthly payments. They’ve also poured fuel one of the hottest and longest housing booms in the nation’s history. But in the wake of the Federal Reserve’s push to take away easy money, low interest rates and red-hot home prices have faded away. With them went the main conditions that made interest-only and other flexible mortgages worth their risks. So the consumer’s love affair with such loans is drawing to a close now, right?

Wrong.

Far from just another financing fad, exotic mortgages have become such a fixture on the U.S. housing landscape that they’ve proven to be a key lever for many borrowers even as they have become a greater danger at same time.

"In our changing market, from unprecedented low rates to a steady rising of interest rates, these varieties of loan programs have become much more popular," says Bill Callanan, a partner with Mortgage Management Systems, a San Francisco mortgage broker. "But if you’re scraping nickels together, they’re not for you." While traditional long-term, fixed-rate mortgages remain the loan of choice for the majority of home buyers, more borrowers are also shopping for interest-only loans, pay-option ARMs and hybrid fixed-ARM loans.

That’s particularly true in high-cost housing markets, where taking one of those loans may be the only way to afford a house. It worked well when double-digit home-price gains built equity while leaving more cash in homeowners’ pockets. Low interest rates muted the potential sting of upward rate adjustments.

But neither of those conditions exist today: Interest rates are well above year-ago levels and home-price gains have cooled or, in some of the hottest markets, already started to erode. One big problem, says Callanan, is that household incomes haven’t been rising as fast as interest rates, creating greater affordability hurdles for home buyers. Borrowers who use these loans now are challenged more than ever to gauge the health of home prices in their area and measure their ability to stay on top of payments, and to know when to refinance.

Paying off

For some, the gamble still pays off. Regardless of the health of the housing market, say mortgage experts, increasingly savvy consumers want more control over their own finances, including being able to invest money that would otherwise be tied up in a mortgage.

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The soaring real-estate prices of the past few years are helping to feed the popularity of a complex tax-savings technique called a "private annuity trust."

The strategy is being promoted as a way for investors to defer hefty capital-gains taxes on the sale of highly appreciated assets — especially real estate — and save on estate taxes, while also generating a stream of income.

The trusts are being widely marketed not just by tax lawyers and accountants, but also by investment advisers and insurance agents — who may also stand to gain big fees by managing trust investments — and real-estate brokers, who hope that the strategy might help clinch property sales and attract listings.

In a private annuity trust, you essentially exchange appreciated assets for fixed annuity payments, which spreads out your capital-gains taxes over many years. The transactions are being pitched to everyone from owners of a primary or secondary residence that has risen dramatically in value to owners of numerous investment properties. The trusts are just one of a number of strategies that people are using in an attempt to trim taxes amid the fevered real-estate market of recent years.

The growing popularity of private annuity trusts, however, has sparked heated debate among tax advisers, with skeptics saying that some arrangements might be too aggressive under allowable tax rules and might not generate all the tax benefits some promoters claim. Some tax lawyers have published articles or created Web sites criticizing the trusts, with titles such as "Private Annuity Trusts: The Numbers Don’t Support the Hype."

Moreover, the Internal Revenue Service has been scrutinizing a growing number of private annuity trust transactions, and though it has not banned the practice, the agency says it has seen numerous cases that it feels do not pass muster.

Proponents of private annuity trusts, for their part, say the transaction, when done correctly, is a perfectly acceptable tax-savings technique that can defer capital-gains taxes for years and minimize estate taxes. "If you evaluate it and set it up right and then operate it appropriately, a private annuity trust can be a great tool to use for estate transfer, asset preservation and tax deferral," says Curt Wyatt, a Palm Desert, Calif., trust adviser, who manages nearly $800 million in private annuity trust assets, business generated over the past three years.

Wendy Phillips, a Landers, Calif., real-estate investor, set up a private annuity trust after attending a seminar on capital-gains strategies at an apartment-owners’ trade show. Ms. Phillips faced capital-gains taxes of some $900,000 on the sale of several rental properties near Palm Springs, and wanted to avoid paying those taxes upfront. "It seemed like a lot out of our pockets at one time," says Ms. Phillips, who will turn 62 years old this month. She and her husband chose to defer the private annuity payments until they reach age 70, which means they can delay the tax hit for several years.

The National Association of Financial and Estate Planning, or NAFEP, a big provider of private annuity trusts, says that business has doubled every year since 2003 and is continuing to grow this year. The strategy is "becoming more mainstream and more people and attorneys are becoming more comfortable with it," says Roy Barker, director of operations at NAFEP, which is based in Salt Lake City.

Private annuity trusts can cost anywhere from about $3,000 to well over $10,000 to set up, plus additional administration and investment fees that can run upwards of 1% of trust assets. Because of these costs, Mr. Barker says the strategy makes the most sense for people who have at least $200,000 of capital gains to defer, as well as people who might be subject to the estate tax. (The current federal estate-tax exemption is $2 million per person or $4 million per married couple.)

Private annuity trusts are complicated, involving lots of convoluted steps and tax rules. In a typical arrangement, you sell appreciated assets — residential or commercial real estate, artwork, securities, even closely held businesses — to a trust, in exchange for a series of fixed annuity payments that last for the rest of your life. The trust then goes ahead and sells the appreciated asset to an end buyer. The cash proceeds are invested by the trust, and are used to fund your annuity payments.

By selling the property in exchange for an annuity, you avoid paying the upfront capital gains that you would have owed if you had simply sold the asset outright. Instead, you are taxed on the annuity payments when they come out of the trust, which spreads out the taxes over a longer period of time. What’s more, you can defer receiving the annuity payments for years, thereby further postponing your tax payments.

The strategy also has estate-planning benefits. When you die, the annuity payments stop and whatever is left over in the trust is considered out of your estate and isn’t subject to estate taxes. The annuity payments you receive during your lifetime are considered part of your estate unless you spend down the money.

Be aware, however, that the strategy is on the IRS’s radar screen. The agency doesn’t like arrangements in which sellers continue to control trust assets or properties that were purportedly sold. The IRS is also concerned that, before the trust is even set up, a buyer has already contractually agreed to take the property. In that case, the government could ultimately view the trust as an improper shelter, set up chiefly to avoid immediate capital-gains taxes rather than providing real economic substance.

The annuity is termed a "private annuity" because it is a special payment contract between you and the trust, as opposed to a commercial annuity issued by an insurance company. The amount of the annuity payments stays fixed over your lifetime and is determined by a formula that’s set by the IRS, based on factors that include your age, the property’s sale price and an IRS-determined interest rate. The older you are — or the longer you defer the annuity — the bigger the payments will be.

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