Aaron Layman's Katy Texas Real Estate Forum

Texas Remains One of Nation's Most Expensive States For Mortgage Closing Costs in 2010 Survey

Texas topped the list in 2009 for states with the highest closing costs.  The picture remains much the same for 2010, with New York occupying the top slot and Texas sliding to number two.  According to this year's survey, origination and third party fees jumped over 36 percent.

New York was one of five most expensive states at $5623, followed by Texas at $4708.  On the other end of the spectrum, Arkansas was one of the five least expensive states for mortgage closing costs at $3007 on average.  North Carolina was the second least expensive at $3255.  The 2010 survey also shows a complete state-by-state breakdown.

The survey points to more borrowers comparison shopping third party fees such as title insurance.  Unfortunately for Texans, title insurance rates are promulgated by the state.  This is the reason why the title and closing portion for closing costs in Texas is roughly twice that of the cheapest state on the list in this year's survey.  For more information on this issue, you can contact the Office of Public Insurance Counsel.

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

Spread the word!

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

Farmers Seeks Rate Increases in Harris County

Famers insurance has filed for rate increases for homeowners insurance in Texas averaging 2.5% statewide.  Harris County could see rate increases as high as 25% under the proposal.  The news of the proposed rate increases comes after similar attempts this year by Allstate and State Farm to raise their rates for homeowners insurance.

What's particularly disturbing in this case is that Farmers is trying to play the Hurricane Rita and Katrina card again.  A Farmers spokeswoman claimed that the rate increases were needed because of rising reinsurance costs.  The reality is that the reinsurance market has actually calmed this year because of the mild hurricane season.  It will be interesting to see if Farmers can furnish documentation of these rising reinsurance costs to state regulators.

McKinsey Documents Expose Insurance Companies' Greed

As Loren Steffy noted in this weekend's Houston Chronicle, most home owners know what the insurance companies are up to.  What most people may not know is that there is written proof of insurance companies' strategic plans to cheat consumers out of money by denying claims and decreasing coverage.

McKinsey & Company Consulting apparently drafted the master plan on behalf of Allstate Insurance during the early 1990's.  According to the article posted by Loren Steffy, Allstate is now trying to prevent the McKinsey documents from becoming public knowledge.  The issue of whether the documents are to be released is now a matter pending before the New Mexico Supreme Court.  David Berardinelli, the Sante Fe attorney who discovered the documents, is hoping for a favorable decision by the court.  The documents could prove to be a smoking gun for consumer advocacy groups and regulatory bodies seeking to put a halt to rising insurance rates.

For the complete article posted by Loren Steffy visit http://blogs.chron.com/lorensteffy.

Independent Insurance Agents Offer Lower Rates In Houston Texas

If you are tired of the big insurance carriers raising their rates and deductibles, you should pick up the phone and call a local independent agent.  As Loren Steffy reported in the Sunday Chronicle, homeowners insurance rates start to look a lot more competitive once you look outside the big three (Allstate, State Farm, Farmers).  While the big three are going to court to try to raise rates, there are plenty of other carriers that are willing to write policies and offer you a better deal.

The insurance industry is predicting a drop in U.S coverage costs due to the past two years of mild hurricane activity.  Reinsurance rates for the big carriers are also dropping.  So why are the big three requesting higher rates?  That's a very interesting question.  It's a question that should prompt a lot of Houston area homeowners to pick up a phone and explore their options with a more competitive carrier.

Here are a few sites to help you start shopping for a better rate:

www.insweb.com

www.netquote.com

www.allquotesinsurance.com

"The American Title Insurance Industry" Proposes Major Reforms

"The American Title Insurance Industry" is a new book written by university professors Joseph W. Eaton and David J. Eaton.  In the book the authors note that the industry has grown for the past 60 years into what now resembles a cartel of sorts in many states with inflated prices and a lack of competition or innovation.

Federal and state regulations have done little to improve rates and services for Texas consumers when it comes to title insurance.  Even with the rate reduction Texans received this year, Texas boasts some of the most expensive title insurance in the nation.  The title insurance industry has received little attention for the most part.  Let's hope the book makes it into the hands of our representatives at the Texas Department of insurance!  http://www.tdi.state.tx.us/

Katy Texas Title Insurance Rates Some of the Most Expensive in the Nation

As a real estate broker, I receive plenty of solicitations for title insurance business.  I prefer to deal with people I know and trust, and I avoid dealing with representatives or companies offering anything more than quality service and maybe a beverage or snacks at closings.  Since prices are virtually identical from one title company to another, my primary concern is whether the file closes on time and my customers are treated professionally.

Title insurance rates in Texas have been cut by 17 percent in the last 8 years.  A cut of 3.2 percent was signed by the Texas Insurance commissioner this year.  To see the current title insurance rates you can visit www.tdi.state.tx.us/orders/titlerates2004.

