June 20, 2017
Increasing Price Competition for Title Insurers
The New York State Department of Financial Services issued proposed rules for title insurance last month and requested comments. I submitted the following:
I write and teach about real estate and am the Academic Director of the Center for Urban Business Entrepreneurship. I write in my individual capacity to comment on the rules recently proposed by the New York State Department of Financial Services (the Department) relating to title insurance.
Title insurance is unique among insurance products because it provides coverage for unknown past acts. Other insurance products provide coverage for future events. Title insurance also requires just a single premium payment whereas other insurance products generally have premiums that are paid at regular intervals to keep the insurance in effect.
Premiums for title insurance in New York State are jointly filed with the Department by the Title Insurance Rate Service Association (TIRSA) on behalf of the dominant title insurers. This joint filing ensures that title insurers do not compete on price. In states where such a procedure is not followed, title insurance rates are generally much lower.
Instead of competing on price, insurers compete on service. “Service” has been interpreted widely to include all sorts of gifts — fancy meals, hard-to-get tickets, even vacations. The real customers of title companies are the industry’s repeat players — often real estate lawyers and lenders who recommend the title company — and they get these goodies. The people paying for title insurance — owners and borrowers — ultimately pay for these “marketing” costs without getting the benefit of them. These expenses are a component of the filings that TIRSA submits to the Department to justify the premiums charged by TIRSA’s members. As a result of this rate-setting method, New York State policyholders pay among the highest premiums in the country.
The Department has proposed two new regulations for the title insurance industry. The first proposed regulation (various amendments to Title 11 of the Official Compilation of Codes, Rules, and Regulations of the State of New York) is intended to get rid of these marketing costs (or kickbacks, if you prefer). This proposed regulation makes explicit that those costs cannot be passed on to the party ultimately paying for the title insurance. The second proposed regulation (a new Part 228 of Title 11 of the Official Compilation of Codes, Rules, and Regulations of the State of New York (Insurance Regulation 208)) is intended to ensure that title insurance affiliates function independently from each other.
While these proposed regulations are a step in the right direction, they amount to half measures because the dominant title insurance companies are not competing on price and therefore will continue to seek to compete by other means, as described above or in ever increasingly creative ways. Proposed Part 228, for instance, will do very little to keep title insurance premiums low as it does not matter whether affiliated companies act independently, so long as all the insurers are allowed to file their joint rate schedule. No insurer will vary from that schedule whether or not they operate independently from their affiliates.
Instead of adopting these half-measures and calling it a day, the Department should undertake a more thorough review of title insurance regulation with the goal of increasing price competition. Other jurisdictions have been able to balance price competition with competing public policy concerns. New York State can do so as well.
Title insurance premiums are way higher than the amounts that title insurers pay out to satisfy claims. In recent years, total premiums have been in the range of ten billion dollars a year while payouts have been measured in the single percentage points of those total premiums. If the Department were able to find the balance between safety and soundness concerns and price competition, consumers of title insurance could see savings measured in the hundreds of millions of dollars a year.
The Department should explore the following alternative approach:
- Prohibiting insurers from filing a joint rate schedule;
- Requiring each insurer to file its own rate schedule;
- Requiring that each insurer’s rate schedule be posted online;
- Allowing insurers to discount from their filed rate schedule so that they could better compete on price;
- Promulgating conservative safety and soundness standards to protect against insurers discounting themselves into bankruptcy to the detriment of their policyholders; and
- Prohibiting insurers from providing any benefits or gifts to real estate lawyers or other parties who can steer policyholders toward particular insurers.
If these proposals were adopted, policyholders would see massive reductions in their premiums.
Some have argued that New York State’s title insurance regulatory regime promotes the safety and soundness of the title insurers to the benefit of title insurance policyholders. That may be true, but the cost in unnecessarily high premiums is not worth the trade-off.
