New York Legislative Bill Overlooks Necessary Business Costs in Public-Option for Land Title Insurance Proposal
November 9, 2009
The American Land Title Association contended that hasty efforts in New York to create a government-run title insurer and displace the private sector in the real estate closing process would not produce the results asserted by proponents. Land title agents in New York go through labor-intensive steps to ensure homebuyers have “good title” before a land title insurance policy is written. The cost of these preventative steps are left unaccounted for in the proposal, potentially leaving New Yorkers “holding the bag” when the assumed revenue is not realized.
“Stable land title agents and insurers understand the volatility of the real estate market, planning for a business cycle that includes years of revenue loss, such as the industry has experienced in this current recession,” stated Kurt Pfotenhauer, CEO of the American Land Title Association. “It is dangerous for a state government to look to a highly cyclical industry to fund critical infrastructure needs such as roads and bridges. What will the state do when their state-run title insurer needs money from the state instead of providing funding for key projects?”
Assemblyman Richard Brodsky and Sen. Eric Adams proposal will have serious consequences for New York’s economy. Any discussion of reforming New York’s land title insurance system must be based on knowledge of the costs involved for the state. Unfortunately, the legislators’ proposal is based on assumptions; primarily that the land title insurance system is similar to property and casualty insurance instead of understanding that the business provides a preventive, assurance product. Through the industry’s hard work, the United States enjoys the fastest closings in the world, which ultimately saves consumers tens of billions of dollars annually in additional interest costs because long rate locks are not needed on mortgage commitments.
From procuring the legal description and ownership to performing a title search on a property and curing any title issues, there are many detailed steps needed to issue a title insurance policy. This work must be performed, whether a state or private entity insures the title. It is unlikely to produce little to no savings for consumers when this work is taken into account within any proposal by the state to displace private title insurance.
Any revenue from a public land title insurer would be offset by considerable costs not spelled-out in the legislative proposal. Governments would be required to invest substantial upfront costs to: hire experienced and trained staff in every county to conduct title searches, resolve title issues and underwrite title risks; establish operations and systems; and hold money that could otherwise be used for other budget priorities to meet the requirements of an extensive regulatory framework which requires substantial capital and reserve holdings, statutory premium reserves and investment restrictions to protect insurer solvency and prevent consumer loss. Assumptions that a single rate schedule exists in New York eliminate price competition fail to recognize that insurance regulators set rates so that no title insurer becomes insolvent – a regulatory structure designed to protect consumers.
In addition to these upfront costs, the state would lose additional revenue in the form of $15 million in premium taxes paid by title insurers in 2008 alone. Local government also would lose significant revenue from recording fees. Nationally, the title insurance industry spends $170 million per year to purchase copies of public documents. New York’s share of this would be lost with the advent of a government-run title insurer.
Opponents of the current system make accusations that the title insurance industry pays little in claims. Title insurers seek to eliminate the risk to consumers of being subject to loss and having to file a claim. When a consumer is hit with a title claim, it means that their right to their home and property is challenged. Title insurers understand that being faced with the possibility of losing what is likely to be the largest investment a family will ever make deserves the strongest protection possible.
There are claims that this legislation will help create jobs. In reality, the legislation would result in lost jobs. A government-run title system would eliminate more than 2,750 title abstracters and examiners in New York and would impact many of the 60,000 attorneys in the state that provide title insurance services among their practice.
The current government-operated system in Iowa is often cited as an alternative to traditional title insurance, however, the Iowa model is not transferable to other states. The title system in Iowa was implemented at a time when there was no established industry in the market. States looking to implement a similar system in an existing real estate practices would be anything but quick and effective.
A congressional study concluded a government-run system would not make buying a home or business any easier or cheaper because of other costs consumers must pay associated with the real estate transaction.
Furthermore, while premium rates for Iowa Title Guaranty might be lower, although not the lowest, than rates in many other states, the total costs that consumers pay for title searches, examinations, and clearing of any title problems might not differ substantially. Iowa’s total costs were about the same as those in Maryland, Nebraska, South Dakota, Washington State, and West Virginia, where private title underwriters are free to do business.
ALTA urges legislators in New York to visit their local land title agent or abstracter to gain a better understanding of the preventative work and service the industry provides homebuyers.