Tuesday, February 12, 2008

Government Substituting Itself for A Good Reputation: Case No. 2 of Government Regulation Gone Amuck

This is a second example of government regulation gone amuck. The title insurance industry. (See the first one at this previous post.)

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.

HidingBehindDaddy
[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.

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4 Comments:

OpenID chris2fer said...

Nice Picture! I heartily approve.

11:25 AM  
Blogger Doug Miller said...

Its just the tip of the iceberg... Actually what has occured is that real estate professionals in a position to help their clients select a title company have abused that duty and exploited their clients' vulnerabilities. A Realtor will often ship their clients into the most expensive title company in town even though they know of more reasonably priced companies with better service. Why? Because they have an interest in the title company or because their broker does. No longer does loyalty to the client count as a liability for which they are to care for, now it is an asset to exploit.

I own a title company in Minnesota and have watched this spread throughout the U.S. I spoke before Congress on this topic 2 years ago and I have a website dedicated to exposing these problems. In fact, I'm in the process of starting a non-profit consumer organization.

I am told that I am also quoted in the hard copy of that WSJ story. I'm Doug Miller. You can find my blog at www.realestateethics.blogspot.com

If you get a chance read "Free Lunch" it has a chapter on this.

12:07 PM  
Blogger Katy said...

Actually, the person quoted was Edward Miller, spokesperson for the American Land Title Association. Anyway, thanks for the input, and I'm sure your observations are correct.

4:42 PM  
Blogger Katy said...

Oh, and Doug, I love your photography at loonseye.com.

4:46 PM  

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