Harshing the Mellow: NAR, DOJ, Lawsuits

I’m actually a bit busy with critical research and writing, but thought I’d take a moment out to write something fun and lighthearted about real estate. Then I read this in Inman: “DOJ-NAR settlement will effectively squash 2 consumer antitrust suits.” The author contends that the recent DOJ-NAR settlement is a wonderful thing, as it renders the Moehrl and Sitzer lawsuits moot:

The Department of Justice could have agreed with the Moehrl claim, basically arguing that because the seller pays the buy side commission, buyers can’t or won’t negotiate buy side fees. They could have argued that such fees be paid directly by the buyer and not be included in the capital outlay for the property. DOJ did not agree. Or if it did agree, it waived that stance in the settlement Thursday with NAR.

Instead, while the Department of Justice agreed with the two underlying claims regarding disclosure and rules, it agreed with the National Association of Realtors that the solution was better disclosure to be enforced through rules.

The Moehrl lawsuit has thus been rendered moot. The DOJ has already taken action on the two claims at issue, and it disagreed with Moehrl’s proposed remedy. It’s the rare judge or jury who would choose to second guess the Justice Department and rule that Moehrl’s remedy is the only correct one.

I admit, I had a solid 2-3 minutes of belly laugh. Such laughter is good for the soul, especially in these trying times. So I’m grateful for that. What an amazing parody, I thought.

But then… I kept reading. Holy shit, this isn’t a parody! This is not the Babylon Bee. The author is quite serious.

If we’re going to speculate on how complex class action antitrust litigation will turn out, then by all means, let’s speculate. But let us at least speculate based on some evidence, some facts, and some knowledge of the law.

As always, I am not a lawyer (retired NY Bar) and even if I were, I am not your lawyer, and this is not legal advice. It’s just one guy’s random thoughts that touch on the law. Consult your attorney for real analysis and advice.

DOJ Did Agree With the Moehrl Claim

The first piece of bad news is that actually, the Department of Justice did agree with the claims in Moehrl and Sitzer. From the Complaint:

Defendant National Association of REALTORS® (“NAR”) has adopted a series of rules, policies, and practices governing, among other things, the publication and marketing of real estate, real estate broker commissions, as well as real estate broker access to lockboxes, that have been widely adopted by NAR’s members resulting in a lessening of competition among real estate
brokers to the detriment of American home buyers.

That paragraph could have come directly from the Moehrl Complaint:

The conspiracy has saddled home sellers with a cost that would be borne by the buyer in a competitive market. Moreover, because most buyer brokers will not show homes to their clients where the seller is offering a lower buyer broker commission, or will show homes with higher commission offers first, sellers are incentivized when making the required blanket, non-negotiable offer to procure the buyer brokers’ cooperation by offering a high commission.

So, no, the DOJ did not disagree with Moehrl; in fact, it is more accurate to say that the DOJ 110% agreed with Moehrl.

Here’s what I wrote in the quick reaction post (VIP) to the DOJ-NAR lawsuit and settlement:

What is striking about the Complaint and the Settlement is how much the language and the principles echo the Complaints of the private class action plaintiffs in Moehrl and Sitzer, the two federal civil cases making their ways through the system.

For example, ¶19 of the Complaint:

Buyer brokers may, in fact, steer potential home buyers away from properties with low commission offers by filtering out, failing to show, or denigrating homes listed for sale that offer lower commissions than other properties in the area. When buyers cannot see commission offers, they cannot detect or resist this type of steering. Steering not only results in higher prices for buyer broker services, it also reduces the quality of the services that are rendered to the potential home buyer, making it less likely that the buyer will ultimately be matched with the optimal home choice. Fear of having buyers steered away from a property is also a strong deterrent to sellers who would otherwise offer lower buyer broker commissions, which further contributes to higher prices for buyer broker services.

Well, shit, that’s basically the gravamen of the civil lawsuits: buyer brokers steering consumers. I’ve written that in previous posts on the Moehrl case. And now, here’s the United States Department of Justice coming out and agreeing with those plaintiffs, and what’s more, they got NAR to agree to settle this complaint.

