Though they probably didn’t realize it, Texans started paying more last week for title insurance, already one of the biggest costs associated with buying or refinancing a home.
The price hike, quietly approved in March by the state insurance commissioner, is the first in 22 years. Aaron Day, a lobbyist for the Texas Land Title Association, said the 3.8 percent increase was justified by data submitted by the industry and the loss of business it suffered during the housing downturn, when premium income dropped by more than one-third.
“Some of these companies have been hanging on by their fingernails,” Day said.
The Texas Department of Insurance and the Office of Public Insurance Counsel, which represents consumers at rate proceedings, recommended the increase during a series of hearings that ended in February. It will generate an estimated $53 million more per year for Texas title companies and their underwriters, the handful of multibillion-dollar firms — such as Stewart Title, Fidelity, First American — that actually issue the policies guaranteeing the soundness of property deeds all across the country.
Yet it comes at a flush time for the title industry: Profits nationwide are soaring, fed by a frenzy of refinancing, and the real estate market in Texas is surging. According to several surveys, Texas homebuyers already pay some of the highest prices in the country for title insurance, helping push anticipated closing costs on a $200,000 mortgage to $4,600, second only to New York state, according to the consumer financial website Bankrate.com.
Title companies collected $1.4 billion in premiums in Texas in 2012, charging prices that consumers can’t shop for because they are “promulgated” — set by the state. Nor can they refuse to buy, since lenders require insurance guaranteeing that the title to property is free of defects or outside claims.
“There is no plausible reason why Texas title insurers just got a rate increase. Absurd,” said Birny Birnbaum, executive director of the Austin-based Center for Economic Justice, which advocates for low-income and minority consumers.
How did we get here? Credit an influential industry that stiff-arms any attempt to change the fixed-rate system and a Legislature that has resisted calls to open the business to the same deregulation it welcomes in everything from electric rates to auto insurance.
“There is zero price competition for title insurance in the state of Texas,” said state Rep. Matt Schaefer, R-Tyler, at a hearing last month on his bill that would let title insurers use the same “file and use” rate system that governs other forms of insurance. It would also allow the premium split — agents now get 85 percent and underwriters 15 percent — to be negotiated.
Both prospects are viewed with alarm by the industry, represented by the 105-year-old Texas Land Title Association. Executive Vice President and CEO Leslie Midgley said that promulgation “has helped smaller title agents in rural areas stay in business through the economic ups and downs. … Having that local title agent who knows the history of the area and is knowledgeable about land transfers is integral to the quality of the product.”
If the past is any indication, Schaefer’s reform bill is doomed. Though the trade group’s membership is relatively small — only about 500 agent firms plus their underwriters — its reach is wide and its influence at the Capitol well-established. Between 11,000 and 13,000 people are employed in the title industry, said Midgley. Title agents are located in all but two of the state’s 254 counties and tend to be active in local civic affairs.
“The title industry is incredibly powerful,” said state Rep. John Smithee, R-Amarillo, chairman of the House Insurance Committee, who supports Schaefer’s bill. “I think every member of the House has one or two title companies in their district. There’s never been anything as effective as a phone call from a local person.”
Several title agents are current and former members of the Legislature, and many more lawmakers have related interests in real estate, law and finance. The association and title insurers have given more than $720,000 to elected officials and candidates since 2000, according to State Ethics Commission records compiled by the Texas Tribune.
Missing from the list of recent recipients is Smithee, who has chaired the insurance committee since 1993. “I don’t see any point in not having at least some deregulation, maybe in stages. We could set a baseline or maximum rate and let companies deviate,” he said.
In 2011, Smithee introduced four bills that attempted to do that. They were staunchly opposed by the industry, which warned that deregulation would favor national outfits with deep pockets, and their affiliated agents, and hurt the smaller independents, who handle about one-third of the title business statewide. “We wouldn’t be able to compete on price,” said Dawn Moore, with Allegiance Title of Dallas, during the hearing on Smithee’s bills.
Attorney Roland Love, chairman of the Texas Land Title Association’s legislative committee, said that the legislation would destroy “a system that has created a lot of small-town independent agents, jobs, investments in title plants.”
