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The Commission Model's Role in Our Financial Crisis

It has been well documented that our current financial problems and recent financial crisis were the result of the bursting of the housing bubble. Investment banks and others sold bundled mortgaged backed securities and insurance against defaults on the those securities based upon the premise that housing prices would always appreciate. Even Ben Bernake when pressed on the downside risk of the derivatives market said, prior to the financial meltdown, that it was unlikely that housing prices would decline in any serious or prolonged way and thus the risks of the housing bubble bursting were minor.

Books such as the "Big Short" and movies such as the "Inside Job" have done a wonderful job documenting how Wall Street investment banks and regulators were to blame for our current financial problems and recent financial meltdown.

Additionally, we all have heard stories of mortgage brokers who unscrupulously encouraged homebuyers to borrow more money than they could afford. We also have heard stories of how appraisers worked in cahoots with mortgage lenders to ensure that high risk borrowers were able to obtain financing based simply upon the equity of the house. For some reason, however, we have heard very little about real estate agents that encouraged homebuyers to buy more expensive homes than they could afford.

A large majority of real estate agents are paid a commission based upon the price of the home their client purchases. If their client purchases a higher priced home they get paid more.

There is an inherent conflict of interest in this model. The agent's fiduciary obligation is to look out for the best interests of the buyer. In almost every case, it will be in the best interest of the buyer to pay less for a home. In contrast, it is in the best interest of their agent for the buyer to pay more for the home.

With this inherent conflict of interest as the backdrop, buyer agents were out in force encouraging homebuyers to purchase expensive homes during the housing bubble. They, like Ben Bernake, never pointed out the downside risk to their clients. They never warned their clients that if the bubble were to burst, they could suffer financial harm.

Had the majority of real estate agents not been paid based upon the price of the home and rather by some other measure, then it is possible that some of the damage could have been avoided. At the very least, real estate agents and the real estate brokerage industry may have been heeding warnings to the public rather than engaging in the same reckless behavior as the investment banks and others that created our current financial mess.

This is the sort of revolutionary thinking that happens at Flat Fee. By working on a non-commission based systemyou can be assured we will give you the best quality real estate work for a pre-discussed amount. If you have more questions about how Flat Fee works, or our business model, contact us here.

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