An Analysis of Title Insurance Data

Date

2016-12

Authors

Eaton, David
Gao, Xue

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Abstract

Texas, along with other states where the government sets title insurance rates, has significantly higher prices than states that allow more competition. On a per-policy basis, Texas’s decision to set prices and restrict innovation adds from $292 (in 2001 dollars) to $1,663 (in 2016 dollars) in costs for the average purchaser of title insurance policies of $1 million dollars or less. The higher costs in Texas apply to all title charges, as well as to subsets such as lender’s title insurance, lender’s title insurance plus endorsement, and simultaneous owner’s and lender’s title insurance. These higher prices are being paid by Texas consumers and businesses because price competition essentially ceases to exist when the state sets, i.e., promulgates, title insurance rates. Texas’ mandate of comprehensive service coverage in its premium (versus only risk premium being required in some other states) does not account for the higher costs in Texas. Our analysis indicates that the promulgation of rates in Texas is a strong determinant that explains the state’s higher title-related charges. By requiring the promulgation of title rates, Texas transfers wealth from property owners directly to title agents and title underwriters, with no additional value to the property owners. The system functions as a ‘reverse Robin Hood transfer.’ It is unclear why the Texas Legislature requires the Texas Department of Insurance (TDI) to set rates for title policies when it allows competition in all other lines of insurance. The promulgation of title rates provides no known benefits to Texas property owners; it is just an additional cost for title insurance in Texas reflecting the absence of price competition that makes it more expensive and difficult for Texans to purchase land or properties. While it benefits the title insurance industry, there is no benefit to consumers who fare much better in nearly every other state. Our analysis seeks to explain different title-related charges among 50 states and the District of Columbia, based on three independent databases, including a national HUD-1 settlement cost database created by the U.S. Department of Housing and Urban Development in 2001, a set of closing cost quotations from a Bank of America website collected in 2016, and a set of Stewart Title cost quotations, computed twice from Stewart Title websites, once in 2010 and once in 2016. Our estimates in this study are based on a validated and robust methodology for determining the cost imposed on all Texas corporations or persons who purchase property resulting from Texas’ lack of competition in the title insurance sector. While it is difficult to estimate exactly how much higher title insurance costs are in Texas because the state sets title insurance rates, it is possible to compute a lower bound for the total amount of additional money paid to title agents and underwriters. There are two ways of doing so. In both cases, the promulgated rate is significant; it is the best explanatory variable for the difference between what property owners in Texas pay versus owner in states that do not mandate a lower bound for title insurance costs. One estimate of the lower bound of the cost to consumers is based on the 2001 HUD-1 data. The total title charges per policy in a state with promulgated rates was on average $292 higher than the per policy total title charges in a state with no active price regulation, expressed in 2001 dollars and not including inflation from 2001 to 2016. The second estimate of the lower bound of the cost to consumers is based on the 2016 data. Overall, several variables—regulation type, service coverage, loan amount and states’ characteristics—can explain between 35 percent and 71 percent of the variance in title charges. The best estimate available from this study for the additional cost for an average property purchaser for a lender’s title insurance policy due solely to the promulgation of title insurance rates is $1,663 per promulgated policy, expressed in 2016 dollars. Over the decades the Texas Legislature has created supplemental title charges that agents and underwriters can impose on property owners, even though the supplemental charges are in excess of the mandated rates. Supplemental charges further increase title costs to Texas property owners as all supplemental title charges raise title costs above and beyond the mandated Texas title rates. The 2013 cost to Texas property purchasers from the Texas Legislature’s authorization of supplemental endorsements was $40,891,270, expressed in 2013 dollars. This study did not try to estimate the differences between Texas and the other states for mortgages over $1 million, and there are many such mortgages, particularly in commercial real estate transactions. Texas’ excess title charges increase as the value of the mortgage increases, so the additional cost of promulgation for mortgages over $1 million would increase the total above the calculations presented here. The conclusions of this report rely on three independent databases noted above covering all 50 states and the District of Columbia. The results using each of the three independent databases are consistent. The title charges of interest (the dependent variables) in these three databases include total title charge, premium plus endorsement, lender’s (mortgagee’s) title insurance plus endorsement, lender’s title insurance, and simultaneous owner’s and lender’s title insurance. Based on these three independent databases, this report evaluates four sets of potential explanatory variables (independent variables) to explain why title charges vary among the states: loan amount; types of premium regulation; number and type of title premium service coverage; and state characteristics. The results are summarized above and explained in detail in the following sections of this report.

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