Unfortunately, Texans still pay some of the highest title insurance rates in the country. Part of the problem stems from the fact that title companies do not compete on price, so consumers have no real means of exerting pressure on title companies to lower rates.  A 2001 Kiplinger Finance article noted, "In Texas, title companies have had rates of returns in excess of 25% for eight to nine years running." Economic consultant Birny Birnbuam also noted that those rates were well above other lines of insurance such as auto or homeowners.  The article goes on to note that claims are rare for title companies, with insurers spending as little as 5 to 10 cents of every premium dollar for claims.  By contrast, other lines of insurance spend up to 90 percent of their collected premiums on claims.

Title Insurance is a different animal in the sense that a title insurance policy is a lifelong policy covered by a one-time, upfront premium.  Title companies have to collect a reasonable premium to cover their cost of claims.  I don't think any one would argue that title companies have to turn a profit, but one only need look at other states to realize there is a better solution for customers.  Home owners in Iowa for instance pay the state for a "Title-Guaranty Certificate" which serves the same purpose as a title insurance policy.  A 2006 Money article posted by Les Christie noted that Iowa was the only state that bans title insurance sales.  The resulting difference in costs for consumers is eye-opening.

The Iowa system adds in the cost of an abstractor ($150) and an attorney ($125) to the cost of the state fee which results in a total cost of about $400 for a home purchase up to $500,000.   Compare that with a $500,000 title insurance policy in Texas which currently costs $2979.   To be fair, I'm sure the Texas title insurance customer is receiving additional services that facilitate the closing process.  The question is whether those additional services add up to $2500.

Another option is to have lenders pay for title insurance and have the federal government implement the program.  One thing is for certain; The current system on the books in Texas is not benefiting consumers.

For more a more detailed explanation about what's wrong with the title insurance industry visit the mortgage professor's website at http://www.mtgprofessor.com/A%20-%20Title%20Insurance/what's_wrong_with_the_title_insurance_industry.htm

Stewart Title Pays $1 Million Fine to Regulators

Houston-based Stewart Title has agreed to pay California regulators a fine of $1 Million for improper activities related to its title insurance business in that state.  The California Insurance Department alleged that Stewart Title funneled payments through shell companies to real estate agents in exchange for referrals.  This kind of activity is a violation of the RESPA or Real Estate Settlement and Procedures Act passed by Congress in 1974.  RESPA was designed to prevent abusive practices in the real estate industry and provide more disclosure to customers about the settlement process and its costs.  California Insurance Commissioner, Steve Poinzer, stated "These illegal rebate schemes damage the trust of consumers and drive up the cost of purchasing a home."

Not surprisingly, Stewart Title, which is a unit of Stewart Information Services Corporation, does not admit any wrong doing.  The settlement with California regulators is just another example of how large corporations often pay the fine as a "cost of doing business".  The California fine comes on the heels of news that Stewart may pay another $2 million to the state of Washington for similar activity.  The Washington state insurance commissioner said this week that Stewart should pay nearly $2 million for its "blatant disregard" of the law.  This would suggest that California regulators may have settled for a lot less than consumers deserved.

For more information about real estate and insurance issues contact Aaron Layman.  He is a licensed real estate broker in Katy, Texas.  You can contact him directly at 281-994-5190.  You can also visit him on the web at www.AaronLayman.com

Allstate Defies State Order and Raises Rates

After being ordered by the Texas insurance commissioner on Monday not to implement a proposed rate increase, Allstate went ahead with the 5.9%  increase.  The office of Public Insurance Counsel has asked the Department of Insurance to impose a $25,000 fine for each policy  Allstate renews under the new higher rates.  Allstate is still appealing a state district judge's order to refund $56 million related to inflated premiums for 2004 and 2005.

This comes after thousands of claims that were denied in the aftermath of the Katrina and Rita hurricanes.  It remains to be seen what kind of action the state will take against Allstate.  Homeowners should be prepared for the increase in rates while the two sides discuss available options.  If I were an Allstate customer, I would be looking for a different insurance carrier.

Loren Steffy of the Houston Chronicle noted that Allstate spent $2.2 billion buying back its own stock in the first half of this year.  This is while Allstate complains to consumers and regulators that it needs more capital on reserve for potential future claims.  Allstate has also been buying more reinsurance to protect itself against future claims while it pads its balance sheet.  Can you spell "Hypocrisy"?

Steffy goes on to note that Allstate's net income has grown to almost $5 billion over the past 5 years.  It seems that Allstate has become quite proficient at charging its customers more an more while providing less insurance.  It's increasingly clear in this situation that the "Good Hands" of Allstate want your money, not your business.

To visit business columnist Loren Steffy of the Houston Chronicle go to http://blogs.chron.com/lorensteffy/.