Tuesday, September 23, 2008

Yes, Republicans There is Good Regulation - My Experience with the Indiana Title Insurance Industry

This may not be a post that sits well with my fellow Republicans and Libertarian friends, but I do believe there is such a thing as good regulation. Repeal or not enforcing regulations can lead to abuses, examples of which exist in the meltdown of the mortgage and financial services industries. I'll speak today of regulation of players in the great real estate game and, in particular, regulation of the Indiana title insurance industry.

In the fall of 2006, when I went to the Department of Insurance, I and another attorney, were charged with the responsibility of creating a regulatory structure for the title insurance industry. Our job was complicated by the fact that the Indiana General Assembly has never adopted statutes to specifically regulating title insurandce agencies, as had many other states. For the most part we were left with trying to apply regular insurance agency statutes to title insurance, a situation akin to trying to fit a square peg in a round hole. As few people understand outside of the real estate industry, regulation of title insurance has to do with the regulation of an insurance product. Ninety percent of the regulatory effort is regulating the real estate transaction presided over by the title agency. That's exactly the reason why most states do not include their title insurance regulatory body within the Department of Insurance. People who deal with regulating other types of insurance rarely understand the odd duck known as title insurance. It's hard to regulate something you don't understand.

We at the Title Insurance Division started with a two part philosophy: First, the regulatory structure must be aimed at providing an even playing field for title insurance agents and insurers. The aim was to provide the proverbial even playing field for those in the industry. The problem we had encountered were those in the industry willing to push the envelope regarding the unfair competition rules, quite often taking advantage of extremely lax federal and state enforcement of anti-kickback provisions in RESPA and Indiana law. Others in the industry were executing voluntary compliance of the rules, even though they knew that the rules probably would not eve be enforced. Although voluntary compliance of the law was the right thing to do, insurers and agencies who followed the rules paid a price in market share as those who ignored the unenforced laws swallowed up more and more customers.

The second part of the philosophy was consumer protection. Having worked in the industry, I knew the notion that consumers are ever going to be knowledgeable about title insurance and make consumer choices based on that knowledge, is nothing more than wishful thinking. No matter how much consumer education there is the consumer will almost always go with the title agency suggested by the lender, the realtor, the mortgage broker, the builder. Because of that fact it is essential that the title agent be an independent voice, an unbiased party in the real estate transaction. The title agent is the umpire who makes the calls and ensures the game is called fairly. Other real estate players though try every trick under the sun, in return for their directing business to the title agency, to get a cut of those agencies' fees. While the title insurance industry suffers, so do the consumers who see their choices diminished and fees escalate.

Worse yet when a title agency's independence is removed, fraud in the real estate transaction creeps in. For example, whenever you see repeated examples of fraud by a mortgage broker, you will also find the same title agent being used over and over again. Why? Because that title agent is someone who will look the other way in the face of fraud or who may even actively participate in it.

This leads to my previous observation that effective enforcement requires that the major real estate players be regulated by the same entity. It's hard to enforce laws against mortgage fraud or unfair competition when you have multiple agencies with different approaches regulating the offending players.

As far as mortgage fraud goes, too often county prosecutors fail to prosecute probably because of a lack of understanding of the complex real estate transaction that contained the mortgage fraud. It's hard to regulate an industry that the regulators do not understand. It is even harder for a county prosecutor, used to dealing with crime in the streets, to switch gears and prosecute someone for a white collar crime in a complex real estate transaction. The U.S. Attorney's office, while more aggressive as to mortgage fraud, will generally only look at cases involving tens of millions of dollars. A comprehensive real estate regulatory division could work in conjunction with county prosecutors to lend them the knowledge and expertise needed to prosecute cases of mortgage fraud that generally goes unprosecuted today.

Those who worship the deregulation philosophy should not have been so quick to cast aside all regulation as evil. Many regulations that ensure competitive markets and protect consumers have merit and need to be preserved. That is a lesson hopefully people of all political stripes have learned these past several months.


Pete Boggs said...

Paul has made some very good points. And there's much more to the mortgage problem, much of which is the result of government intrusion.

Builder / developer created mortgage companies aren't a bad thing, but are doing wrong when they shoe-horn borrowers into homes for which they "technically qualify," during the first two years of ownership, before their property taxes are assessed, charged & added to the monthly amount they must pay. This malpractice has run rampant in Indiana as evidenced in many recently built neighborhoods where there's a high concentration of foreclosures.

Let's be clear that Fannie Mae & Freddy Mac (creatures of the US Congress) were a governmentally sponsored (quasi governmental means governmental, like quasi pregnant), affirmative action scheme to bolster the appearance rather than reality, of home "ownership." Translation: spread that paper as far & fast as you can- the industry did just that, as they are in business to do.

When you go to any industry and supply them with the means & wherewithal to do that which they do and are productive at doing, it should be no surprise that they produce in direct proportion to the resources which are allocated or allow them to do so. No surprises here, it all goes back to YOU GET WHAT YOU SUBSIDIZE.

Paul K. Ogden said...


I echo your comments on builders/developers putting people into new homes they can't afford, helped by the very fact you cite regarding property tax escrow being artificially low those first few years because the property has not been reassessed yet. When I would close loans I went out of my way to warn the buyers that they were going to get hit with a huge tax bill two years down the road and to be prepared.

Bottom line is we need to discard the notion that homeownership is best for everyone. Some people are better suited to rent because of their lack of income and/or job uncertainty. When we encourage people to own homes that they have to stretch their finances to afford, those folks are taking a risk they shouldn't be. And with the Freddy Mac and Fannie Mae bailout, all of us are paying for our encouragement of those people to take that risk.

Consider this too. When you put a person in a home, with no equity because the mortgage is 100% loan to value, and that person is paying a 30 or 40 year mortgage, isn't that person pretty much renting the house anyway? Sure maybe the house will go up in value but that's not a certainty and you're assuming a big risk. When the homeowner fails in homeownership, that then is a black mark on their credit report that drives up their borrowing costs for other loans.