Aaron Layman's Katy Texas Real Estate Forum

Elementary 32 Named After Stan C. Stanley

Elementary 32 has officially been named after Stan C. Stanley.  Stanley is a business owner, former chairman of the Chamber of Commerce, and a long-time volunteer in the Katy schools.  Stanley Elementary will open in August at 26633 Cinco Terrace Drive.

Economic Stimulus Bill Includes $8,000 Tax Credit For First Time Homebuyers

First time home buyers in Houston Texas have something to cheer about!  The new economic stimulus bill which was just signed by the President includes a tax credit of $8000.  Purchases must be made between January 1st, 2009 and Nov 30th, 2009.  To qualify, buyers cannot have owned a home during the past three years, and they must stay in the new home for 3 years or more.  Income limits of $75,000 for single filers and $150,000 for couples also apply.  The new credit is a welcome improvement over the previous $7500 credit which was actually more of a loan.

For more information see this article posted on CNNMoney.com

http://money.cnn.com/2009/02/13/real_estate/homebuyer_tax_credit_finalized/index.htm?postversion=2009021712

Second Recreation Center For Residents Of Cinco Ranch Southwest

The second recreation center for residents of Cinco Ranch Southwest should be open by summer.  The facility will includea pool, playground and 3 new tennis courts.  The new complex will be located at the corner of Fry Road and Cinco Terrace Drive.  You can see the artist's rendering on the attached file.

Download Rec2 Graphic

Want to find the best values in Cinco Ranch?  I'm only a phone call away.

Aaron Layman

281-994-5190

New RESPA Rule Affecting Builder Incentives Will Shed Light On High Title Insurance Premiums

While The National Association of Home Builders (NAHB) and lenders battle HUD over new RESPA rules affecting builder incentives, I thought it would be prudent to draw attention to another issue that is directly related.

I was executing a contract with a client yesterday for new construction, and of course I heard the same phrase brought up while we were completing the paperwork.  We will "pay for the origination and owner's title policy if you use our preferred lender", was the pitch.  According to the builder sales rep, this would save my client roughly $7000.  In this instance we were dealing with a purchase price of roughly $500,000 and a likely loan amount of $400,000.

As I always tell my clients, don't be fooled.  The idea that home buyers benefit from affiliated business arrangements that place the builder and lender in a direct conflict of interest is ludicrous.  It is the very reason I encourage my clients to obtain several quotes for their mortgage so we know exactly what the options are.  If a home buyer approves with only the builder's lender, there is no incentive for that lender to offer the most competitive rate and fees.  Once you take the competition out of the equation, its much easier to skim a little extra profit off the loan.  I have witnessed this type of behavior first-hand.

The new HUD/RESPA rules have been delayed, but are set to take effect April 16th.  For the sake of homeowners, I certainly hope that HUD can get the job done.  Home buyers shouldn't have to pay origination fees on loans where the preferred lender is already profiting on the yield spread premium (interest rate spread).  Here in Texas, owner's title policies are typically a seller expense and should be covered by the builder anyway.  When builders are forced market their homes based on the quality of the home itself, consumers will be much better off.  The new RESPA rules should put an end to many of the shell games that have taken place when it comes to builders and affiliated lenders.

The de-linking of the incentives could also expose the outrageously high title insurance premiums we have in Texas.  If builders are forced to take a closer look at what they are actually paying for, Texans should see title insurance premiums drop precipitously.  Who knows, we could even see a total restructuring of title insurance industry in Texas.  Based on what we are currently paying, that might not be such a bad thing.

Big Banks Collect TARP Bailout Money, Drop Mortgage Brokers As Consumer Option

As reported in today's CNNMoney article, some big banks have decided to drop or reduce their mortgage broker business.  While this may be good for the banks, it is likely to diminish mortgage options for consumers.  JP Morgan Chase has dropped its wholesale mortgage business and Citigroup has all but eliminated their mortgage broker affiliates.  See the complete article here..

http://money.cnn.com/2009/02/12/real_estate/lenders_drop_mortgage_brokers/index.htm?postversion=2009021206

The banks, which have received billions in TARP money, seem to think that they will improve the customer experience for those seeking mortgages.  The argument that mortgage brokers are responsible for most of the bad loans seems laughable in this instance since the banks' underwriters have been the ones actually giving final approval to many of the now delinquent mortgages.  Mortgage brokers simply take orders and shop for better rates among available channels.  I find it hard to believe that big banks will somehow be better stewards of their mortgage lending operations.  If we're going to be doling out billions in bailout relief to these banks, they should be encouraged to expand mortgage opportunities for borrowers, not curtail them.

