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The Case Against the Destruction of a Free Market Sector of Our State's Real Estate Industry: New York Taxpayers for Economic Justice Oppose Plans to Socialize the Title Insurance Industry

Steven Day, a spokesman for the group, explained, "At the outset, anyone familiar with the nature of title insurance would recognize that the 'justification' cited in the bill demonstrates a fundamental misconception on how title insurance operates and attempts to portray perceived deficiencies in the industry which, in reality, are nonexistent."

Setting down the facts

The legislation seeks to compare title insurance to other forms of insurance -- but in fact title insurance is a completely unique and distinct type of insurance coverage. Unlike other forms of insurance, which typically cover losses arising from events occurring in the future, title insurance protects against losses caused by pre-existing defects to a property owner's title, in exchange for a one time premium payment for the title policy which remains in effect -- without annual premium payments -- for as long as the insured remains an owner or for the life of the loan.

This unique characteristic affords title insurers and their agents the opportunity to proactively clear, or "cure," defects or exceptions to title that are known or discoverable through an exhaustive search and examination process of public records (oftentimes performed by individuals sifting through municipal or court archives).

What the consumer gets for their money

Through the process of search and examination and clearance of exceptions to title much of the risk of a title defect can be eliminated prior to the issuance of a title policy. The significant effort undertaken to discover and rectify title defects means that most of the title insurance premium goes to cover the costs related to core services in the examination and closing of a title transaction, while only a relatively small portion of the premium goes to covering claims. On a national basis, nearly 87 cents of every premium dollar collected is spent on risk elimination.

Doing the math on a flawed bill

The group's spokesman, Steven Day, observed, "The bill sponsor's seek 'justification' for permitting the Fund to issue title insurance policies suggesting title insurers in 2007 (at the height of the real estate market) collected $1.2 billion in premium but only paid $50 million in claims. Their position is demonstrably wrong and a product of failed arithmetic. Its claim that the Fund will save New Yorkers 'hundreds of millions of dollars annually' based on the industry's low loss ratio critically ignores the high operating expense ratios incurred by the title insurance industry precisely to ensure that problems do not arise and to keep the incident of losses as low as possible."

Homeowners have a right to expect that every effort is made in eliminating potential title defects before they crop up and jeopardize their ownership rather than have to present a claim later. As a result, title insurance has a higher expense ratio and lower loss ratio than all other classes of insurance, which are fundamentally different.

Government "efficiencies?"

Offered Day, "It is hard to fathom the Fund being able to operate more efficiently than the private sector, even under the best economic circumstances. More likely, its operating expenses would exceed the industry's current ratio of approximately 87% due to typical government inefficiencies and the extraordinary start-up costs required to enter this new field. Making the promise of savings espoused by proponents of this bill illusory and undeliverable. Given these realities, this bill could actually result in higher title insurance rates for consumers."

The group asked what assurances do New Yorkers, lenders and participants in the secondary mortgage market have that the Fund would not be influenced by state budgetary constraints, political pressures or other factors, thereby compromising the integrity of the title insurance process?(1) While Section One of the bill establishes a "title insurance fund" to be "applicable to the payments, expenses and assessments on account of title insurance policies," it is unclear that the Fund would be able to resist attempts to raid its coffers as has been proven repeatedly in state government. In fact, the Insurance Fund has already been raided for purposes other than its established mission.(2)

Keeping up with an industry where speed and efficiencies are key

Also unclear is whether New Yorkers will feel confident that the Fund, which operates in the comparatively tepid universe of workers' compensation insurance, will be able to perform the exhaustive amount of labor-intensive, fast-paced work necessary to issue a title insurance policy, which oftentimes must be issued quickly due to transactional considerations.

"With these facts, the rationale for thrusting the Fund into the title insurance market, in which it has little expertise, should be questioned, and the proposed legislation opposed, by any New Yorker who currently, or in the future, buys, sells or refinances real estate," concluded Day.

(1) According to a study performed by the American Land Title Association ("ALTA") in 2005, approximately 36% of all residential real estate transactions required some sort of curative action. If the Fund were to cut operating expenses and, as a result, curtail efforts to repair the public record or eliminate title defects, the number of claims incurred would increase significantly, possibly as high as 50 - 60% of all transactions.

(2) According to published reports, in 1975, the Fund was directed to invest in a public authority that was selling bonds to help bail New York City out of its fiscal crisis. In 1982, the Fund was directed to transfer $190 million in reserves directly into the state's general fund to plug a shortfall in the fiscal 1983 budget. This "atypical transaction" was repeated again in 1987, 1988, 1989 and 1990, with the total amount "borrowed" from the Fund equaling $1.3 billion.

SOURCE The New York Taxpayers for Economic Justice, Inc.