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Title Insurance

Date: Mar 15, 2005
Contributor: Tyrone Mcsherry

State Will Take Look at Prices in Title Insurance Probe

As they continue to investigate an alleged title industry kickback scandal, state regulators are forming a task force to look into the larger question of whether the title insurance business has become uncompetitive and overpriced.
Regulators say the three largest title insurers in the state -- Fidelity, First American and LandAmerica -- now control 75 percent of the market.

Title insurance is often the second-biggest cost consumers face when buying or refinancing a home, behind lender fees. Lenders require the insurance, which ensures the seller owns the property and protects buyers from future claims or liens. The one-time cost varies; someone buying the median-priced home in Sacramento County would probably pay about $1,600 to $1,900 for title insurance, said the state Insurance Department.

The arcane world of title insurance got thrust into the news in recent weeks when California Insurance Commissioner John Garamendi issued subpoenas to two of the state's largest title insurers and, last week, to six real estate companies. He alleges they're involved in a scheme in which the insurers pay builders, lenders and sales agents hundreds of dollars per transaction for sending them business.

"This particular activity illuminates the fat that's in (rates) and that needs to be taken out for the benefit of consumers," asserts Rebecca Westmore, the department's senior staff counsel.

California's insurance code states that title insurance rates should not be "excessive, inadequate, or unfairly discriminatory," though it gives little guidance as to what constitutes "excessive," state officials said. The code simply states that no rate shall be deemed excessive unless it's "unreasonably high ... and a reasonable degree of competition does not exist."

Consumers can shop for their own title insurance among the 22 insurers that write it in California, but most wind up using one recommended by a builder, lender or agent.

"It doesn't seem this is a very competitive or well-functioning market in that consumers don't shop for title insurance, and there isn't price competition per se," contends Doug Barker, chief of the Insurance Department's rate filing bureau.

Department officials said that, based on the task force's findings, they may try to restore competition in the title industry and lower rates through existing regulatory powers or by proposing legislation.

Regulators say they've been alarmed by the magnitude of what they say are kickbacks that Fidelity National Financial and LandAmerica Financial Group paid builders, lenders and real estate agents for steering business their way.

Fidelity and LandAmerica insist that they did nothing illegal or unethical and that no consumers were hurt.

Garamendi alleges kickbacks from title insurance companies were disguised as payments for so-called reinsurance sold by subsidiaries of the builders, lenders and agents. These reinsurance subsidiaries were to assume part of the risk of the title policy in return for a portion of the title premium.

Garamendi argues that reinsurance was unnecessary and certainly too expensive given the tiny risk the reinsurers assumed.

Fidelity and LandAmerica, whom Garamendi has subpoenaed for information, insist they followed federal guidelines on reinsurance.

"It's a business practice that followed (federal) guidelines, state regulations and was permissible under those regulations," said LandAmerica spokeswoman Lloyd Osgood. "Consumers paid the same regardless of whether there was ... reinsurance or not."

Regulators cite this example: Builder Meritage Homes created a reinsurance subsidiary that contracted with two Fidelity-owned title companies.

Meritage agreed to refer title insurance business connected with its home sales to Fidelity. In exchange, Fidelity ceded 50 percent of each title premium -- after subtracting a $350 servicing charge -- to the Meritage reinsurance company. The Meritage reinsurer was responsible for covering 50 percent of any title insurance losses, state officials said.

Meritage insists it did nothing illegal and followed federal Department of Housing and Urban Development guidelines. Those guidelines include ensuring that the fee paid for the reinsurance is commensurate with the level of risk being assumed.

Garamendi argues this risk was minuscule and the reinsurance fees relatively huge. In the Fidelity-Meritage arrangement, a title policy for a $350,000 house sold for $1,350. Fidelity kept the $350 service charge and half of the remaining $1,000 in premium, then paid the balance of $500 to the Meritage reinsurer, state officials said.

Given the low risk of having to pay claims on such a policy, the true cost of that reinsurance should have been closer to $33.75, state regulators argue. The additional $466.25 paid was "pure gravy," the department contends.

State officials say title insurers pay out 3 to 5 cents of each premium dollar collected to cover claims.

Reinsurance in residential real estate was virtually nonexistent before 1997, and its use didn't spread widely until a couple of years ago.

Fidelity and LandAmerica say the amount of premiums ceded to reinsurers nationally has been relatively small: Fidelity puts the number at $10 million, mostly over the past two years, while LandAmerica reports $12 million since 1997 -- or about 0.07 percent of its $17.5 billion in revenues over that period.

Fidelity and LandAmerica recently canceled all reinsurance agreements in light of regulators' concerns, meaning they'll cover all of the risk themselves.

A third giant title company, First American Corp. of Santa Ana, recently reached a $24 million nationwide settlement with Colorado insurance regulators, who had investigated its reinsurance agreements. Garamendi has not subpoenaed First American.

In addition to Fidelity and LandAmerica, Garamendi has subpoenaed six noninsurers, including Wells Fargo Home Mortgage and KB Home, as part of his reinsurance investigation. He's promised more subpoenas, which require executives of the named firms to provide information and attend Garamendi's April 4 public hearing on reinsurance in Los Angeles. The department says First American and other insurers will be included in subsequent hearings.

Some Department of Insurance officials contend LandAmerica and Fidelity have enjoyed relatively high profitability, at least as measured by return on equity, in recent years. Over the past few years both have reported return on equity, a measure of the average shareholder's return, at levels close to or above 15 percent, meaning a strong performance relative to most public companies. For comparison, the Standard & Poor's 500 index's return on equity averaged 14.5 percent in the third quarter of last year.

The industry's response: We only wish we could be so profitable.

"If you look at just the last two years, you're looking at the very tip-top of the best cycle the industry and real estate industry at large have ever had, so the numbers are really big," said Mark Bogetich, a spokesman for the California Land Title Association.

"CLTA very much looks forward to sitting down with anyone in the department who wants to have an honest discussion about the ups and downs in the industry in terms of profitability over the last 20 years," Bogetich continued. "We'd be more than happy to have that discussion and answer any questions they have."

Title industry profit margins -- the profit earned on sales -- have been more in line with averages for other industries. For example, LandAmerica reported net pretax margins of 9.3 percent and 11.2 percent for 2004 and 2003, respectively.

By comparison, the profit margin for the S&P 500 was 10.4 percent in 2003, the most recent year for which annual figures were available.

"The industry is very competitive, and margins are tight and prices are low," Bogetich said.




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