In the midst of the worst financial crisis since the 1930s, one that originated in and owes its severity to developments in the home mortgage market, it is nice to be able to report some good news about this market. The newly chartered EnTitle Insurance Co. is now offering title insurance directly to borrowers through its Web site, www.entitledirect.com. The premiums charged by EDI undercut those of existing insurers by about 35 percent.
In addition, EDI offers borrowers, as a free service, a method of avoiding what to many borrowers is the worst part of the mortgage experience — "pile of paper shock," or POPS. POPS results from borrowers being presented with a pile of documents at closing, most of which they have not seen before, and which they are expected to sign while the other participants tap their fingers impatiently. EDI provides a tool called "Control Panel" that allows borrowers to control the flow of documents and information from start to closing.
I was a paid consultant to EDI during 2007 but not since, and I have no financial interest in the company.
Title insurance premiums have always been substantially higher than those that would exist in a well-functioning competitive market, largely because it was marketed to referral agents rather than to the borrowers who paid the premiums. The cost of marketing to referral agents is very high.
On purchase transactions, the Realtor is usually the referral agent, while on refinances it is usually the lender. Referral agents usually are more interested in using their referral power to feather their own nests than to negotiate lower prices for consumers. While direct payment of referral fees is illegal, there are many indirect ways to do it that are legal, including making the referral agent a part owner of the title agency. EDI will also have marketing costs, but it is betting that in the Internet age its costs will be substantially lower.
Cutting the price of title insurance can be a hassle. Title insurance is regulated by the states, and all but a few require that premium charges be posted with the state. In some states, individual insurers post their premiums, while in others it may be done either by an individual company or by a group of cooperating insurers. In Texas, New Mexico and Florida, premiums are set for all companies by the state itself.
EDI will begin in Pennsylvania and plans to offer insurance in 33 states by the end of 2008, and in most of the remaining states in 2009. It may find a way to discount prices in Florida, but will not be able to in Texas and New Mexico until those states change their restrictive laws. Iowa is also out of bounds because a state agency there offers title insurance at very low premiums.
The Control Panel service is available free to all borrowers, whether they purchase title policies from EDI or not. The core of this service is an online folder that contains all information relevant to the transaction, and which is continually updated as the loan moves toward closing. EDI assigns a closing specialist to each borrower who monitors the entire process, and will alert the borrower to any tasks that need to be completed before the closing. (The closing specialist is available to help, even if the borrower does not use the Control Panel). EDI provides a list of common tasks, and borrowers can add their own.
EDI also provides sample documents for early review, which will be replaced by the actuals as these become available. One of these is the new HUD-1 closing document proposed by HUD, which is shown side by side with the good faith estimate of settlement costs that is provided the borrower within three days of submitting a loan application. Through continuous updating of the HUD-1, borrowers will see any divergences in the original estimates of settlement costs as they occur, as opposed to being blindsided by them at closing.
The Control Panel device is a bold initiative, to my knowledge the first of its kind. Whether it works or not depends in good part on whether the third parties involved in the process — Realtors, loan providers and perhaps attorneys — participate. Borrowers will give them access to their folders, but whether the third parties use it as the principal mode of communication with borrowers and whether they download documents to the folder in timely fashion and keep them up to date remains to be seen.
My surmise is that the degree of third-party participation will depend very much on how borrowers approach them. If borrowers raise the issue of the Control Panel after selecting their Realtor and loan provider, many will be reluctant to change their customary routine. They don’t have to comply because they already have the customer. To ensure their active participation, I would make it a written condition of my doing business with them.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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