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I’m at the CMLS 2013 meetings, and thought I’d post some further thoughts about a discussion/debate I had on Twitter (#cmls2013) about something I’m hearing quite a lot about at this event.
There’s just a ton of conversation on panels and on stage and in the hallways about data, about “our data”, about monetizing it, protecting it, leveraging it, etc. etc. with a heavy emphasis on just how valuable and important the MLS data is to homebuyers, home sellers, investors, renters, to Wall Street, and to other users of real estate information. One of the panels featured Chip McAvoy from CoreLogic and Dale Ross from RPR, companies that sell to Wall Street type of firms — especially a product called “match and append“.
My point from my panel — that I regard this focus on consumers by the MLS as dangerous, and that the MLS should focus on its core competency, that of regulating the relationship between real estate professionals with the key mechanism of cooperation and compensation — is something that needs expanding.
Plainly put, what I fear is that on the current path, the MLS is extremely vulnerable to being classified as a public utility and being regulated directly by the government. Those MLS’s that are super-excited about becoming the trusted source for data to consumers — including CMLS, which is pushing its SourceMLS program — should pause and consider what it is that they’re wishing for. Because they might get it. Good and hard.
Let’s get into it.
History: 2006 Congressional Hearings
First, we travel back to 2006 when Congress held a hearing on the “Changing Real Estate Market“. Recall that this is when the NAR-DOJ antitrust lawsuit was raging. There was real discussion going on at the time as to whether Congress ought to regulate the real estate brokerage industry.
Michael Oxley, then chairman of the House Financial Services Committee and he of the Sarbanes-Oxley fame, said the following in his opening statement:
The GAO’s report, as well as the actions over the past 18 months by the Department of Justice and the Federal Trade Commission and scholarly reports, explains what is happening. Real estate brokerage is self-regulated. Licensing rules are largely set by the brokers themselves, and real estate exchange rules are entirely set by the brokers themselves. The exchanges have become institutions to protect the interests of brokers, not consumers.
We let the stock exchanges in this country set their own rules, but only with the SEC reviewing and approving those rules. For residential real estate markets, there is no government regulator to protect the public interest. There is only regulation of the brokers, by the brokers, for the brokers.
Another witness, Stephen Brobeck, the Executive Director of the Consumer Federation of America, took direct aim at the MLS:
Traditional brokers, who control these listing services, argue that they created the services and should be able to control them. Our response is two-fold: First, home sellers who pay 5-7% commissions should be provided the widest possible exposure to information about the homes they wish to sell. And home buyers, who effectively pay a portion of this commission through higher home prices, as authoritative economic studies have shown, should have ready access to as complete information as possible about these houses. Second, because the MLSs and Realtor.com so dominate listing services, they function as a near-monopoly and should be regulated as a public utility. This regulation should ensure, most basically, more complete and accessible home sale information both to all service providers and to consumers.
Now, back in 2006, the real estate industry defeated any notion of turning the MLS into a public utility, or like the securities industry, having the MLS set its own rules, but only after approval by some regulator (as Oxley was suggesting). Why? Because people like Patricia Vredevoogd-Coombs, then President-Elect, and Geoffrey Lewis of REMAX, made strong arguments that the MLS is a broker-to-broker, B2B network.
From the testimony of Pat Coombs:
Real estate reform advocates maintain that the MLS is a necessary utility, and as such, should be available to the public for use. As indicated above, the MLS is a cooperative that not only operates for the use and benefit of its members in serving their clients and customers, but it is created and operated, and its inventory provided by, the very members it serves. That distinguishes it from public utilities like water, gas or electricity, which are not created and operated by their customers, members of the public.
From the testimony of Geoffrey Lewis:
The MLS was designed as a B2B vehicle, not a business-to-consumer vehicle. It was designed as a mutual sharing of information by industry peers to facilitate the sale of and search for properties. The idea was that cooperating brokers and agents would work to earn their own customers using their own assets and then share listings via the MLS. The concept is simple: you earn a customer, you get to use the MLS with the customer. The concept is not: you get free access to the MLS and then you use it to advertise the properties of your competitors in order to attract customers.
