What happens when you allow the real estate brokerage industry to control the title insurance industry? In Minnesota the answer appears to be price fixing.
When a real estate brokerage firm has an ownership interest in the real estate safeguard service called title insurance, that relationship is called an Affiliated Business Arrangement (“AfBA”). We do not believe that it makes any sense to allow a gatekeeper, like a title firm, to have any relationship with an industry that has a huge success fee invested in every transaction. Minnesota may now be the best piece of evidence needed to demonstrate why affiliated title firms have no legal business purpose in providing real estate safeguard services to lenders and consumers. In light of the recent foreclosure crisis, these AfBA should be prohibited, yet now there is a Realtor sponsored bill that proposes to give this anti-consumer, inappropriate and unsafe business relationships preferential legal treatment under federal law. As we have discovered, not only are these AfBA’s unsafe, they also lead to market manipulations and artificial price increases.
In 2010, the Minnesota Realtor Association (MNAR) provided a forum for competing real estate brokers with title insurance AfBA’s to create a market inefficiency and eliminate routine title insurance discounts. MNAR allowed these brokers to change a boilerplate statement in the MNAR standard purchase agreement that secretly wiped out these discounts. We estimate that MNAR and these brokers have already cost Minnesota homebuyers over 100 million dollars (money that unfairly profited the title insurance industry).
There is a long history of how real estate brokerages have influenced the upward pressure of title insurance costs. In many areas, real estate brokerage firms have become loss leaders for their affiliated ancillary services like title insurance. Consumers are particularly vulnerable to manipulative market practices when it comes to selecting title firms because they rely so heavily on the guidance of their real estate brokers. At the time consumers are presented with the decision of selecting a title firm, they are often overwhelmed with other aspects of the transaction and defer to the Realtor’s recommendation. Rarely is the consumer informed enough to question the drawbacks to the relationship between the broker and their title firm. As a result, consumers do not shop and compare title firms and neither does their Realtor. The vulnerability to price gouging is at its highest for the purchase of title insurance services.
Title insurance firms affiliated with real estate practitioners are bad for our economy for many reasons – they eliminate competition through market manipulations, they increase prices and destroy important safeguards that lead to things like mortgage defaults, consumer bankruptcies and financial crisis’s. Now there is another reason. Price fixing.
When real estate brokers can convene at their trade association’s headquarters and change a “neutral” form that approximately 99% of homebuyers and sellers use and that change creates a market inefficiency that puts an extra 100 million dollars in those brokers’ pockets, there is a problem that needs to be addressed. This situation discloses the temptation level present to unfairly profit from title insurance and the vulnerability of real estate consumers (their clients).
Title insurance is already highly complex and vulnerable to artificial upward fee pressures and premiums (from AfBA’s that do not have to compete for business) that have nothing to do with actuarial data or losses. There is a long history, just in Minnesota, of form changes that have caused Realtors to profit from ancillary businesses or receive unfair liability protections. Regulators should be focused on prosecuting brokers for actions like this and eliminating the mechanisms that facilitate this type of conduct. Title insurance price increases now have everything to do with the inappropriate financial incentives that exist between real estate brokers and their affiliated title firms. Although this inappropriate upward pricing pressure has existed among individual real estate brokerage firms for a long time, the blatant price-fixing that happened in Minnesota takes the situation to a whole new level.
The idea that there is a Realtor sponsored bill proposing to provide preferential treatment to AfBA’s offends logic and fairness. AfBA’s are legally tolerated only if consumers sign AfBA disclosures that provide minimal disclosure of the conflicts of interest and those “disclosures” (designed by Realtors) do not come close to obtaining the informed consent of their clients. AfBA’s are considered to be second-class citizens in the realm of title insurance and transaction protections that consumers should demand by selecting independent title firms. Although the brokerage industry may be powerful lobbyists, no legislator should consider giving these conflict-ridden market manipulators preferential treatment over independent title firms that insist upon conflict-free service.
of this situation with some of the documentation we have collected.