An unexpected obstacle to the American Dream

This commentary originally apeared in the Tyler Morning Telegraph on August 8, 2016 

Few images are as iconic to the American Dream as a modest house with a white picket fence. The house, of course, is in part symbolic. Apartments, townhouses, and condominiums have become nearly as important to a community as the traditional single-family abode. What remains constant is the desire for a place to call one’s own.

Although safe and adequate housing is within the reach of most Texans, there are nevertheless several policies at the state and local level, which make securing a place to live more difficult than it need be. The cost that Texas’ title insurance regulations impose on prospective property buyers is one of them.

Research by the Texas Public Policy Foundation shows that Texans pay among the highest title insurance rates in the nation. The blame for that markup stems largely from the state’s refusal to allow competition.

Texas has a reputation for having among the most accessible housing markets in the nation. Pressure from an expanding population as well as the attempt by Texas cities to control growth through stringent land use regulations have pushed home prices upwards recently. But, overall, Texas’ combination of low taxes and minimal regulations encourages the economic efficiency that keeps costs low.

The philosophy that governs Texas’ title insurance regulations veers sharply leftward from this free market model.

Title insurance refers to an indemnification practice commonplace in real estate transactions. Land is often used as collateral for investments and is therefore often subject to competing claims of ownership. Title insurance represents one way a buyer can certify that their right to the land is free and clear of challengers.

Almost every Texan will bear the cost of a title insurance policy at point or another, either directly as a homeowner or indirectly in their monthly rent. Lenders require title insurance as a mortgage condition, and so title policies have become a latch that most property buyers must turn before closing on a home.

Despite bearing the policy’s cost, however, consumers have little control over the form that the insurance line takes. Under Title 11 of the Texas Insurance Code, the state assumes responsibility for nearly all the details that would be typically negotiated by parties to the transaction. It sets the price. It determines the types of coverage needed. It even calculates the manner in which premiums will be divvied up between title insurance companies and title agents.

This top-heavy combination has proved expensive. With no legal outlet for price competition, title insurance companies confront minimal pressure to find cost-cutting measures and have fewer options to pass any discovered savings along to the consumer.

In addition, because the state requires the most comprehensive plan, consumers cannot choose a cheaper, sleeker option that suits their needs.

Multiple reports have observed a severe lack of consumer power in title insurance markets. Texas’ monopolistic policies have aggravated this tendency, with the result that, Texas bears the fifth highest title insurance rates in the country for a $300,000 home with 5 percent down.

Representatives from industry are quick to counter, pointing out that title insurance is a unique product and that it plays an important role in today’s economy. Both observations have some truth to them. Neither characteristic, however, justifies the stranglehold that the state has imposed on the liberty of consumers to negotiate a better price; nor the higher costs added to something as fundamental as access to housing.

Title insurance represents only a portion of the expenses Texans must scale before securing a home, but the heights of opportunities are often lost inches at a time. In no other corner of the Texas economy is a product’s peculiarity and high demand viewed as an excuse to hide from the competitive market. Why should title insurance be any different?

Kathleen Hunker is a senior policy analyst with the Center for Economic Freedom at the Texas Public Policy Foundation. Follow her on Twitter @KathleenHunker.