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On
The Cover/Top Stories
Inside
America's Richest Insurance Racket
Scott Woolley 11.13.06

Title insurance firms rake in $18 billion a year for a product that is
outdated, largely unneeded--and protected by law.

Parker Kennedy's roots run deep in the California company his family
founded 112 years ago. Through four generations the clan (unrelated to the
Massachusetts political dynasty) has run what today is First American, the
largest title-insurance company in the nation. It collects $5.8 billion a
year selling this age-old mainstay of homeownership.

All that cash--for an outdated product that should have been all but
wiped out by digital technology.

Title companies appeared a century ago, helping to protect home buyers
from being swindled by crooks who sold properties they didn't own. A title
insurance policy protects the buyer in case the deed turns out to be
defective but the seller cannot be collared to refund the purchase price.
It is far less necessary in these days of computerized records, online
searches and rare instances of title fraud or hidden liens.

Yet First American and its two main rivals--number two Fidelity
National (no relation to Fidelity mutual funds) and third-ranked
LandAmerica--are fat and thriving in an $18-billion-a-year business that
has quadrupled in ten years.

First American has doubled its prices in a decade, to an average charge
of $1,472 per home for a title search and insurance. Meanwhile, thanks to
computerized record-keeping, the cost of searching for a home's ownership
records online has fallen to as low as $25. Technology also has helped
make mistakes rarer; now only $74 of each policy goes to pay claims--that
is, make home buyers with defective deeds whole. That leaves a $1,373
spread for overhead and for profit.

Fancy this: racetracks that keep 93% of your money and return only 5%
in winning tickets. They wouldn't last long, not unless they could somehow
rig the rules to both forbid price competition and make the purchase of
race bets mandatory. That's more or less what the title insurance industry
has done to American homeowners.

Kennedy attributes his profits to the long housing boom and the efforts
his company has made to deploy technology and move jobs offshore.
"Nobody's cutting a fat hog," he says.

But the title industry's halcyon days owe much to antiquated state laws
that thwart new competition, allow prices to soar despite declining costs
and force almost every home buyer to pay for insurance that most of them
will never need. In all but a handful of states, laws bar insurance giants
in other fields, such as AIG or State Farm, from offering title insurance
and undercutting incumbents' prices. It also is illegal for anyone to
offer guarantees that provide the same protection as title insurance.

Home buyers can't get mortgages without buying title insurance; nor can
banks themselves legally offer it as part of a loan. (Otherwise, the banks
could demand high-volume discounts.) A handful of states set prices title
firms may charge; others regulate prices and rubber-stamp the prices title
firms request.

The industry has boomed on such you-gotta-have-it
conditions--especially in the refinancing craze of recent years. In 2000
some 2 million refinancings went through; that grew to 7 million in 2005.
A homeowner refinancing a mortgage pays for new title insurance, despite
the utter absence of any new risk in the deed.

The title industry's perennial protectionism has had a predictable side
effect: corruption. Shielded by law from having to compete on price,
insurers resort to bribes and gifts to real estate agents and mortgage
brokers for steering business their way, deceptive front companies, phony
"reinsurance" deals and other creative chicanery .

Regulators in Washington State just revealed that First American spent
$120,000 a month courting real estate agents with season tickets to
University of Washington football games, tickets for Seattle Supersonics
basketball games, shopping sprees and other goodies. The state report says
the firm was "the worst offender" and committed more than a hundred
violations a month in the 18-month period studied. It adds: "First
American offers a prime example of how illegal inducements can help a
company attain superior market share."

Kennedy says that despite pressure to keep up with crooked competitors
he never approves such schemes: "All you can do is try to hire honest
people."

Now some forces are working to rein in this rapacious industry.
Officials in dozens of counties are working to standardize homeownership
for digital access by the public. The U.S. Department of Housing &
Urban Development is mulling ways to force more competition on the
industry, though previous efforts have failed utterly. Some politicians
who have been stalwart allies of the business now are reversing course. In
California the chief regulator has just called for a 23% price cut. This
summer New York mandated a 15% cut in rates.

Yet regulators in most states have blithely acquiesced as consumers
bills have risen. This, despite insurers' low risk of payouts and the
tech-fueled decline in costs. Sifting through property records to ensure
that a title is clear of old claims costs them all of $25 to $125 if the
records are digitized.

The industry's high-tech muscle is flexed at First American's offices
in Santa Ana, Calif., a few miles from where Parker Kennedy's
great-grandfather, Charles Parker, started the company. A cavernous data
center overflows with details on property in counties encompassing 98% of
the U.S. population. Packed with supercomputers and suspended on massive
pylons to keep them running in an earthquake, the facility soon will hold
data on virtually every building in the country, Kennedy vows.

When Kennedy's great-grandfather started out in 1894 he would hire
stenographers to go to the county courthouse and copy ownership records by
hand into ledgers and then deliver that information to clients by horse
and buggy. People who didn't have the desire, time or knowledge to do it
themselves happily paid for these title surveys. In 1924 he guaranteed his
copies were accurate, turning his product into title insurance.

That process hadn't changed much by the time Parker Kennedy joined
First American in 1977. He had been working as a lawyer when his father,
Donald, chief executive at the time, persuaded him to join the family
business. Parker would trek to courthouses and assessor offices in
southern California and tediously page through musty volumes of property
records; a single title search could take all day.

Kennedy, now 58, rose to chief executive in 2003, though he began
steering the company into the digital age a decade ago. The tech overhaul
has let him close 48 of 50 offices in his home state of California in five
years, replacing people and paper with databases and offshore data entry
clerks. The online automation also has reduced errors. If the title
searcher misses a contractor's lien and the builder who should have paid
cannot be made to pay, the insurance steps in. It's a rarity.

"We get a little more automated every day," Kennedy says. "In the old
days, if you wanted to double your business you had to double your people.
Now you can double your business and increase your staff maybe 10%."

The tech push must continue, he says, because one day economic
rationality and digital reality will catch up to the title industry. Real
estate ownership records, always open to the public, are going online,
alongside all sorts of other data. Today anyone can instantly learn a
property's square footage, its sales price history, even view satellite
photos, at virtually no cost. If records are instantly accessible and
accurate, the need for title insurance will fade away. "Eventually
insurance won't be an important component of the product," he allows.

So Kennedy hopes to harness digital technology to create a new
business. Rather than broker one piece of information for an exorbitant
cost, he hopes to collect all manner of real estate skinny and sell it to
banks, insurers, real estate agents and direct marketers.

Title insurance accounts for 70% of First America's $8 billion in
annual revenue, with newer and unregulated services providing the rest.
Kennedy says that this unregulated part of the business will be as
lucrative as the legally armored one he now runs. "When I look out 5, 10,
20 years, I just see data becoming a very powerful thing to own."

It wasn't until after the Great Depression that big insurers started
eyeing title-industry profits, and the title firms found a clever way to
fight back--not by lowering prices but with state laws that walled off the
industry from outside competition.

They invoked consumer protection: In the Depression many insurers had
gone bust, including a few that also offered title insurance. The title
industry, and many regulators, argued that insurers that also sold life or
car insurance were more likely to go broke and stick their customers with
unpaid title claims.

Click here to see a sampling of letters we
received in response to this story.

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