Smithee: “This sounds worse than nuclear war, almost.”
Love: “You’re threatening something that’s working very well.”
Smithee: “It’s working well for the title agents.”
None of his bills made it out of his own committee.
A refinancing bonanza
The title industry says the Texas system is seen as “the model” by other state regulators, and it disputes cost comparisons with other states, saying they might not include everything — insurance, title search and examination, closing services — that is rolled into every Texas title insurance policy.
However, Florida is the only other state that follows that model. And the six states that use comprehensive policies like Texas all have lower premiums, according to published surveys.
In a 2011 report to the Texas Department of Insurance, University of Texas professor David Eaton and his graduate students at the LBJ School of Public Affairs found that states that don’t regulate title insurance at all have the lowest rates. Those with the most regulation — Texas and Florida top that list — had higher rates and less price competition.
Eaton estimates that Texas consumers would save, on average, $700 per policy if the state stopped fixing the price of premiums. “I’ve never understood why Texas decided on promulgation,” he said. “The more you look at it, the more stupid it is.”
Eaton clearly has a bone to pick — he’s co-author of “The American Title Insurance Industry: How A Cartel Fleeces the American Consumer.” The book argues that title premiums everywhere are higher than needed to cover the true costs of insuring property titles — a remarkably low-risk enterprise — while making a reasonable profit.
But unlike their health or car insurance, what people pay for title insurance rarely comes up except when they buy or sell a home, which might happen only a few times in their lives. Even then, the several thousand dollars for title and assorted closing costs fly by in a blur of mortgage documents.
“Mostly their eyes go to the bottom of the page, they’re looking for two or three things, they get out their checkbook,” said Janet Minke, vice president at Alliant National Title Insurance Co. in Fort Worth. “It is what it is.”
But the explosion in refinancing has caused some to look harder at what they’re paying for. Figures from the Federal Housing Finance Agency indicate that close to 900,000 mortgages have been refinanced in Texas since April 2009, and the national Mortgage Bankers Association reports that refinance activity accounted for more than 80 percent of all mortgage applications in 2012.
That’s a bonanza for title companies since a policy is purchased with every new mortgage. The title history is fresh, and with digitized records, the work can usually be done quickly on a computer.
Agents interviewed for this story wouldn’t estimate how long that takes, saying each application is different. Tim Dwyer, CEO of Entitle Direct, a Connecticut firm that offers cut-rate title insurance directly to homebuyers, said the answer depends on the availability of court records. In many Florida counties, he said, processing a run-of-the-mill refinance application can be nearly “instantaneous — from start to finish to get underwriter approval, about an hour.”
Texas requires title companies to give a discount when a mortgage is refinanced, but the maximum — 40 percent — is possible only during the second year of a home equity loan (state law forbids refinancing those more than once a year) and the discount drops to zero after the seventh year. These days homeowners might have refinanced multiple times as they chased lower interest rates.
In a home sale, the seller pays for the title insurance required by the lender; in a refinance, the owner does. That there is any fee to reissue the same title policy often comes as a shock to owners.
“The hardest thing is when people refinance they pay for a new title policy, and then when they sell, they’re paying it again,” said Cindy Goldrick, owner of Wilson & Goldrick Realtors. “On a million-dollar home with closing costs and everything it could be $8,000. It’s not a small amount.”
In the past decade, the refinance issue has provoked scores of class-action lawsuits against title underwriters for failing to give eligible homeowners their discount. The companies agreed to settlements that paid millions in rebates to those consumers in Florida and New York state.
Aggrieved homeowners in Texas, however, where state and federal appellate courts have been especially hostile to class actions, have hit a wall. The Fifth Circuit Court of Appeals has decertified three such lawsuits, sending them back to the trial court in Dallas and warning plaintiffs’ attorney Eric Calhoun not to return.
In one of the cases, Calhoun said a sample of 112 refinanced mortgages from Stewart Title’s files turned up 73 homeowners who didn’t receive the mandatory discount. That number is higher than the Department of Insurance’s internal audit records, which showed just 15 violations of the discount rule all last year. Minke and other title agents say the department is a stickler for the rule.