Increased competition is not always in the public interest but it certainly is in the case of New York State’s highly concentrated title insurance industry. The Department should seek to create a regulatory regime that best balances increased price competition with adequate safety and soundness regulation. New Yorkers will greatly benefit from such reform.
June 20, 2017 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Roundup
- The Federal Housing Finance Agency (FHFA) released their 2016 Report to Congress. This report is mandated by federal statute and examines many mortgage and financial institutions such as Fannie Mae and Freddie Mac. Additionally, the report provides guidance for each company’s regulatory rules and FHFA’s research and publications.
- The Department of Housing and Urban Development (HUD) provided approximately 220 million dollars in funds this week to America’s lowest income citizens. The Housing Trust Fund, established by Congress in 2008, dispersed funds to various states in order to aid the poor and homeless.
- The Affordable Housing Credit Improvement Act of 2017 (AHCIA), if approved may improve the productiveness and effectiveness of America’s low-income housing tax credit. If the the shifts are approved, more applicants will qualify for a boost. Additionally, if the proposed Act removes the cap on QCT, more than 20% of families will qualify the housing aid in designated areas.
June 20, 2017 | Permalink | No Comments
June 19, 2017
Treasury’s Trojan Horse for The CFPB
The Procession of the Trojan Horse in Troy by Giovanni Domenico Tiepolo
The Hill posted my latest column, Americans Are Better off with Consumer Protection in Place. It opens,
This month, the Treasury Department issued a report to President Trump in response to his executive order on regulation of the U.S. financial system. While the report does not seek to do as much damage to consumer protection as the House’s Financial Choice Act, it proposes a dramatic weakening of the federal government’s role in the consumer financial services market. In particular, the report advocates that the Consumer Financial Protection Bureau’s mandate be radically constrained.
Republicans have been seeking to weaken the CFPB since it was created as part of the Dodd-Frank Act. The bureau took over responsibility for consumer protection regulation from seven federal agencies. Republicans have been far more antagonistic to the bureau than many of the lenders it regulates. Lenders have seen the value in consolidating much of their regulatory compliance into one agency.
To keep reading, click here.
June 19, 2017 | Permalink | No Comments
Monday’s Adjudication Roundup
- A Florida Appeals Court threw out a 30 million verdict against a small Florida town. Initially, a property owner won the case based upon the town’s “taking” of their property; however, the Florida appellate court found an error in the trial’s definition of taking. As a result, the Court ordered a new trial which will consider the issue of a “partial taking.”
- Sunoco Inc. is experiencing trouble with their planned “Mariner East 2 pipeline project.” The corporation recently sought to use eminent domain to garnish the needed land in order for them to proceed with their planned project; however, the trail court determined the company lacked authority to use eminent domain for land seizures.
- Two U.S. citizens are unhappy with a U.S. Tax Court’s ruling regarding their charitable donation. The pair claimed a total of $11 million in deductions in the 2004 tax year based upon their charitable donation which partly stemmed from an easement of one of the owner’s “historic warehouse in Manhattan. The Court finds the easement was recorded later than the year claimed on their tax returns; therefore, it was not an easement in the 2004 tax year.
June 19, 2017 | Permalink | No Comments
June 16, 2017
Fox in The CRA Henhouse
Law360 quoted me in Treasury’s Fair Lending Review Worries Advocates (behind a paywall). It reads, in part,
President Donald Trump’s Treasury Department said Monday that revisiting a 1977 law aimed at boosting bank lending and branches in poor neighborhoods was a “high priority,” but backers of the Community Reinvestment Act fear that any move by this administration would be aimed at weakening, not modernizing, the law.
Critics and some backers of the Community Reinvestment Act say that the law does not take into account mobile banking and the decline of branch networks among a host of other updates needed to meet the realities of banking in 2017.
While there is some agreement on policy, the politics of reworking the CRA are always difficult. Those politics will be even more difficult with the Trump administration and Treasury Secretary Steven Mnuchin, who ran into problems with the CRA when he was the chairman of OneWest Bank, leading the review, said David Reiss, a professor at Brooklyn Law School.
