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Break Up Big Title Insurance
A handful of big firms reap huge profits on a mostly useless product.
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Amid the blur of forms and fees that go along with purchasing a home is, for most buyers, coughing up a couple thousand dollars to pay for title insurance. The average cost for this insurance, if you’re buying a median-priced home, is between $1,400 and $2,700, depending on the state in which you live — and it could obviously be much more if you’re buying a more expensive property.
In theory, this cost goes toward protecting both the homebuyer and their lender from problems stemming from disputed claims to the home. So, for example, if someone pops out of the woodwork claiming to be a long lost heir whose inheritance included the house you’re living in, title insurance is supposed to protect you and the bank that holds your mortgage.
That’s the theory, anyway. In practice, the title insurance industry is mostly a scam, controlled by an oligopoly selling a ridiculously expensive product that is barely ever necessary, built on a corrupt system of kickbacks and referrals from other industry players, not a functional, transparent market.
Fortunately, there’s a solution too for freeing homebuyers from this nonsense. In order to implement it, though, state lawmakers need to be willing to blow up an industry that doesn’t really need to exist.
Though clean data can be hard to come by, the top five title insurance corporations control about 80 percent of the market. The largest, Fidelity National Title Group, is technically a conglomerate of three corporations — Chicago Title, Fidelity National Title, and Commonwealth Land Title — that are each individually in the top seven by market share. Homebuyers pay, collectively, about $20 billion annually in title insurance fees.
That $20 billion doesn’t buy a whole lot of protection though, because title insurance is very rarely used. Only 3 to 4 percent of the monies collected by these corporations is paid out in claims every year. (For comparison, health insurers must spend between 80-85 percent of premium monies on medical care.) The rest either feeds the industry’s profits, or goes into kickbacks to the lawyers, mortgage lenders, and real estate agents who drive customers to particular title companies.
In fact, that’s one reason the price of title insurance is so high: While its homebuyers who pay for it, they aren’t really the ones who shop for it. Most just take a recommendation from their lender or agent.
Title insurers know that, so build their business not by trying to win over new homebuyers, but by kicking money back to the other industry players to ensure that referrals keep rolling in and the whole machine keeps printing profits. And since there are only a handful of companies anyway, there’s plenty of opportunity for soft price collusion within a geographic area.
In what is the exact opposite of a functional market, title insurers actually have an incentive to raise prices to increase business, because higher prices increase the cut they can dole out to the other players in the chain. And while it is possible for a homebuyer to reject title insurance for themselves, most are pressured not to do so, and buyers still have to cover the costs of the bank’s title insurance, which is just about impossible to get out of.
There’s even investment advice out there saying that title insurance corporations are a good bet because its an industry with little price competition, an oligopolistic market, and “customers who are not price sensitive,” meaning they generally just pay whatever is asked.
Gross all around.
Most states very loosely regulate title insurance, if they regulate it at all. “This is not just a minor issue,” said one Massachusetts lawmakers who merely tried to pass a bill to study new rules for the industry. “There's no regulations at all in Massachusetts. The insurance commissioner doesn't even have the power to ask for data from those insurance companies that sell title insurance.”
But there’s one big exception: Iowa.
Iowa lawmakers banned title insurance back in 1947; when insurers attempted to challenge that law in the 1970s, the Iowa Supreme Court blocked them, calling title insurance “an invidious form of business,” and saying the legislature was well within its right in “barring a costly form of ‘insurance’ for which plaintiff's own testimony demonstrates there is little need.”
But following bank deregulation in the 1980s, which allowed banks to do business across state lines, national banks refused to issue mortgages in Iowa due to the lack of title insurance. Instead of re-legalizing the industry, though, Iowa legislators created Iowa Title Guaranty, a sort of public finance agency that issues title insurance.
Today, it costs just $175 in Iowa for title insurance for home purchases up to $750,000, with an additional $1 for every $1,000 in purchasing costs beyond that. According to the Iowa State Bar Association, “Iowa Title Guaranty has saved Iowa real estate consumers more than $1 billion in the last 15 years.” The money the agency collects is spent on affordable housing initiatives, including financial assistance.
Title insurance corporations have tried to get Iowa to repeal its ban, but having a public title system is actually super popular, so the corporations have been unsuccessful. And there’s a lesson there for other lawmakers: Sometimes simply getting rid of an industry that is leeching off a process that lots of people need to go through is both the right and politically useful thing to do.
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— Pat Garofalo