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Thursday, January 12, 2006 | Title insurance isn’t the sexiest part of a real estate transaction.

But according to a recent report issued by California Insurance Commissioner John Garamendi, San Diego’s homebuyers should be paying more attention to title insurance fees.

The report shows that a few big players dominate California’s title insurance industry. It says the price of policies is kept high by a lack of competition in the market, a lack of consumer knowledge, and cozy relationships between realtors and title insurance providers.

Title insurance is required in California whenever a buyer purchases real property or a lender borrows money for the purchase of property. It is intended to guard against the chance that the title purchased might not be legally transferable.

Garamendi claims that real estate agents and escrow companies essentially choose title insurance companies for their clients. In other words, the home buyers and sellers are not taking advantage of the rights they have to choose lower-priced options.

“Price competition is not the mechanism in which the consumer is making a decision on what title insurance company to choose,” Garamendi said during a visit to San Diego this week. The insurance commissioner, a Democrat, is running for lieutenant governor.

“It’s basically just a scam,” Garamendi said.

Despite repeated calls to the local branches of the big three title insurance companies in San Diego – Fidelity, First American and LandAmerica – nobody from any of the companies would comment on the report and its findings.

The purpose of title insurance is to guarantee that the seller has clear ownership, or title, of the property. Essentially, title insurance companies check that the seller’s ownership of the property does not have any challenges to it. For example, a lien could be held over a property because the owner hasn’t paid property taxes, complicating a prospective sale. A title company checks for such defects on a property by examining public records and maps.

Title insurance companies also insure the buyer and the seller against any challenge to the title that might come about after the transaction has taken place. Thus, they essentially insure that their work has been carried out correctly.

Not very sexy stuff.

And also not a very significant part of the cost involved in buying or selling a home, especially when you take into account property values in San Diego. Nevertheless, Garamendi said that there is no reason why consumers should have to pay more for their insurance than they have to.

The report asserts that there is not a reasonable degree of competition in the market for title insurance services in California. Indeed, it concludes that the title insurance industry suffers from a phenomenon known as “reverse competition.”

Reverse competition occurs here in San Diego, the report says, because title insurance companies aren’t marketing their products directly to the people who will pay for them – the seller and the buyer. Instead, the insurance companies target third-party agents (Realtors and mortgage brokers) who, in practice, steer to them the bulk of their business. The net cost of these relationships, the report says, falls on consumers, who end up paying more for the same product.

The report quotes Professor Jack Guttentag, a professor of finance emeritus from the Wharton School at the University of Pennsylvania:

“Service providers compete not for the favor of borrowers, who pay their fees, but for the favor of the lenders who select them. This type of competition is perverse because it drives up the costs of the service providers.”

The relationship between title insurance companies and third-party agents is governed by the Real Estate Settlement Procedures Act. Local realtors said that legislation, coupled with aggressive prosecution of corrupt title companies by regulators, means the days when title companies paid for expensive holidays for friendly Realtors and bought a Realtor’s office furniture have long gone.

That doesn’t mean title insurance companies don’t spend money marketing their services to real estate agents.

Jim Abbott, a Realtor in downtown San Diego said title insurance companies often spring for coffee and refreshments at the brokers’ meetings he attends, but stressed that there are lots of legitimate reasons insurers and Realtors would want to rub shoulders.

With so many players involved in a real estate transaction, it’s only natural that buyers and sellers want their agents to be well-acquainted with the people they work with on a transaction, said June Barlow, vice president and general counsel at the California Association of Realtors.

“Clients rightfully look to them to see who’s the best,” she said. “People buy a house once every five, 10 years, Realtors are doing it every day, so they have a good pulse on who the providers are that have been reliable for them.”

Therefore, Barlow said, insurance brokers are as justified spending money selling their services to third-party agents as any other trade.

The report also finds that the market for title insurance is heavily concentrated in a small number of firms. According to the report, Fidelity, First American and LandAmerica, controlled 77.4 percent of the California market in 2005.

Real estate agents and mortgage brokers said that there’s a very good reason why these three companies control such a large share of the market: They’re very good at what they do.

“I do business with four different title companies, and I do business with them because of the quality of service they give me,” said John Marcell, president of the California Association of Mortgage Brokers. “I know that those four companies are top-drawer, they know what they’re doing.”

But attorneys in Garamendi’s office stressed that the services title companies are providing are simply not commensurate with the profits they are making, the difficulty of the work they do, or the risks they are taking on.

The report argues that the very low risks involved in title insurance, combined with increasingly easy title searches owing to new technology, do not justify profits that are estimated at more than 20 percent in the largest companies. It’s just too easy to do what title insurers do, the report says, and there’s no reason why so few companies make so much.

The primary reason for this discord, the report says, is a lack of knowledge on the client’s behalf. It quotes a 1977 Department of Justice Report:

“Perhaps nowhere in the economy is there such a maldistribution of economic knowledge and power than in the finance and real estate markets.”

Realtors and mortgage brokers pointed out that is exactly why most people simply never question their agents’ judgment when it comes to choosing an insurer. Shopping around for a cheaper insurance quote just isn’t a priority for most people, they said.

“Ninety-nine and nine-tenths of the time, they (clients) have no idea about title insurance companies,” Marcell said. “Basically, the customer’s going to say ‘you choose.’ “

Customers do have the option of shopping around, however. A quick search on Garimendi’s Web site offers a comparison of title insurance premiums. In San Diego County, the premiums – which, admittedly, are from 2003 – on a title lender’s fee for the sale of a $500,000 house varied by more than $400.

That’s not a bad saving, and saving, as everyone knows, is sexy.

Please contact Will Carless directly at

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