Katy ISD Posts Attendance Boundaries For Elementary 32

Katy ISD has posted attendance boundaries for elementary 32, affecting residents in the Cinco Southwest area of Katy.  The boundaries will prevent some students from having to enroll in Woodcreek Elementary and later switch to Griffin.  See the official release below.

http://www.katyisd.org/files/campuses/EL32_Attendance_Boundaries.pdf

On a related note, Katy ISD officials have pushed back the anticipated bond proposal to 2010.  With the recent economic slowdown and decreased housing starts, growth projections have been pushed back, decreasing the urgency of planned projects.

Katy Texas & West Houston Real Estate Market - January 2009

The Katy Texas real estate market saw fewer sales and lower average prices in January.  Sales were off some 20% in South Katy for the month and North Katy saw a 12 % drop in closings.  Average sale prices were down slightly, but master-planned communities continued to fare quite well.

One distinguishable trend for South Katy has been a narrowing price range.  Homes in the $200K-$300K price point have seen more activity while the upper end of the market has tapered off.  As the economy has weakened, fewer buyers have been willing to take the plunge in the luxury home market.  Home buyers across the nation are more cost-conscious these days, so the more moderate price points will likely continue to outperform as long as the economy remains soft.

The wild card with local economy continues to be the price of oil.  Recent activity suggests that a bottom may be forming, but only time will tell.  Gas prices have already bounced from their recent lows, and oil may not be far behind.

Title Insurance Companies Fleecing Texas Property Owners With High Premium Rates

Like many homeowners, I recently refinanced to take advantage of record low mortgage rates.  The opportunity came sooner than expected, just 6 months after purchasing our current residence.  Being an active real estate broker, I was prepared to pay the normal exorbitant fee to re-issue a policy for title insurance, knowing that we pay some of the most expensive rates in the nation when it comes to title policy premiums.

When I purchased my home in August, Fidelity National/Chicago collected $2590 for the owner's title policy.  When I refinanced this January I paid another $1453 for the re-issue.  The risk on the original title policy had not changed, but I had to pay the fee to refinance.  Such is the case when large corporations collude to protect their interests and profits.  While Texas has had several nominal rate reductions in the past decade, there has been little, if any, discussion of why our rates are so high.

While reading the latest issue of "Tierra Grande", a publication catering to practicing real estate professionals, I noticed an article called Taking Title, no less.  It touts the "peace of mind" that comes with the protection from future challenges to title when purchasing a Texas title insurance policy.  See http://recenter.tamu.edu/pdf/1887.pdf to view the complete article.  In it, Dr. Ali Anari goes on to explain the basic workings of title insurance and shares industry statistics for the past decade.

What Dr. Anari fails to address is the obvious abuse of cartel pricing power in an industry that lacks any real government oversight.  The data from the Real Estate Center point to a shockingly low loss rate on premiums paid over the past decade.  In 2007, losses only accounted for 3.3% of the some $1.6 billion collected in premiums.  That begs the question, what happened to the other $1.5 billion?

Joseph and David Eaton published 287 pages of insight into the industry in "The American Title Insurance Industry: How a Cartel Fleeces the American Consumer".  The book offers some historical perspective into a business that is very profitable and very secretive.  A handful of large corporate insurers issue a bulk of the policies in America, but these businesses are rarely asked to open their books for public scrutiny.  Title insurance companies are loathe to disclose data on administrative and advertising costs which comprise roughly 90% of their operating costs by some estimates.

Another article published by CNNMoney also raises questions with industry practices and highlights some of the wide disparity among premiums across the U.S.  http://money.cnn.com/2006/01/11/real_estate/title_insurance_exposed/index.htm

Iowa's Title Guaranty program (http://www.iowafinanceauthority.gov/en/title_guaranty_division/) offers consumers a low cost alternative to the boutique escrow services available to Texans.  Iowans enjoy the lowest title insurance rates in the country partly because the sale of title insurance is banned in the state.   Coverage for a policy under the Iowa Guaranty program costs only $110 up to a purchase price of $500,000, and refinance policies cost only $90.

For clarification, I called the Iowa Finance Authority which oversees the Title Guaranty program.  I then called a practicing attorney in Davenport to get a handle on what their typical closing costs look like in a residential purchase and refinance transaction.  I gave the attorney a copy of my own HUD statements for both my purchase and refinance transactions.  The summary of my findings is shown in the link below.

