Over Charging Is Just The Tip Of The Iceberg (part one)
http://www.denverpost.com/news/ci_6952345
Well that's a big can of nasty worms to open up for the Title Insurance industry. The title industry is one of the last players in the real estate industry that has not been eroded by the transparency of consumerism. It's the mystery industry...seemingly untouched by the regulators and more importantly consumer protection groups. In fact, as real estate companies and mortgage companies are shutting their doors at an unprecedented rate, title companies (and the national insurers) are only having to reduce their bloated staffing. The truth be known, they are flush with cash, in fact more cash than they know what to do with! In the Real Estate industry, they may well be the "Last Man Standing". You can check out the financial information of all national title underwriters by using this site.
What Are Discount Title Insurance Rates
The article states that a consumer is putting together a class action lawsuit based on being overcharged by a title company. The person claims that he was not given the "reissue" rate. In the title industry, reissue rates are discounts off the standard full premiums charged on title insurance policies. Though the discounts vary from state to state and from title insurer to title insurer, they average 50 to 60 percent off the full rate. Reissue rates are normally available only on refinancing, but in some states they can be obtained on home resales where a title search was performed relatively recently for the seller. The reissue rate is based on the premise that less work would have to be done on the research of the property and less risk. For example, say you bought a home three years ago. The ARM product is adjusting above fixed rates, so you decide to refinance. Should you pay full price for another title search and insurance policy? Well considering that a search of the public records on your property was performed just three years ago, there's no reason to have to pay for another full search.
In regards to rates and the free market concept to keep Title Insurance Rates in check, some people ask "aren't title companies regulated by the state?" Here's how it works in Colorado. A Title Insurance Underwriter files rates and fees with Department of Insurance. A notice is put out and the public has 30 days to examine and contest the rates. I don't know about you, but if I had my choice of watching the grass grow or waiting for random filings at the state...I'd take the grass growing as more exciting. Joe Consumer has now idea or concept on what to even contest.
Speaking of free markets. If the free market is working WHY ARE all the rates at the state of Colorado within single digit percentages of each other? It's no coincidence at all. They just must all have the same overhead and same lack of efficiencies. Remember, the Large National Title Insurer files rates that any title company or agent have to use. So that means that Title Company ABC has to use the same EXACT rates as XYZ Title Company (Different title company names but Same Tile Insurance Underwriter). Even if Title Company ABC wanted to do it for free...they CAN NOT. They must charge the rates filed with the state. Here is a news flash. Title Insurance Rates are controlled from the top down by the Large Title Insurance Underwriters. Wow, its just amazing how they all file almost the same identical rates.
Affiliated Business Arrangements (AfBA) and independents were the first group to break this National Title Insurance Underwriting cartel. I will cover this in part two of this post.
What About The Government
Hmmm, so why isn't the concept of
discount title policy pricing more widely known among the consumer at large? Well it's not because of the Colorado Department Of Regulatory Agencies, Insurance Division. As with most tax funded nanny state, "watch dog", protect us, agencies, the directors are put in place by the current political regime. Marcy Morrison, the current Colorado Commissioner was appointed by the current State Governor. One only needs to check the political contribution coffers of Governor Ritter and the Democrats (or Republicans) to note that Title Insurance Companies and their executive leaders contribute quite handsomely to their campaigns. It's also not a coincidence that house and senate bills as well as rulings favor the large Title Insurance providers and not the consumer.
Some state regulators and the Department Of Housing and Urban Development have started looking into this arena. Specifically, they're starting to ask whether consumers have been overcharged for years. In the meantime, it's up to consumers to make sure they're getting the best deal possible.
Title Insurance is tricky business — governed by rules and regulations that differ from state to state. A few states have set caps on rates or approve premiums for title insurance. Three States Florida,Texas and New Mexico use Title insurance rates that are promulgated by the State's regulatory Department Of Insurance. Title companies in those states are not allowed to deviate from these state set fees.
What these promulgated rates mean for the consumer is a more transparent system of costs. The regulatory bodies hold hearings were Title insurers have to provide full documentation on their costs, claims and profits. The state then decides based on all the facts, just what a consumer should pay.
