Posted by Todd Zywicki:
Increasing Competition in the Real Estate Industry:
http://volokh.com/archives/archive_2007_10_14-2007_10_20.shtml#1192638761
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 [1]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 [2]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
[3]here.
Perhaps the most outrageous element of closing costs is that for title
insurance. According to an excellent article in [4]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 [5]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 [6]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.
References
1. http://www.usdoj.gov/atr/public/press_releases/2007/226685.htm
2.
http://managementrandd.blogspot.com/2007/10/how-anticompetitive-are-your-state-laws.html
3. http://findarticles.com/p/articles/mi_qn4188/is_20040323/ai_n11447225
4. http://www.forbes.com/forbes/2006/1113/148_print.html
5.
http://www.latimes.com/business/la-fi-title10oct10,1,7606703.story?coll=la-headlines-business&ctrack=1&cset=true
6. http://www.clta.titlewizard.com/default.aspx
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