The title insurance
business is very competitive. Its products are totally
unglamorous; don't differ much from those of its rivals; and there isn't
a lot of repeat business from the end user.
The end user is the homeowner who is usually required to purchase lender's
title insurance when buying a home or refinancing it and who may or may not
choose to buy owner's insurance at the time of initial purchase or subsequent
refinancing. In either case, once is enough. Title insurance isn't cornflakes,
and, as a consumer product, has a darn poor business strategy.
So, the industry rarely bothers to market to the people who actually pay for
their product. Therefore, few consumers could buzz in with "What are Ticor,
Chicago, and First American?" on Jeopardy!, even if "America's
Top Title Companies" were the $2000 answer.
Instead, title insurers market to the middlemen who are in the position to
give them business time after time. There is big money to be made if a title
insurance company can secure the repeat business of a major bank, mortgage
company or escrow agent.
Rarely is a home buyer asked to pick his title insurance company. Certainly
he could demand that right, but most homebuyers are unaware of or forget about
this item on the settlement statement and are as content with the fait accompli
- a policy ordered by the lender - as they can be expected, considering
it may have cost them $500 or more at closing.
Thus the competition for title insurance business takes place at a very sophisticated
level, business to business, and has, over the last ten years or so come under
serious investigation for several illegal or unethical schemes to give title
companies an unfair advantage and/or to reward lenders for their patronage.
The most recent allegations are ongoing. At present ten states are investigating
alleged title insurance fraud. These investigations involve not only
a number of America's top title insurance companies but two super-size lenders,
a national real estate company, and, most notable in this investigation, a large
number of large homebuilding corporations.
The current scheme, at least the one under scrutiny in California, Washington
State, and Colorado, is very complicated and involves not only the title company
and the middleman (lender/homebuilder/real estate company), but a reinsurance
company, usually a subsidiary of the middleman.
In case you wonder how we went from lender to homebuilder in a single paragraph,
a note about how homebuilders sometimes operate is in order. A huge nationwide
developer of golf course communities (real story) once it options a
tract of land in virgin territory, makes its second item of business picking
a local lender for end financing of its development. Being selected to handle
the financing for a 200 or 800 lot development, even if only for a short term
mortgage on the land, is a tremendous opportunity for a local, even a regional
lender. The builder cannot guarantee that its buyers will use that bank or mortgage
company, but in the case of our example, the marketing strategies and the timelines
that are stringently enforced certainly encourage the buyer to go with the program.
It is up to the chosen lender to convert that opportunity into a construction
loan or eventual, long-term, take-out financing, but selection is a tremendous
In return for it alliance with the lender, which also carries a lot of positive
public and media exposure in addition to the actual lending business, the builder
calls the shots. Our profiled builder calls itself a selling machine. No argument
here. It trains the lender in the builder's methods and insists on strict
adherence to its policies. It negotiates favorable rates for buyers, sets deadlines
for closings that impact the lender as well as the buyer, and is in a position,
if it desires, to pick closing attorney's, escrow agents, and title companies.
(These are not necessarily the same in every state.) Remember, many of the large
homebuilders in this country are listed on the New York Stock Exchange and are
much larger than either the local banks or the title companies they are dealing
Some homebuilders are now accused of collaborating or conspiring with title
insurance companies to profit from providing them with nearly guaranteed business.
The current scheme, at least as alleged in Colorado and California, is pretty
Enter the third player - a reinsurance company. Reinsurance
is in common use in the industry (not just title insurance but also hazard and
other types) as a way to share risk. No single insurance company can take on
insuring a huge development such as the Empire State Building against fire,
hurricane, liability, or terrorism, so they sell off pieces of the policy they
wrote to other companies, sharing the premiums and sharing the risk.
In the case of title insurance, there is not much danger of the company suffering
a crippling loss from writing a title policy on a $200,000 house in Toledo.
According to Erin Toll, Colorado deputy director of the state's Department
of Insurance, "Over 99 percent of the transactions involving title insurance
don't require reinsurance." This is typically for "hugely
expensive commercial properties or tiny title insurance companies." The
California Department of Insurance estimates the loss ratio for the typical
single family title policy at three to five percent.
Now here comes the kicker. Guess who controls the reinsurance companies? Yes,
the homebuilder. The reinsurance companies, which are to a stunning extent incorporated
in Vermont, collect premiums from the title insurance companies for assuming
part of the risk of a policy and then return a large portion of the premiums
- shall we say "kick back" - to the homebuilder for the original referral.
These reinsurance companies are not necessarily owned by the homebuilders but
are what investigators call "captive" to them.
Deputy Director Toll has stated that these reinsurance premiums were often
grossly out of line with the risk, in some case half of the total insurance
premiums they got from the builders (as originally collected from the home buyers).
This may (ya think?) have forced up the title insurance premiums required from
the insured, yes, those same homebuyers.
That so many states, so many home builders, and so many title companies are
potentially involved in this mess makes a concise report on its current status
almost impossible. To date, however, First American Title has agreed to repay
$24 million to consumers nationwide. Fidelity National Financial has stopped
issuing reinsurance policies and is negotiating settlements in some states.
Commissioner Garamendi issued subpoenas to ten companies in February and March
and has scheduled an April 4 hearing to take testimony from executives of LandAmerica
and Fidelity National Title, two of California's largest companies; and
more than a dozen builders in have been named in a suit filed by regulators
in Colorado for guaranteeing First American further business in exchange for