Whenever the subject of real estate affordability comes up there's a strange gap where title insurance is concerned. With the stealth of Houdini, the fees and charges paid for title insurance seem eternally overlooked -- and grossly higher than necessary.
Title insurance or its equivalent is something homebuyers want and need. You want to make sure that title defects, hidden liens and other problems that existed prior to closing are resolved without additional time and money.
The issue with title insurance or equivalent protection such as the state-mandated program they have in Iowa, is not whether such coverage is necessary, instead the issue is cost.
More than a quarter of a century ago, in 1980, Luiz Simmons -- then and now a Maryland state delegate -- undertook a study of title insurance costs. The study plainly found that "title insurance losses constitute a minor portion of the premium with a major portion going to acquisition underwriting and loss prevention costs."
How much of the premium went to commissions for title agents? The study found that commissions often represented 60 percent or more of the entire premium.
In other words, if you were a title insurance company your big cost was not fixing title problems, it was selling policies. Since consumers were picking title agents and not title insurance policies, the way to sell policies was -- and is -- to offer the highest possible fees to title agents, the folks who do title and settlement work.
You might think that the Simmon's study is old news but that's not the case. Testifying before Congress in 2006, J. Robert Hunter, Director of Insurance for the Consumer Federation of America said that "on a countrywide basis, the top four title insurers paid an average of about 80 percent of the title insurance premiums to their title agents in the form of commissions. An analysis of commission splits in California found that between 8 percent and 12 percent of the premium was paid to the title underwriter and between 88 percent and 92 percent of the premium was paid to the title agent."
"It should be noted," Hunter continued, "that the commission split is not disclosed to borrowers. The HUD-1 form that discloses the costs of title insurance to borrowers at line 1108 merely shows the total premium amount the buyer pays for title insurance, but homebuyers assume that the entirety of the premium goes toward underwriting, not the real estate intermediary in the room with them at the time of closing."
Now comes word from New Jersey of an idea which gets to the heart of the title insurance controversy: Instead of banning premium rebates to consumers, why not allow them?
Offered by state senator Raymond J. Lesniak, senate bill No. 2229 would allow title insurance companies and title insurance agents to offer "a rebate, discount, abatement, credit or reduction of premium, or other benefit or inducement in connection with a contract of title insurance."
Instead of state-mandated monopoly pricing, homebuyers would be able to shop for title insurance on the basis of the policy with the lowest cost.
Interestingly enough, at least one title insurance agency -- myClosingSPACE.com -- supports the plan.
In business for a year and now licensed in New York, Pennsylvania, Florida and Massachusetts as well as New Jersey, Company president and CEO Sam Ingram says myClosingSPACE.com is a title agent that supports the proposed New Jersey legislation.
"If this bill is passed it will give the consumer unprecedented flexibility to save money on title services," says Ingram.
"MyClosingSPACE.com favors this bill," says Ingram, "because we have a different business model from all other title companies. We offer our services directly to the consumer rather than going through lender's, attorney's, and Realtors (LAR's). Even though myClosingSPACE.com is only a year old, we processed over 500 quotes for title insurance during the month of January 2007. We've leveraged the Internet and various consumer events (such as our season sponsorship of the NJ Nets) to drive volume. The resulting economies of scale and efficiencies in our processes allow us to offer the lowest possible rates and fees that the state of NJ will allow."
But why should the state of New Jersey, or any state, prohibit lower fees to consumers? How is that in the public interest? Who benefits? In other states Ingram says his company is actually able to offer lower fees than what he is forced to charge in New Jersey.
Sen. Lesniak has a smart idea, one which assumes that competition is good for the marketplace. His bill ought to pass and other states should look with care at the Lesniak proposal.
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