I think the future holds more licensing requirements in store for real estate professionals. After entering a credit crisis like we are currently experiencing, all professionals connected to the real estate industry may face new licensing or additional requirements.

In an interesting piece written by two economists—Fed visiting scholar Morris Kleiner, of the University of Minnesota, and Richard Todd, vice president of Community Affairs at the Minneapolis Fed called Licentious Behavior:

On the face of it, this makes perfect sense: If incompetent or dishonest brokers have encouraged borrowers to take out loans beyond their means, then targeting these abuses through stricter governmental requirements on brokers should help prevent future problems.

But a recent empirical examination by two Fed econ- omists casts doubt on that solution. In the first compre- hensive assessment of relationships between mortgage broker licensing and market outcomes, the economists find that most regulatory steps appear to have no clear connection to consumer outcomes, but one financial regulation (surety bond and minimum net worth requirements) is consistently related with conditions that seem worse for both brokers and borrowers.

Deja Vu

The appraisal industry faced new licensing requirements in 1991 as a result of the S&L crisis of the late 1980s. Think Vernon Savings & Loan and property values being appraised higher every few hours by appraisers who must have possessed incredibly precise and masterful valuation skills and adequate supporting data (yeah, right).

Appraisers ended up being licensed, waiting in line with other professionals in the testing centers such as pool cleaners and hair stylists.

Appraisers were part of the problem in the current credit crunch as well. Licensing did not prevent bad appraisers from crossing the line then or now. In fact, I would venture to guess that the quality of the average appraiser (not the median) declined sharply after implementation of licensing 17 years ago.

Was it licensing that created the deterioration in quality of appraisers?

No. It was a bigger systemic problem but it did play an unintended role. Licensing of any profession provides a false premise of quality. In this case it was presented to the mortgage industry, but more importantly, allowed a shift in liability to the appraiser who had a freshly painted bullseye on his or her back.

Licensing alone does not promote better quality work.

Quality only gets noticeably better by an incentivized private sector who is enticed through regulation to require better quality reports. It is not enough to say you “can’t do something.”

Is licensing a good thing?

Absolutely. It provides a minimum barrier to entry and a process to allow for the removal of bad appraisers from the business.

Licensing alone won’t improve quality, however. An example would be a town whose police department cracks down on speeders – this alone doesn’t make everyone a better driver, but it does play a role in improving safety. People still get into accidents when they have a drivers license.

A side benefit to municipalities becomes an important revenue opportunity for the licensing bureau, especially with a weakening economy in most of the country. Revenue funds some enforcement for blatant violations, and provides some oversight and regulation. I am fairly certain that a portion of earmarked licensing revenue ends up channeled to other departments, essentially defeating a primary argument for licensing.

What about mortgage brokers?

So for mortgage brokers who are on the verge of being licensed in New York state, with a economic slowdown already being felt, I think it is a long shot that this effort will be defeated.

Will it increase the quality of mortgage brokers in New York state? I doubt it, only on the lower fringe.

I saw first hand the basic financial conflict in their role as commissioned provider of mortgage business, paid only if the loan closed. As in every profession, there are good and bad “professionals.”

All who touch the mortgage should to be licensed, at the very minimum.



8 Responses to “Licensing Doesn’t Really Work, But A Necessary Revenue Opportunity”

  1. Wow! I started in business (after a stint in the Army) in 1986 and this is the first time I’ve ever seen the truth about licensing in print.

    A license can be worse than worthless because it confers implied competence on all licensees, even the incompetent ones.

    I’ll take results orientated professionals over licensed ones any and every day.

  2. Edd C Gillespie says:

    What troubles me about this discussion to license or not license is that we have no workable alternative when it comes to the excesses of greed. The following comment in the article caught my attention: “wrote Shapiro; licensing ‘tend[s] to benefit consumers who value quality highly at the expense of those who do not.’ I thought about that all night (pretty much). I must be dense. I cannot imagine a circumstance where the expense of high quality (to the extent quality is defined as honest assistance) in mortgage service (IE MBs, appraisers and lenders) would be more expensive to the ultimate consumer than the quality they have been getting. The true culprit in this go round was licensing and regulation that wasn’t enforced. For whatever reason (and I have theories), with respect to real estate appraisers, the regulators can’t seem to agree on what they want. What is they want from mortgage brokers?
    Seems to me we license and then try to build a regulatory framework with committees made up of those who don’t want effective regulation. Is that too cynical?

  3. Fred Glick says:

    Licensing in the states where there are non along with background checks, consumer protection services that can react quickly, realistic training and a national loan officer database that is tied into a systems where we can tell who originates the fraud will help get the scum out of the business!

    CA still has the CFL license and bank employees are exempt. This is silly.

    CO changed from nothing to everything and thousands of losers left the business.

    It can work. It just has to be done right!

  4. Licensing is one of many steps needed. The next step is industry self-regulation of ethical conduct. Mandatory, for all loan originators no matter where they work.

  5. Jonathan J. Miller says:

    Jillayne – Speaking from experience in my industry, I think self-regulation sounds like a good idea, but at best, it’s ineffective. It has a role, but like licensing, it is a very small part of the solution.

  6. Edd Gillespie says:

    I was told by a certified general on his way to MAI that he believes the only effective combination to build appraiser character (the stuff of self regulation) is if they are independently wealthy and principled. Boy would that jack up the cost of real estate mortgage appraisals! So long cheap & fast (and good riddance). As it is too many people depend on this job to make a living. I wonder if that is so for MBs.

  7. In Washington State the licensing requirements for both Mortgage Officers and Real Estate Agents have been increased. I agree that it raises the barrier to entry however, it does not necessarily impact in a meaningful way delivery of a good combination of Competency and Positive Customer Service.

  8. I think licensing is necessary as it sets a “floor” for a group. A license requirement if properly constructed and managed, will weed out known problems and set a minimum threshold for license holders. Self regulation by the peer group moves the group to the next level of quality. Bar Associations are a good example of this sort of self-regulation. What Real Estate really needs is a Fiduciary level of responsibility to the consumer. Holding all providers to that level of responsibility would have prevented a good deal of the current mess. The RE industry has destroyed the trust of the consumer. Many in the business behave as Fiduciaries without being forced, but until it becomes the norm, we will never regain the trust of the consumer.