Department of Justice Waived Nothing, and Agreed with NAR on Nothing

The second bad news is that the Department of Justice agreed with NAR on nothing, other than NAR’s capitulation and surrender. I pointed this out in the VIP post:

The most important part of the Settlement Order, as I see it, is Paragraph XI:

XI. UNITED STATES’ RESERVATION OF RIGHTS

Nothing in this Final Judgment shall limit the right of the United States to investigate and bring actions to prevent or restrain violations of the antitrust laws concerning any Rule or practice adopted or enforced by NAR or any of its Member Boards.

See, normally, when you have a settlement, you have a settlement of everything. It’s the primary reason why people settle lawsuits, whether frivolous or not, because they don’t want to have the sword of Damocles hanging over their heads. It’s a “Fine, you win, but can we please put all this behind us?” Nobody wants to settle, then have to deal with future lawsuits on the same issues.

This paragraph says otherwise. This paragraph says that the United States DOJ is nowhere near done with NAR, its Rule or practice, or with the MLS.

What happened here between DOJ and NAR is the legal equivalent of Conan’s vision of the good life:

The DOJ got everything it sought, other than costs. Oh good, NAR didn’t have to pay for DOJ’s lawyers. Other than that, crush, drive, lamentations of their women, and so on.

So Why Didn’t the DOJ Go Further?

The author’s principal mistake appears to be one of mistaking the DOJ not getting rid of cooperation and compensation for good with the DOJ agreeing with NAR that disclosure is the better remedy. It’s actually an understandable mistake. I mean, why didn’t the DOJ go for the whole shebang?

And since they didn’t, and they settled with NAR, that must mean that they’ll be on NAR’s side in the Moehrl and Sitzer lawsuits. The author of the Inman article:

The legal concept here is one of “pre-emption.” The DOJ-NAR settlement works to pre-empt alternative resolutions of the issues common to all three lawsuits: disclosure and rules.

Through this settlement, NAR has succeeded in preserving a vital cog in the housing market’s machine: the ability of buyers to capitalize the cost of real estate services. Only because the seller pays both sides, does the buyer get to include the commission in the amount being financed. The alternative would be hugely disruptive. Buyers would have to fund the cost of real estate services out of cash. For a first-time buyer otherwise eligible to put 3 percent down, this would be a 50 percent to 66 percent increase in the amount of cash needed to complete that purchase. It could be years before the mortgage system and tax regulations could be adjusted to “correct” for such a change.

Actually, there is no such legal concept in lawsuits. Pre-emption applies if there is federal legislation that trumps state and local laws, and that’s a whole complicated topic in and of itself. It does not apply to lawsuits. Precedent applies to lawsuits, but settlements have no value as precedent. So there is no legal concept here, sorry.

Furthermore, nothing in this settlement is binding on anybody other than NAR. The DOJ has reserved all kinds of rights to keep pursuing NAR over this issue. If anything, this settlement leaves the door wide open for the DOJ to intervene in the class action lawsuits on the side of the plaintiffs.

The real reason why the DOJ did not go further, I think, is because they didn’t need to. The Moehrl and Sitzer class action lawsuits are still ongoing. Why bother trying to eliminate cooperation and compensation completely when their allies in the private sector are already pursuing the same goal, and the judge has clearly signaled that they are likely to win at trial. That’s a waste of time and resources.

Far better to provide an assist to the private plaintiffs by having NAR admit via settlement that their rules and practices were in fact anti-competitive; that’s quite like providing the Moehrl lawyers with air support, or artillery.

In fact, should NAR bring up this particular settlement during the Moehrl trial, suggesting to the judge there that “Look, the United States agreed that disclosure is adequate remedy!” the likely outcome is the DOJ (unconstrained by this settlement) coming in with an amicus brief slamming the shit out of NAR: “We never said any such thing!”

DOJ already did that once, much to NAR’s chagrin. Don’t make them do it again, because it will hurt NAR badly.

The Upshot: Harshing the Mellow

So bottomline, here’s the upshot: cooperation and compensation is likely to be declared illegal by a federal court. I’m sorry if that pisses you off, or plunges you into despair. At this point, I don’t see how NAR wins at trial.