Download Title Insurance Comparison

Under the Iowa program, the purchase/sale transaction would have cost $1535 in title related fees.  The same Texas transaction showed $3766 in fees.  That's a difference of $2231 or 60%.  My refinance transaction would have cost only $590 in Iowa.  That's a savings of approximately $1388 or 70% of the $1978 I paid in Texas.  For purposes of this comparison, fees for title certificates, recording, and courier were omitted because those were similar in both states.  My objective was to focus on the differences with the two programs.  I should also note that I included the high end of the estimate provided for abstract fees on the buyer's side in Iowa.  The attorney in Davenport provided a range of $165-$300, so I included the higher estimate.

I also questioned the attorney on turn-around times for transactions in their office.  The representative said that commitments can be ready in as little as 3 days, and transactions can close in as little as a week provided the buyer's lender is on board.  Iowa offers a "Rapid Certificate" option that can facilitate a faster closing.

The title insurance industry can criticize the Iowa system if they wish, but the numbers don't lie.  Iowa's abstract system is remarkably efficient at focusing expenditures where the real work is actually performed.  Escrow officers/closers, abstractors and attorneys do the bulk of the work and are compensated accordingly.  The charge for the insurance policy itself is minimal, as it should be since losses are rarely paid on premiums collected.  The Iowa system also distributes insurance costs more equitably for all homeowners since the price of the home has little to do with the actual risk on the policy. In Iowa, the costs are the same whether the property is valued at $100,000 or $500,000.

The major title companies have attempted to penetrate the Iowa market as well, but fortunately Iowa legislators have not taken the bait.  I located this informative document which was published to outline the benefits of the Iowa Title Guaranty program vs traditional title insurance.  http://www.iowabar.org/MiscDoc.nsf/2b85a4ea12f4bfac8625669d006e27ab/3260df54a8f7f5fa86256cb80070ee4f/$FILE/Title%20insurance%202.pdf.  If any Iowa lawmakers are questioning the success of their program, I would be happy to show them my closing statements to ease their minds. 

Recent data peg the median price of a residential property in Texas at $150,000.  Even at that number, the Iowa program with the higher base attorney fees provides a savings of roughly $700, or 30%.  For a $100,000 property, the savings under the Iowa program would be roughly $400, or 20% based on current Texas policy rates.  Average homeowners are not benefiting from the current Texas system and rates.  Over-charges to owners of more expensive homes are even more pronounced.

Title industry reps will argue that their product is the "Cadillac" of policies, providing superior protection, but try convincing the average consumer of that when they are faced with the two cost comparisons achieving the same objective.  The abstract system also seems to take no more time than the typical Texas title commitment.  Why then, would Texans pay up to 75% more for their title insurance?

The answer lies with the money and influence peddling that is rampant in Texas politics.  The Houston Chronicle recently shed some light on lobbyists and the money spent entertaining Texas lawmakers.  http://www.chron.com/disp/story.mpl/special/legislature/6229050.html  Unlimited campaign donations by special interests have tainted the Democratic process.  Large corporate title insurers have capitalized on this environment to create what is essentially promulgated price gouging in Texas.

There is no logical justification for the wide disparity of premiums among states.  The American title insurance industry needs more comprehensive oversight.  While Congress is looking at ways to make mortgages and home ownership more affordable, this would be an excellent opportunity to inject some transparency into the business and bring premium rates down to reasonable levels.  Texans, in particular, deserve relief from inflated premiums.

A good place to start would be a drastic reduction or elimination of the premium for refinance transactions.  Changing the formula to de-link the premium rate from the price of the house would also eliminate some of the most egregious over-charges.   A third, more drastic but likely more effective solution would be to convert to an abstract system similar to Iowa and ban the sale of overpriced title policies in Texas. 

Texans have been paying inflated premiums for decades, but there is a way you can change that.  Contact your representatives in Congress and ask them to push for reform in the title insurance industry.  You can also contact the commissioner at the Texas Department of Insurance.  The next hearing for approval of title insurance rates will be held June 1st, 2009.  The Office of Public Insurance Counsel is currently collecting case data and would welcome consumer input for the upcoming rate hearing.

http://www.tdi.state.tx.us/commish/index.html - Texas Department of Insurance

http://www.opic.state.tx.us/ - Office of Public Insurance Counsel

http://www.cej-online.org/ - Center For Economic Justice

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I would like to extend a special thanks to Vera at the law firm of Gallagher, Millage & Gallagher for providing data for this article.