“A team at Treasury led by the OneWest leadership should give consumer advocates pause,” he said.
* * *
Across the administration, from the U.S. Department of Education to the Department of Justice, civil rights enforcement has taken a back seat to other concerns. And Mnuchin is in the process of populating the Treasury Department with former colleagues from OneWest.
Trump nominated former OneWest CEO Joseph Otting to be comptroller of the currency earlier this month and is reportedly close to nominating former OneWest Vice Chairman and Chief Legal Officer Brian Brooks as deputy Treasury secretary. Brooks is currently the general counsel at Fannie Mae.
Activists who fought the CIT-OneWest merger on CRA grounds say that the placement of those former OneWest executives in positions of authority over the law should raise alarms.
“[Mnuchin’s] bank, OneWest, also had one of the worst community reinvestment records of all the banks that CRC analyzes in California, which raises questions about his motivation in ‘reforming’ the Community Reinvestment Act. Is he interested in reforming it to help communities, or to help the industry do even less?” said Paulina Gonzalez of the California Reinvestment Coalition.
The Treasury secretary has defended his bank’s foreclosure practices and others that drew fair lending advocates’ ire, saying that most of the problems at OneWest were holdovers from IndyMac, the failed subprime lender OneWest’s investors purchased after it failed.
Discussing reforms to the CRA under any administration, particularly a typical Republican administration, would be difficult on its own for lawmakers and inside regulatory agencies, Schaberg said.
“Anybody down in the middle-management tier of any of the banking agencies, they’re not going to touch this because it’s so politically charged,” he said.
The added distrust of the Trump administration and Mnuchin among fair housing advocates makes the prospect of any legislation to reshape even harder to imagine. Even without legislation, new leadership at the regulatory agencies that monitor for CRA compliance could take a lighter touch. And that has fair housing backers on edge.
“In my mind, there’s a fox-in-the-henhouse mentality,” Reiss said.
June 16, 2017 | Permalink | No Comments
Friday’s Government Reports Roundup
- Shortly after taking office, President Donald Trump ordered the U.S. Treasury Department to assess the U.S. financial market. Steven Mnuchin, U.S. Treasury Secretary, found a need for specific immediate actions which will provide “much-needed relief.” The detailed report also calls for a reversion to the use of “private mortgage investor capital in secondary markets.” Mnuchin and his team met with members of the finance and banking community which allowed the U.S. agency to produce a 150 page report explaining the problems and potential solutions of the U.S. finance system.
- The Federal Open Market Committee announced at least a .25% hike in the mortgage rates. This decision was nearly unanimous; the president of the committee, Neel Kashkari was the outlier. This hike comes to no surprise to many mortgage lenders and economists.
- The United States’ Department of Housing and Urban Development (HUD) released its Coordinated Entry Guidebook. HUD’s guidebook seeks to ensure that families and individuals that are misplaced from their homes receive the adequate help they need. To aid in this process, the guide focuses on four key principals “access, assessment, prioritization, and referral.”
June 16, 2017 | Permalink | No Comments
June 15, 2017
Time Is Ripe For GSE Reform
Banker and Tradesman quoted me in Time Is Ripe For GSE Reform (behind a paywall). It opens,
Federal Housing Finance Agency (FHFA) Director Melvin L. Watt told the U.S. Senate Committee on Banking, Housing and Urban Affairs last month that “Congress urgently needs to act on housing finance reform” and bring Fannie Mae and Freddie Mac out of conservatorship after almost nine years.
Conservatorship is temporary by its very nature. There is universal agreement that it can’t go on forever, but there is widespread disagreement about what the government-sponsored entities (GSEs) should look like after coming out of conservatorship – and how to get there.
“Only a legislative solution can provide political legitimacy and long term market certainty for the housing finance system,” according to a recent Mortgage Bankers Association (MBA) white paper on GSE reform. MBA President and CEO Dave Stevens said now is the time for Congress to tackle the changes that will maintain liquidity, but protect taxpayers and homebuyers.