Given these arguments, and given the power of NAR, nothing happened on Capitol Hill. The MLS was not regulated as a public utility, nor did Congress pass legislation to have the someone like HUD regulate the MLS, as the SEC regulates the financial exchanges.
That Was Then… This Is Now
Fast forward to 2013. What has happened between 2006 and 2013?
Well, first, we had this little thing called the collapse of the real estate market. Which then led directly into the biggest financial crisis since the Great Depression, and a recession from which we haven’t yet fully emerged. (Even cheerleader economists admit that growth isn’t really where it needs to be, and no one thinks we’re just brimming over with job creation, right?)
Back in 2011, Barry Ritholz of the Big Picture blog, an influential investment and finance writer, noted that the bailout of the banks — directly related to their exposure to mortgages and mortgage backed securities — totaled $29.616 trillion. And we all know about the collapse of Lehman Brothers, massive bailouts of banks, the QE 1, 2, 3, into QE Infinity as the Fed keeps pumping liquidity into the system to prevent catastrophe. Despite the bounce-back in housing in late 2012 into 2013 thus far, it isn’t as if everything is back to normal and peachy-keen.
Well, volumes have been written about why the collapse happened, and who was responsible for the Great Recession. Most of the blame has been heaped on the big Wall Street banks and the credit rating agencies that danced to their tunes, but in the report on the financial crisis from the Senate Permanent Subcommittee on Investigations contains this little gem:
Lack of Data During Era of Stagnant or Falling Home Prices.
In addition, the models operated with subprime data for mortgages that had not been exposed to stagnant or falling housing prices. As one February 2007 presentation from a Deutsche Bank investment banker explained, the models used to calculate “subprime mortgage lending criteria and bond subordination levels are based largely on performance experience that was mostly accumulated since the mid-1990s, when the nation’s housing market has been booming.” A former managing director in Moody’s Structured Finance Group put it this way: “[I]t was like observing 100 years of weather in Antarctica to forecast the weather in Hawaii.” In September 2007, after the crisis had begun, an S&P executive testified before Congress that: “[W]e are fully aware that, for all our reliance on our analysis of historically rooted data that sometimes went as far back as the Great Depression, some of that data has proved no longer to be as useful or reliable as it has historically been.”
The absence of relevant data for use in RMBS modeling left the credit rating agencies unable to accurately predict mortgage default and loss rates when housing prices stopped climbing. The absence of relevant performance data for high risk mortgage products in an era of stagnant or declining housing prices impacted the rating of not only RMBS transactions, but also CDOs, which typically included RMBS securities and relied heavily on RMBS credit ratings.
Part of the reason for the financial crisis was that rating agencies, the banks, and investors were relying on ratings models that did not have good data. They assumed that home prices would not fall. Those prices fell, but the data that the ratings agencies had did not include those.
Well, what do you think “match and append” is? The marketing says “accurate, complete, and timely” information. That comes from the MLS.
Dodd-Frank and the CFPB
Another major thing that happened since 2006 is the passage of Dodd-Frank Wall Street Reform and Consumer Protection Act, which established the Consumer Finance Protection Bureau.
From the CFPB’s About Us Page:
In June 2009, President Obama proposed to address failures of consumer protection by establishing a new financial agency to focus directly on consumers, rather than on bank safety and soundness or on monetary policy. This new agency would heighten government accountability by consolidating in one place responsibilities that had been scattered across government. The agency would also have responsibility for supervision and enforcement with respect to the laws over providers of consumer financial products and services that escaped regular Federal oversight.
Keep in mind that one of the major domains of regulation for the CFPB is mortgages. Yeah, the same mortgages against which MLS’s are looking to sell their “timely, complete, and accurate” data so the banks can do match & append and other analytics on their loans. The same mortgages and the same banks that purchase “gray market data” from unscrupulous third parties that scrape MLS data from websites and such, rather than buying legitimate data from the MLS.
I think it is clear that the CFPB has the legislative mandate via Dodd-Frank to regulate the real estate industry. Even if regulating brokerages directly is beyond its purview — because real estate is mostly a state matter — the CFPB absolutely has the power to regulate MLS information, since that is so critical to mortgages which is its central mission. And just like the financial exchanges can set their own rules, subject to approval by the SEC, at a minimum, the MLSs can set their own rules, subject to approval by the CFPB.
