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

9. The Future of Title Insurance

9 The Future of Title Insurance Scott Woolley, a reporter for Forbes, asserted that the title insurance industry is “America’s Richest Insurance Racket.”1 The authors met many executives and employees of title insurance agencies. We interacted with the staff of the American Land Title Association (ALTA). None of them deserve to be designated as racketeers. There is no Godfather among them. The industry’s wealth-dipping practices are legitimized by special interest legislation at both the federal and the state levels. The status quo is not fair, but it is legal. Like many other business groups, the title industry invests both money and human talent in exercising its constitutional right to buy access to the corridors of power. This uncomfortable aspect of democratic government is well summarized by Shane Ham and Robert D. Atkinson: While e-transformation of the real estate industry will cut the cost of buying a home and boost economic growth, there are three reasons why we believe the industry is unlikely to make this transformation absent public policy intervention. First, middlemen (e.g., mortgage brokers, realtors and title companies ) exercise control over large parts of the real estate transaction, either through favorable laws and regulations or control of key assets such as the Multiple Listing Service (MLS), the computerized database for the sale of homes for sale. Their efforts to protect their roles in the transaction make it more difficult for consumers to have other choices including self-service enabled by e-commerce. Second, unlike industries such as travel or securities trading, where producers are relatively concentrated (for example, the online travel site Orbitz was initially established by the five largest airlines ), the real estate industry is highly dispersed. There are millions of “producers” (home sellers) who sell perhaps once per decade. They are not organized as a pressure group. 207 Finally, transformation of at least one part of the industry—title search and insurance—is held back by the lack of government effort, in this case the establishment of electronic “recordation” systems for real property records.2 The Ham and Atkinson report estimated that in 2002 the closing costs for the sale of about 5.56 million homes involved just over seventy-five billion dollars in closing costs. They estimate that regulatory changes and the use of e-transformation (digitized data bases) in 2002 could have reduced the closing cost by more than half, by about thirty-nine billion dollars.3 In April–May 2006, the excessive cost of title insurance received renewed media attention as a result of a hearing of the House Committee on Financial Services. Kenneth R. Harney summarized the disclosed evidence under the headline “Title Insurance Draws Regulatory Scrutiny, and the Results Aren’t Pretty.”4 No one in Congress has proposed remedial legislation to deal with the reported abuses, however. In Michigan in 2006, four title insurance companies agreed to refund $27.5 million. A U.S. district judge in Detroit found that they had overcharged new homebuyers between December 1998 and July 5, 2005. Refund checks averaging $345 were to be sent to homeowners around July 2006.5 The actual level of excessive charges may have been much higher. The court did not demand that the title insurance companies provide actuarial data about the relationship between their income from premiums and the rare insured losses for which lenders or owners had to be compensated. Few state legislators, governors and commissioners of insurance appear to be aware of the fact that state laws impose excessive premiums on all real estate investors, including low income families with few debts which could help qualify them to become first-time homeowners . This has not been true of the National Association of Insurance Commissioners. That organization’s policy-making board members have repeatedly discussed pertinent policy options. Nevertheless, they are on record in support of the status quo. It is hard to know if the evidence presented in this book could motivate public officials to support measures to shrink the economically unwarranted closingcost surcharges. In the past, lobbyists have generally been successful in preventing proconsumer reforms. 208 The Future of Title Insurance Antitrust Enforcement Presidents Theodore Roosevelt, Woodrow Wilson, and Franklin D. Roosevelt successfully mobilized political support for antitrust legislation during the twentieth century. Industry understandably favored cartel and monopoly arrangements, as they can facilitate the maintenance of artificially inflated price levels. As Katherine Hobson notes: “Parts of our antitrust...