“The last recession destroyed many communities throughout the country,” he said. “The GSEs played a large role in that. They fueled a lot of the capital that allowed all varieties of lenders to make risky loans and then received the single-largest bailout in the history of this nation. They are not innocent.”
Connecticut Mortgage Bankers Association President Kevin Moran said his organization supports the positions of the MBA.
“There’s going to be change no matter what,” Stevens said. “We’re stuck with this problem. It’s technical and complicated and needs to be done. They can’t stay in conservatorship forever.”
Taxpayers Need Protection
Professor David Reiss at Brooklyn Law School said that future delays are not out of the question.
“Change is coming, but the Treasury and FHFA can amend the PSPA [agreement] again,” Reiss said. “It’s been amended three times already. There’s a little bit of political theatre going on here. It’s incredibly important for the economy. You really hope that the broad middle of the government can come to a compromise. If there isn’t the political will to move forward, they can simply kick the can down the road.”
Reiss said the fact that Fannie Mae and Freddie Mac are both going to run out of money by January 2018 is a factor in why reform is needed soon, but the GSEs aren’t in danger of imminent collapse.
“They are literally going to run out of money,” Reiss said. “But keep in mind they will continue to have a $2.5 billion line of credit. It’s partially political. They’re trying to get the public conscious of this. I don’t think anyone in the broad middle of the political establishment thinks it’s good that they’ve been in limbo for nine years.”
The MBA’s proposal to reform Fannie Mae and Freddie Mac aims to ensure that crashes like the one in 2007-2008 never happen again, in part by raising the minimum capital balance GSEs have to maintain to a level at least as high as banks and other lenders.
“They have a capital standard that is absurd,” Stevens said. “Pre-conservatorship they had to have less than 0.5 percent capital. Banks are required to maintain 4 percent of their loan value against mortgages. That’s a regulated standard. Fannie and Freddie are not as diversified as banks are. Our view is to make sure they are sustainable; they should at least a 4 to 5 percent buffer to protect them against failure.”
To put that into context, a 3.5 percent buffer would have been just large enough for the GSEs to weather the last housing crash without the need for a taxpayer-funded bailout. Stevens said the MBA would go even further.
“They should also pay a fee for every loan that goes into an insurance fund in the event all else fails,” he said. “In the event of a catastrophic failure, that would be the last barrier before having to rely on taxpayers. Keep in mind: for years, shareholders made billions and when they failed taxpayers took 100 percent of the losses.”
Stevens said the MBA would like to see more competition in the secondary market, and that the current duopoly isn’t much better than a monopoly.
“There should be more competitors,” he said. “If either one [Fannie or Freddie] fails, you almost have to bail them out. Our goal is to have a highly regulated industry to support the American finance system without using the portfolio to make bets on the marketplace.”
A Bipartisan Issue
While some conservatives like Chairman of the House Financial Services Committee Rep. Jeb Hensarling (R-Texas) have called for getting the government out of the mortgage business altogether, Stevens said that would likely mean the end of the 30-year, fixed-rate mortgage.
Furthermore, GSEs are required to serve underserved communities. Private companies would be more likely to back the most profitable loans.
“The GSEs play a really important role in counter-cyclical markets,” Stevens said. “When credit conditions shift, private money disappears. We saw that in 2007. It put extraordinary demands on Fannie Mae, Freddie Mac and Ginnie Mae. You need a continuous flow of capital. You can put controls in place so it can expand and contract when needed.”
Reiss said getting the government out of the mortgage business would certainly mean some big changes.
“I think there is some evidence that some 30-year, fixed-rate mortgages could still exist,” Reiss said. “It would dramatically change their availability, though. Interest rates would go up somewhere between one-half and 1 percent. Some people might like that because it reflects the actual risk of a residential mortgage, but it would also make housing more expensive.”
June 15, 2017 | Permalink | No Comments
