Government Substituting Itself for A Good Reputation: Case No. 2 of Government Regulation Gone Amuck
Today's Wall Street Journal article by John R. Wilke talks about "new scrutiny" of the "$17 billion title-insurance business."
According to him, there are four insurance companies that dominate the national title insurance industry: Fidelity National Title Group, First American Corp, LandAmerica Financial Group, and Stewart Title Insurance. They control almost 90% of the market.
Because state governments regulate this industry in an effort to eliminate pricing abuse and unsavory practices like kick-backs (although I never really understood how you can compensate an intermediary if you don't pay them), these companies have taken to hiding behind Daddy Government.
[Thanks to chris2fer.wordpress.com for this cute picture. I recommend his site for other photos that will melt your heart.]
The irony is that because state regulators approve the rates charged by title companies, the companies benefit from a certain amount of immunity from antitrust claims. What the states have done is, in effect, to create a monopoly, whereby the title companies "collaborate" (collude?) under state government protection to set their rates.
In other words, the goal of government has backfired.
How many of you readers have bought real property and then shopped around for a title company? I'm willing to bet that the shoppers would represent less than 1 percent. All of us accept the title company that our broker and his escrow agent provide.
On the other hand, I am also willing to bet that the escrow companies are faced with a constant barrage of efforts by title companies to compete with each other. This is healthy.
If there were no regulatory action on the part of the state governments, the title companies would be required to compete on the basis of the quality of their service and the rates they charge. Because rates would not be "fixed" by government action, they would become competitive.
What happens, however, is that state government officials (who have no personal skin in the game) approve of title company rates, thereby (1) making all the rates the same, and (2) arbitrarily fixing an amount that has little to do with the actual market.
What has evolved as a result is that the title companies have found another way to compete. With the government's help, they have been able to charge enough money to send kick-backs to escrow agencies. The one who can send the most gets the prize.
Nowadays, therefore, instead of the incentive being to make money by offering a high-quality and low-cost service, it is reduced to making the most money under government protection.
Without this government stamp of approval, market players would have to sink or swim on their reputation. Escrow companies would have to spend a little time finding the best quality title insurance company, if only to preserve their own good name.
When the government tries to regulate industry, it substitutes itself for a hard-won and constantly challenged market reputation; and it creates a playing field where the players who can survive the cost of acquiring government approval can abuse their monopolistic privileges and hide behind their government benefactor as they rip off those paying for the service.
Who is the ultimate loser? You and I, the helpless consumer.