President Donald Trump recaptured the White House by pledging to lower the high costs that are burdening so many hardworking Americans. He has already taken bold action to address a major culprit: housing. On his first day in office, Trump issued an executive order to defeat what he called the “cost-of-living crisis.” As part of the order, he demanded that federal agencies find ways to make housing more affordable.
Suggested solutions for reducing housing costs typically focus on the extremely worthy goals of increasing supply and cutting government red tape that has been a strong impediment to new construction. However, just as important as building more dwellings is tackling the litany of closing costs that quickly add up when consumers buy a home or refinance a mortgage.
Title insurance, for one, can cost a homebuyer an average upwards of $2,000. But less than 5 percent of the total premiums collected by title insurers actually go toward paying claims, while a whopping 70 percent ends up in the hands of agents, according to an analysis conducted by the U.S. Government Accountability Office. Health insurers, by contrast, are mandated by law to keep a relatively paltry 15 to 20 percent of their premiums. The primary driver of the expense of title insurance is labor, which the title industry says is essential for conducting record searches that will prevent consumers from suffering losses.
The good news is that in some corners of the housing finance industry, innovators have found ways to lower title insurance costs by embracing cutting-edge technologies. For example, Fannie Mae launched a pilot program late last year that allows automated title searches on certain low risk refinancings instead of requiring homeowners to purchase expensive title insurance. The reason why these transactions are so low risk is because they are refinancings where the homeowner has substantial equity in their home -- meaning a traditional title review was already conducted when a borrower first bought their home. But that hasn’t stopped title insurers from fighting to get the pilot killed so they can keep padding their revenues.
We recently conducted an extensive review of Fannie Mae’s pilot program to assess how much it will reduce closing costs. Our findings, published in a white paper last month, show that depending on the state, expanded use of automated underwriting could generate meaningful savings on title insurance premiums for these low-risk refinancing transactions. If the program is made permanent, it will save homeowners as much as $2.19 billion in total and $1,629 per refinanced loan – without increasing the risk to consumers. In exchange, Fannie Mae charges a modest fee to compensate it for its costs in place of payments to title insurers.
Why is Fannie Mae’s pilot so effective? Largely because it brings competition to a title insurance industry known for its opaque pricing and being dominated by just a handful of large players. These big, entrenched companies have deeply resisted alternatives that are proven to save consumers money. Over time, our hope is that more widespread use of automated title searches and other innovations create so much competition that the title insurance cartel is broken up, thus eliminating the need for initiatives like Fannie Mae’s pilot.
Dislodging the title insurance industry won’t be easy. These companies have perfected their Washington influence game, hiring well-connected lobbyists to protect a racket they know they cannot justify on the merits. For too long, these entrenched companies have profited while Americans have borne the cost. Promoting competition in this broken system and handing the savings back to homebuyers is what voters rehired President Trump to do. He can help fulfill that promise by continuing Fannie Mae’s title insurance pilot.