Spokesman John Greeley said the department doesn’t discuss its audit procedures, and Calhoun concedes enforcement might have improved since his lawsuits were filed. Still, Texas consumers have lost “tens of millions of dollars,” he said. “The bottom line is these people will not get their money back and will continue to get ripped off.”
Tilting with title industry
After Mike Geeslin became state insurance commissioner in June 2005, he spent the next five years in a spotlight. He dealt with everything from hurricanes to workers’ compensation to critics who said he was too soft on the insurance industry. He arm-wrestled with State Farm Insurance and the Texas Windstorm Insurance Association. By the time Geeslin left office in 2010, plenty of ink had been spilled on those issues.
What didn’t get noticed: The whole time, Geeslin was also skirmishing with the title companies — a small segment of the insurance industry, but one that “took a lot of agency resources,” he said.
“It was acrimonious,” Geeslin said. “Obviously I got nowhere.”
One by one, Geeslin’s moves toward changing the regulatory framework were parried. Some dealt with the issue of title company expenses and the problems that state and federal regulators face in sorting them out. Getting accurate information is key to how profits are determined for rate-making purposes.
In 2006, Geeslin issued a call for records on non-reimbursed expenses paid by title companies to real estate firms, lenders and others. Such expenses are related to a practice known as reverse competition, because it markets the product (insurance) to someone other than the person (the homeowner) who purchases it. It might include forbidden rebates or kickbacks, which increase costs to consumers.
The data call met resistance from the title companies, which later successfully backed legislation that made it more difficult for the department to obtain financial information it hasn’t sought previously.
In 2008 and again in 2010, Geeslin concurred with a Sunset Commission recommendation to the Legislature to pass a law giving the department authority to conduct regular title agent examinations to ensure that expenses are reported accurately. That never happened, nor did the Legislature respond to Geeslin’s requests to start introducing “some measure of price competition” into the title insurance market.
In November 2010, Geeslin surprised some in his own agency when he rejected a 2.2 percent increase in title insurance rates recommended by a state administrative officer, saying economic indicators showed the industry’s fortunes were looking up and the increase wasn’t needed.
The following January, Geeslin announced he was stepping down, after five and a half years as commissioner. Two months later, state Rep. Drew Darby, R-San Angelo, who owns a title company, and then-Sen. Chris Harris, R-Arlington, a title attorney, introduced a bill that promised to correct what an industry newsletter called “a number of areas where the Legislature apparently felt that (the insurance department) has overstepped its authority.” It passed easily.
Among other things, the new law allowed title agents to sue the insurance department if they find requests for information “unduly burdensome” and required that such requests undergo a lengthy rulemaking procedure before companies have to comply.
In March of this year, the American Land Title Association reported that Texas was second only to California in the amount of title insurance premiums generated in 2012 — $1.4 billion, a 24 percent leap over 2011. The same month, Geeslin’s successor, Eleanor Kitzman, approved the title rate hike, larger than the one he had rejected two years earlier. Geeslin’s order had included a profit provision of 6 percent; Kitzman’s order provided 7.5 percent, a figure agreed to by the state and the title industry.
A striking piece of evidence at the rate hearing was a chart from the Office of Public Insurance Counsel showing that while title company transactions and premiums had dropped precipitously from 2007 to 2010, so had the companies’ expenses. According to the analysis, it’s a long-term trend due to technological efficiencies and consolidation that bodes well for profitability, even through future housing downturns.
Also striking: The lack of public awareness of a rate hike that will cost Texas homeowners an additional $53 million a year.
“Why folks … are not protesting up and down the Capitol makes no sense,” said Dwyer, the Entitle Direct executive. He said his firm is poised to enter the Texas market with title insurance priced at a 35 percent discount if rates are ever deregulated.
But the public silence makes perfect sense to Love of the Texas Land Title Association.
“Why didn’t anybody show up at the hearing?” he asked. “Because they’re not unhappy with the system we have at this point.”
CLARIFICATION: This story was updated to note that home equity loans may not be refinanced more often than once a year.
Brenda Bell, a member of the Statesman’s investigative team, has reported on a wide range of Texas issues and public figures. Her recent work has included extensive coverage of state contract irregularities and other concerns at the Department of Public Safety.