Some people claim this is outright governmental intervention of the free "Market". The Ultimate Nanny State! However, Title Insurance is quite different than a lot of other insurance products. On one hand, It's a product that's a must buy for most all real estate transactions, both commercial and residential. But, on the other hand, It has one of the lowest claim ratios of any insurance product, with claim payouts of less then 5%. Take a read of this Forbes article, Inside America's Richest Insurance Racket
The big difference in the title insurance industry vs. other types of insurance products is the distribution model. A very large percentage of their business comes at the direction of Mortgage Lenders and Real Estate Brokers. The consumer relies on industry players to recommend the title company for the transaction. In the past and right now, distribution is based on bribes, incentives and every array of miscellanies 'good ol boy' concepts. This model is about as old as it gets. All the national Title Insurance Underwriters all follow the same secret society rules...keeping rates high while paying fines for these violations that really amount to another "Cost Of Business". In an industry where premium dollars and revenues are in the BILLIONS...these fines amount to nothing more that higher costs to the consumer.
The Regulators are out there chasing real estate brokers and mortgage lenders as well as Title Companies for accepting and giving everything from raffle tickets, dinners, candy, pizzas, sporting event tickets free marketing materials, etc.,etc., etc, Of course the regulators feel good, they get press and they justify their jobs and the consumer is happy to pay for more regulators in the form of higher taxes and in the end, pay more in title insurance for the increased fines that are just heaped on top by the insurers as a cost of business.
Understanding The Players
In general there are two players in the Title Company arena. Player 1, the title company or the agent you know by the name, in the article above, Land Title. Player 2, the national or larger insurance policy provider or underwriter, which in Land Title's case, is one in the same, Land Title. They are an agent of themselves, so to speak. In another example you could have XYZ title company as the agent or title company and say Land America as the larger underwriter. The underwriter is whom you should be concerned about and is the real teeth for any Title Insurance Policy.
So to really confuse things. A typical closing could involve an escrow company or attorney performing the settlement activities. You would be closing at a Title Company, which may or may not be associated with the escrow company and the title policy could be underwritten by yet another company. As I said, the mystery industry!
Buyer Beware
Depending on the state or company. Most Title insurers' policies sometimes severely
restrict the eligibility period to obtain reissue discounts. In the above article, the author claims that Land Title has a five year reissue rate. Many Title Companies claim the same. But depending on the company it is really only a full 50% reissue during the first few years. In ending years it is prorated down to say only 10% off in the fifth year (90% full rate). But, a "five year" reissue rate sounds good to the consumer, if they do not know any better. In fact most real estate brokers know very little in regards to title insurance and escrow industry and how it really affects their clients. Other little schemes are strict rules requiring presentation of the prior "title policy" to
the title agent, to prove that insurance still covers the dwelling. Now keep in mind that all these rules and discounts also are regulated by state laws in most cases vary even county by county in pricing! So
consumers really are at the mercy of "Caveat emptor"
Some title, escrow or settlement attorneys mention
the existence of lower cost rates. But the financial incentives for
them are heavily weighted to non-disclosure, as Association Land Title Association (ALTA) confirms. The
smaller the premium that is charged for the insurance coverage, the
smaller the compensation to the title agent.
The average national "split" of the premium charged at closings,
according to ALTA, is 70 to 72 percent to the title agent or title company, and the balance to the title insurance underwriter. The percentages can go as high as 92.5 percent to the title agent and just 7.5
percent for the insurance underwriter. Conclusion All title companies (and of course the consumer) are at the mercy of the rates handed down from on high by the national title Insurance underwriters. Even the leaner, meaner more efficient AfBA's and small independent title Companies have to (had to) be underwritten by a national provider like Stewart Title or Land America...which means what ever rate is filed by Stewart Title with the State is the rate that any title company or Agent MUST USE. They can not charge less or more to anybody, period. This type of top down price control and the failure of most regulators to realize is cosing consumers millions. Follow part two to get the real down and dirty on how reissue rates and new Title Insurance Underwriters can be the new leaders in providing fair and competitive rates for the consumer without getting big brother regulatory agencies involved.
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Posted by: Josh Cahill | October 04, 2007 at 10:18 PM