The American Title Insurance Industry: How a Cartel Fleeces the American Consumer

6. Title Interest Groups

6 Title Interest Groups The Title Evaluation Network The purchase of furniture is likely to involve just a salesperson, a store manager, and a bookkeeper. In contrast, at least a dozen specialists earn their living from the average real estate transaction. Their gross income constitutes the closing cost, a one-time expense added to the purchase price, which the Internal Revenue Service allows to be deducted as a sales expense from any capital gain the seller may have realized . These specialists range from the real estate agent, who markets the property for sale, to the mortgage broker, who negotiates the loan required so that the sale can proceed. Most of these professionals make a living, and often a good living, without mandatory premiums fixed by state law. All of these professionals help to minimize title defects , but only title abstract and settlement agencies are paid for this task. Table 6.1 lists the most common parties likely to be involved in a title transaction. In the 1980s, the Federal Trade Commission (FTC) explicitly limited the McCarran-Ferguson antitrust immunity to risk insurance transactions. It ruled that the antitrust liability exemption does not extend to the associated noninsurance services, such as title searches, legal services, and escrow fees.1 Title companies had unsuccessfully argued before the 3rd U.S. Circuit Court of Appeals that such an interpretation defines the insurance business too narrowly. The U.S. Supreme Court in May 1994 turned down their appeal without comment . In the day-to-day practice of the title insurance industry, however , title abstract and settlement offices continue to benefit from the provisions of the McCarran-Ferguson Act. Their income is enhanced by being able to charge a “comprehensive” premium protected by state law from market competition. Consumers want to keep home conveyance expenses low, but each of the conveyance experts wants to extract a “fair share” from the 127 transaction. They identify their turf and try to secure governmental support for their exclusive jurisdictions. This objective is achieved through education prerequisites, qualifying examinations, licensing, bond deposits, and continuing education requirements. Ditech.com and other real estate–related businesses are ready to offer several required services for a single set fee, including the cost of title insurance. The closing-cost bargain is being offered on cable television . The price-cutting will have to be absorbed by reducing the compensation of all other specialists. Ditech also increases the refinance mortgage interest rate to recoup its closing costs during the life of the loan. The net cost to the property owner after the loan has been paid off often exceeds the value of the discount on closing costs at the time it was initiated. Property Owners The high transfer costs in real estate transactions are facilitated by the fact that the two central players are unorganized: the seller and the buyer have little political clout. On the rare occasions when consumer issues are dramatized through public hearings or media events, their concerns are temporarily highlighted. The National Community Rein128 Title Interest Groups Table 6.1 Specialists Involved in Title Insurance Specialist Role in the Title Insurance Business Real estate investor Provides the capital Realtor Helps to negotiate transfer agreement Title abstract and settlement agent Markets the title insurance company; performs title search and preparation of title insurance policy Title abstractor Collects pertinent title history information Direct title insurance carrier Insures against covered title defects Building inspector Calls attention to quality of buildings Mortgage broker Locates lender and processes mortgage papers Clerk of court and staff Records the property transfer Appraiser Inspects property to estimate its market value Surveyor Determines exact geographic boundaries of lot Attorney Evaluates document’s language, accuracy, and completeness Escrow or closing agent Administers the property and title transfer Source: Joseph W. Eaton and David J. Eaton. vestment Coalition (NCRC) in California tried to help Radian, Inc., secure permission to market its low-cost refinance program, for example . But NCRC’s lone employee in the region could not influence enough state senators to allow the enabling legislation to come up for a debate. State insurance departments tend to include officials who are concerned with what serves the interests of consumer, but as civil servants they are constrained from expressing controversial views publicly . Civil servants have good reasons to avoid being viewed as hostile by any lobby. Excessive consumer advocacy can hurt their careers. The Consumer Federation of America cannot help them...