This commentary originally appeared in The Houston Chronicle on February 23, 2017.
Isn't it funny?
When it comes to title insurance, Texas, the nation's beacon of free markets and liberty, has perhaps the most heavily regulated market in the entire country.
While Texas consumers might find this ironic, it is doubtful they think it funny that they pay millions of dollars each year in excess charges to title insurance companies because of the industry-designed regulatory system under which the market operates. A few simple changes, however, would bring relief to consumers and businesses – and to the Texas economy.
New research by the Texas Public Policy Foundation confirms the high cost of Texas title insurance. A 50-state apples-to-apples comparison of all title-related closing costs shows that Texas has the fifth-highest rates for a $300,000 home in the country. Only New York, Illinois, Louisiana and New Jersey have higher costs – which aren't exactly known as great supporters of free enterprise.
The estimated price for a $300,000 home with 5 percent down in Texas is $2,663. Among the 45 states with lower prices, the price in the median state, West Virginia, is $703, or 26 percent, lower than Texas.
The foundation's research is in line with other studies looking at Texas title insurance costs. For instance, a 2011 LBJ School of Public Affairs study found that Texas had the highest premiums in the country for both $200,000 and $400,000 homes.
Texas' "title insurance tax" can be laid squarely at the feet of its "title insurance monopoly" created by excessive regulation. Title 11 of the Texas Insurance Code states, "The purpose of this title is to completely regulate the business of title insurance on real property." And it does exactly that.
The result is one price and one product – every company charges identical premiums based on the value of the property; it is illegal to offer a discount to customers. This is a dream for title insurance companies but a nightmare for consumers. Consumer choice is virtually nonexistent. The result is that every title insurance company in Texas gets to enjoy the benefits of a monopoly price well above what would exist in a competitive market.
The LBJ School recently calculated that this monopoly pricing adds "an expected incidental charge of $1,663 per lender's title policy."
The prescription for eliminating Texas' title insurance tax is simple: Introduce competition into the market so consumers can shop for the best price. This is the same way Texas regulates virtually every other line of insurance. And it is how almost every other market works. The government doesn't, for example, set the price of computers, cars or cows.
While the solution may be simple, its implementation is not proving easy. While many businesses come to Austin seeking to reduce regulations on their activities, the title insurance industry has opposed competition and consumer choice.
In a brochure distributed to the Texas Legislature, the Texas Land Title Association defended the monopolistic system, saying, "We have developed one of the best title insurance markets in the country, with consumers across the state benefitting … Now is certainly not the time to mess with the safety and simplicity of our real estate process." Or, so it seems, the profits of the title insurance industry.
Texas has become the nation's economic engine in large part because we have allowed competition to bring lower prices and better products in markets such as telecommunications, electricity and oil and gas.
Title insurance regulation here seems more suited to New York or California, though, to be fair to California, it must be noted that a $300,000 policy there is $600 less than in Texas.
More than funny, it is unbelievable that Texas has instituted a regulatory regime that reduces consumer choice in a market to essentially zero. But there is hope: The Legislature has demonstrated over the years a recognition of the importance of competition and consumer choice in increasing economic growth. If it does so again when it comes to title insurance, that would indeed be cause for celebration.