Now hearken back to some of the words from 2006 and combine them — match and append them? — with the language of the CFPB.
An informed customer is the first line of defense? Well, how would the consumer get informed about accurate, complete, and timely property prices?
CFPB gathers and analyzes information to better understand consumer financial markets, you mean like the market for mortgages? Is that doable without having accurate, complete, and timely data?
And oh by the way, all of those ratings agencies and investment firms and Wall Street banks would love to get some more accurate, complete, and timely data so they can price mortgage-backed securities better.
And into this environment, the MLS industry wants to talk about how it is the best — and only — source of complete, accurate, and timely information for consumers? Into this environment, the MLS wants to roll out massive programs that signify that MLS data is the most accurate for consumers, for banks, for ratings agencies, and the like with something like the SourceMLS program?
Let’s say the industry is successful in branding the MLS in the consumer’s mind as the only trustworthy source for complete, accurate, and timely data on properties. Let’s say that the industry has successfully stamped out “gray market” data merchant with things like REDPLAN and Distill Networks.
What then do we say to Congress next time around when it considers whether to regulate the MLS as a public utility? That this is a broker-to-broker network created by and for the participants only? That the MLS is a B2B vehicle, not a B2C vehicle?
The successful arguments of 2006 don’t pass the laugh test if the MLS continues on the path to be the source of data for consumers, rather than for its participant brokers and agents.
Oh, and frankly, we won’t have to argue in front of Congress, since Dodd-Frank clearly gives CFPB the power to regulate mortgages — and by clear implication, home pricing information that directly influences mortgages. Have I mentioned that CFPB lacks both congressional and Presidential oversight in any meaningful way? Brian Larson thinks that’s a slippery slope argument, but to me, the grant of authority is pretty clear.
For example, we have this little tidbit:
The Consumer Financial Protection Bureau (CFPB) adopted a rule today to begin supervising larger consumer reporting agencies, which include what are popularly called credit bureaus or credit reporting companies. This is the first time these companies will be supervised at the federal level.
Consumer reporting agencies are private businesses that track a consumer’s credit history and other consumer transactions. Such companies play a key role in the consumer financial services marketplace and in the financial lives of consumers. For example, the reports that the three largest credit reporting companies sell are used in determining everything from consumer eligibility for credit to the rates consumers pay for credit.
The Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the CFPB to supervise nonbanks in the specific markets of residential mortgage, payday, and private education lending. For other markets for consumer financial products or services, the CFPB has the authority to supervise nonbank “larger participants” as defined by rule.
Good luck differentiating MLS’s, which aggregate property information used with mortgages, from credit reporting agencies, which aggregate personal information used with mortgages.
(By the way, in case you’re going to make the “Government can’t take our intellectual property assets like that!” argument… keep in mind that every single real estate agent has to be licensed by the government to do what she does in the first place… and every real estate sale transaction uses a HUD-1 form. It’s a cinch to require all licensed real estate agents to enter listing data into the new CFPB Properties Database as part of their license.)
It Won’t Ever Happen, You Chicken Little!
The most common response I’ve gotten here at CMLS is that I’m overthinking it and overdoing it because nothing will ever happen. NAR is too powerful, we’ve been over this MLS thing in 2006, and nobody cares.
Okay. Let’s hope those skeptics are correct.
Because as for me, when there are trillions of dollars at stake here (see above, Barry Ritholz), the big Wall Street banks would love, love, love to have a public utility delivering all of the residential listing data from a single CFPB database, and we have a new bureaucracy in town which employs members of public unions… I’m nowhere near as sanguine. Let’s not forget that while NAR is #5 on the list of Heavy Hitters, AFSCME is #2 and Goldman Sachs is #6. That’s before we add in all the other big banks, and before we take Citizens United into account.
Maybe it will never come to pass, but then again, if it does, let’s be clear that the industry is hoping, wishing, and working to throw away the arguments that prevailed in 2006. I might be paranoid, but that doesn’t mean the government isn’t out to get you. 🙂
Be careful of what you wish for. You might get it. Good and hard.