One of the things we pushed for during my time at the FTC was increased competition in the home real estate industry. This covered areas such as overly-expansive definitions of the unlicensed practice of law, regulations that tried to expand the closing services that required an attorney, and efforts by traditional real estate agents to try to foreclose competition from discount brokers.
The DOJ has set up a new website that describes all of the anticompetitive legislative and regulatory barriers in the residential real estate market that raise the price of real estate services and reduce consumer choice. There is lots of informative and good stuff there. My FTC colleague Luke Froeb has more.
One area in which we regrettably fell short was for reform of closing costs by permitting “bundling” of all closing costs into a binding estimate for all the costs, soup to nuts. This would have permitted to consumers to shop for all costs at one as a package, rather than the current required HUD-1 process where all the costs are itemized instead. One story that describes the HUD proposal and its demise is here.
Perhaps the most outrageous element of closing costs is that for title insurance. According to an excellent article in Forbes on the title insurance “racket”:
Title companies appeared a century ago, helping to protect home buyers from being swindled by crooks who sold properties they didn’t own. A title insurance policy protects the buyer in case the deed turns out to be defective but the seller cannot be collared to refund the purchase price. It is far less necessary in these days of computerized records, online searches and rare instances of title fraud or hidden liens.
First American has doubled its prices in a decade, to an average charge of $1,472 per home for a title search and insurance. Meanwhile, thanks to computerized record-keeping, the cost of searching for a home’s ownership records online has fallen to as low as $25. Technology also has helped make mistakes rarer; now only $74 of each policy goes to pay claims–that is, make home buyers with defective deeds whole. That leaves a $1,373 spread for overhead and for profit.
Fancy this: racetracks that keep 93% of your money and return only 5% in winning tickets. They wouldn’t last long, not unless they could somehow rig the rules to both forbid price competition and make the purchase of race bets mandatory. That’s more or less what the title insurance industry has done to American homeowners.
But the title industry’s halcyon days owe much to antiquated state laws that thwart new competition, allow prices to soar despite declining costs and force almost every home buyer to pay for insurance that most of them will never need. In all but a handful of states, laws bar insurance giants in other fields, such as AIG or State Farm, from offering title insurance and undercutting incumbents’ prices. It also is illegal for anyone to offer guarantees that provide the same protection as title insurance.
Most states responded by passing laws dictating that only dedicated title insurers could sell home buyers title policies. Decades later many of the banned multi-line insurers are far more financially secure than most title insurers in the eyes of credit-rating agencies, but the states haven’t done much to raze the barriers….
Having insulated themselves from outside rivals, the title companies then won state support to limit competition among themselves. A small number of states passed laws fixing prices of title insurance. Other states enacted a pastiche of rate regulations that let insurers set their own rates, routinely granting them increases.
Spared from having to compete on price, title firms large and small vied for customer referrals from real estate agents, mortgage brokers and builders by bribing them, in violation of federal law. The insurance agents who woo the customers are also compensated handsomely. Of the cash First American collects for title searches and accompanying insurance, it hands 80% to its own agents and to independents.
Although it would be better to simply permit open competition in this market and to permit packaging of closing costs, at least some competition is better than none. So this innovation in California to permit on-line comparison of title insurance price quotes seems like a major step in the right direction. It is a website where consumers can shop and compare quotes for title insurance. Let’s hope the idea spreads.
Senator Shelby, who is quoted in the news article above, was a leading opponent of the HUD proposal, owns a title insurance company in Alabama. The title insurance industry opposed the HUD proposal because they were afraid that its adoption would lead to stronger competition and, egads, reduce their economic rents. In the Forbes article linked above, a spokesman for Senator Shelby insists that his attitude toward the HUD proposal was unaffected by his stake in the title insurance company.