NAR might win on appeal, possibly because antitrust law is so complicated and it isn’t super clear what the responsibility of a trade association is when members of said trade association behave badly, against the trade association’s rules and policies.

In plain English, the issue at the heart of all of this is steering. The NAR Code of Ethics prohibits steering. In theory, NAR would punish REALTOR members who engage in steering of buyers on the basis of compensation offered; that sort of steering is also against the law. Granted, there isn’t a single instance anyone anywhere can find of a REALTOR being disciplined for steering buyers on the basis of compensation offered, and there’s a whole lot of evidence that suggests such steering is commonplace… but still, NAR prohibits the practice.

So can NAR and the MLSs and the brokerages be held responsible that their members, their subscribers, and their agents break the rules?

“We’re on the same side, Moehrl and DOJ! We also want to stop buyer steering for money!” is the only plausible defense NAR has here. “Cooperation and compensation is not the issue; the evil in the hearts of men is the issue.”

Problem with that is, if the evil in the hearts of men is widespread and commonplace… and logical and completely expected… and in this context, note what Judge Andrea Wood wrote in her denial of NAR’s motion to dismiss: “Common sense suggests that a buyer-broker is highly unlikely to show their client a home when the seller is offering a penny in commission.” If that’s the case, then the remedy surely includes NAR’s compliance with a new set of rules that prevent the evil in the hearts of men from affecting the price of real estate services: eliminating the practice of having the seller pay for the buyer’s agent.

That might still be the outcome: get rid of cooperation & compensation, in exchange for not having to pay some $50 billion in damages.

Where the Effort Has to Be

What that then suggests is that NAR has to do is to convince the legislature to change the law, rather than try to win any lawsuit around this issue.

As the Inman author writes, the issue is allowing buyer commissions to be financed. That’s a matter for Congress and the various regulators — CFPB, HUD, etc. Leave aside for the moment whether paying someone to help you buy a house is so important that a family should pay interest on that cost over 30 years. (On a $300K house, the buy-side commission might be $9,000. Finance that over 30 years at a 3% rate, and the actual cost ends up at $13,660.) The issue is preserving buy-side commissions.

The only way to do that is by lobbying for changes in the laws and regulations that govern mortgages. I assume that NAR is on this like white on rice, because NAR is extremely competent at the government advocacy game.

Which is why…

Now is NOT the Time to Relax

I felt I had to write this brief takedown of the Inman article. I have nothing against the author (whom I do not know), and I can easily see why a layman would have such a misunderstanding about what happened in the NAR-DOJ settlement. I don’t care about any of that.

What I care about, however, is an article like this, or thinking like this, causing REALTORS to relax. “Oh whew, NAR saved us from disaster! I can relax with this here bowl” is the exact opposite of what you should be thinking. I am deeply sorry if that harshes your mellow, ruins your day, and bojacks your party. I don’t want to ruin your day, or anybody’s day. But yo, better you feel bad today than at Judgment Day.

The lawsuit is lost with or without you relaxing. What remains in the balance is the inevitable lobbying that will come. In that effort, NAR will need every single weapon at its disposal.

A huge market disruption has not been avoided; it is still very much on its way. The ability of the marketplace to allow transactions which capitalize the cost of real estate services has not been preserved; that is where the next battle will be. And NAR’s lobbyists can only do so much, even if they’re capable and connected, especially when the likely incoming Biden-Harris Administration is likely going to be quite hostile.

I’ll leave you with this: You got to fight. For your right. To get paaaaaaaaaiid.

-rsh

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Rob Hahn

Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

1 thought on “Harshing the Mellow: NAR, DOJ, Lawsuits”

  1. ROB,

    Thanks for the clarification.

    IMO, the consumer never really understood how commissions worked in a real estate deal. The “seller pays the commission” line has always been a bit of slight-of-hand. The quicker the transaction becomes transparent and understood by the consumer the better.

    Is this the start of a push for viable alternative, secondary, local, dark pool (etc.) marketplaces to replace the current MLS system?

    We’ll see…. 🙂

    Thanks again,
    Brian

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