HUD has recently announced its first settlements concerning "captive title reinsurance," an expression that sounds like something out of a romance novel in a real estate office. But rather than having anything to do with romance, captive title reinsurance is all about another subject: Money -- and who gets it.
Reinsurance is a world unto itself. In basic terms, when the Smith Insurance Company writes a policy, it may want to hedge it's bet by selling some or all of the risk to another firm -- a re-insurer. The re-insurer takes on the policy's risk in exchange for a payment from Smith.
It follows that where there's insurance there is also re-insurance and that includes title insurance. Whether that should be the case is a matter of dispute.
According to the HUD, "Captive title reinsurance is a practice whereby a title insurance company transfers a portion of the risk and title premium to a company owned by the builder, lender or real estate broker referring the title business. In HUD's view, any captive title reinsurance arrangements in which payments are not bona fide and exceed the value of the reinsurance are a violation of RESPA. There is particular concern when these arrangements involve an entity that is in a position to refer business to the primary title insurer. There is also strong evidence these arrangements are designed to generate referral fees when there is a history of few or no claims paid."
In other words, the usual reason to re-insure is because you worry about claims. But if you have a business with few or no claims being paid, you have little or no reason to re-insure.
"There is almost never any legitimate need or business purpose for title reinsurance on a single-family residence," says HUD Assistant Secretary for Housing Brian D. Montgomery.
To resolve captive title reinsurance issues, HUD said it made a $650,000 settlement with CitiMortgage, Inc., and its captive title reinsurance company Chesapeake Reinsurance; a $675,000 settlement with M.D.C. Holdings, Inc., certain of its Richmond American Homes homebuilding subsidiaries and AHT Reinsurance; and, a $305,000 settlement with WL Homes, which does business as John Laing Homes, a California and Colorado builder.
To their credit, says the government, the companies "came forward and cooperated with HUD in reaching these settlements. In addition to the settlement payments, the companies agreed not to enter into any new captive title arrangements and to cease writing new captive title reinsurance business."
It's good that HUD is going after arrangements which are inappropriate under the Real Estate Settlement and Procedures Act (RESPA), but there's far more to do.
For instance, if re-insurance arrangements are going or gone, should not title insurance premiums decline? After all, there's one less "cost" and risk has not increased. Is this not an issue that HUD, state insurance regulators and state attorneys general should be examining?
HUD talks about expanding home ownership rates and here's a golden opportunity to bring that goal closer. If settlement costs can be reduced then ownership becomes increasingly plausible for more people.
Homebuyers and those refinancing do not now get to choose their title insurance provider under the current system. Instead, settlement agents make such selections and in return sometimes get commissions equal to 70 percent of the premium -- and more.
What's needed here is a system where title insurance is sold directly to the public. This would force title insurance firms to compete, reduce closing costs and make homes more affordable.
Ask yourself: Why shouldn't title insurance be sold directly to the public? It can't be because title policies are too complex -- life, health and auto insurance are sold to consumers. It can't be because title insurance policies have huge numbers of exceptions -- if title policies were sold directly to the public help would be available from lawyers and brokers, plus the number of exceptions might decline. Would not websites spring up to compare policies and offer advice?
Imagine that: Selling title insurance directly to the people who actually pay for it and would like to pay less. What a concept.