Broker commissions changes: what you need to know

Looming changes to real estate commissions are already causing ripple effects in mortgage lending.

The National Association of Realtors will implement new rules this summer, following a $418 million settlement to end lawsuits challenging broker commissions. Four major real estate players also agreed to massive settlements in the past year, paving the way for a new landscape for homebuyers, home sellers and their representatives.

Housing finance stakeholders, who held their breath through the legal proceedings, are beginning to respond to the changes affecting borrowers. While the government has already amended one rule to protect certain consumers, other concerns regarding affordability and blurred lines between Realtors and loan officers remain.

Here's the latest on what you need to know about real estate agent commissions.

How it started

Two Kansas City-area home sellers sued the country's leading real estate entities in 2019, in the case known as Sitzer/Burnett. Class action plaintiffs based in Missouri, who paid commissions of 5.5% on earlier transactions, accused Anywhere Real Estate, HomeServices of America, Keller Williams and NAR of conspiring to require sellers to pay inflated commissions.

The companies were also targeted in other federal commissions claims: Moehrl v. NAR in Minnesota and Nosalek v. MLS Property Information Network in Massachusetts.

The plaintiffs contested long standing rules by NAR for associated multiple listing services, which dictate how compensation is dealt at a home sale's closing. Seller brokers under the current rules are required to offer compensation to a prospective buyer's agent to get listed on an MLS.

The home seller at closing pays their own broker a commission, usually between 5% to 6% of the home sale price, and the sum was split between the sell-side and buy-side agents. The majority of each commission share went toward the agent, then their companies. It's a system that evolved from a NAR predecessor over a century ago, and has endured scrutiny ever since.

Major defeat, massive settlements

Anywhere Real Estate and RE/MAX settled with plaintiffs for $83.5 million and $55 million, respectively, ahead of last year's trial. The Sitzer/Burnett jury in October ruled in favor of home sellers and awarded the class $1.78 billion in damages.

Remaining corporate defendants vowed to appeal the verdict but months later agreed to their own, more expensive settlements. Keller Williams cut its liability to $70 million in a February deal; NAR agreed to a landmark $418 million settlement in March and pledged rule changes; and HomeServices of America okayed a $250 million resolution in April.

The companies emphasize they do not acknowledge wrongdoing in their settlements. NAR said an appeal wouldn't have addressed copycat cases, and filing for Chapter 11 bankruptcy protection would have left its members on the hook.

A Missouri federal judge in May gave final approval to the settlements by Anywhere Real Estate, Keller Williams and RE/MAX. That ruling, which noted over 200,000 claims had been filed so far, ends those companies' liability in Sitzer/Burnett along with the Moehrl and Nosalek lawsuits. Final approval for HomeServices of America and NAR settlements remain pending.

Attorneys for Sitzer/Burnett plaintiffs filed a similar case against six more real estate players after last October's verdict. Three of those firms have since settled: Compass for $57.5 million; Douglas Elliman for $7.75 million and Redfin for $9.2 million. EXP Realty, Weichert and United Real Estate are still fighting the charges, according to court records.

A claim against HomeServices of America parent Berkshire Hathaway Energy, owned by Warren Buffet, also remains. Plaintiffs accuse the company of "intentionally undercapitalizing" its subsidiary and accepting the profits of the commissions conspiracy.

New rules

The 109-page NAR settlement follows smaller changes the association made in the lead-up to Sitzer/Burnett, including an earlier ban on buyer brokers from advertising their services as "free." Just ahead of last October's trial, NAR began to allow listing brokers to offer no compensation to buy-side brokers.

The changes set to go into effect August 17, 2024 prohibit offers of compensation from being made on MLSes, although they can still be negotiated off an MLS. The organization will also require written agreements for MLS participants working with buyers.

The agreement releases numerous parties from liability, including NAR members, Realtor associations, Realtor MLSes, and brokerages whose residential transaction volume in 2022 was $2 billion or less. Entities not covered can either opt-in to pay an amount determined by a formula accounting for transaction volume, or enter non-binding arbitration; the deadline for firms to decide was June 18.

Mortgage accommodations

Mortgage veterans immediately raised concerns around affordability issues for prospective borrowers who can't afford any new cost burdens. The Federal Housing Administration was the first to address the uncertainty in late March, affirming that buy-side commissions are excluded from caps on interest party contributions. Those IPCs include concessions such as loan closing costs and rate buydowns.

The U.S. Department of Veterans Affairs in June updated its policy to remove a significant hurdle for veteran borrowers. Former guidelines restricted those homebuyers from paying commissions on VA loans; the new policy effective August 10 allows them to pay for "reasonable and customary" broker charges. The rule is temporary as the VA said it would establish a permanent policy through notice-and-comment rulemaking.

Lingering concerns

The industry is "largely unprepared and overly optimistic" in its view that the NAR consequences will be limited, Keefe, Bruyette & Woods wrote in a June report.

The Mortgage Bankers Association said it will monitor the impact of the settlement. Industry veterans suggest homebuyers beyond the FHA and VA spaces will face affordability hurdles, and the changes will further exacerbate racial and economic disparities in homeownership. Such changes could subsequently cut the demand for starter homes and depress property values, David Dworkin, president and CEO of the National Housing Conference, wrote.

Lenders could see their agent referral partners dwindle, experts said. In addition, more professionals could pursue dual-employment opportunities or split compensation situations in coordination with a lending team.

The Department of Justice meanwhile menaces over the commissions changes, after a U.S. Circuit Court of Appeals in April allowed federal investigators to reopen a probe into NAR. The association last month petitioned for a rehearing in that case.

The DOJ already criticized the Nosalek settlement, calling the MLS's changes similar to NAR's "insignificant and largely cosmetic" while ignoring the larger problem of brokers steering clients to listings with larger commissions. It has yet to weigh in on the NAR settlement, although by law feds are allowed to voice concerns in pending class action settlements.