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Monthly Archive for June, 2010

ALTA Responds to “Title Insurance is a Scam”

June 30, 2010, by Seth Hettena. Closed

Jeremy Yohe of The American Land Title Association, the industry’s mouthpiece, has written a lengthy response to my earlier post about title insurance being a scam.

You can read the original post here and Jeremy’s comment appears here.

In his comments, Jeremy has addressed some of the concerns I raised in my piece, but did not address the well-established inefficiencies and structural flaws in the multi-billion title insurance industry.

Jeremy wrote, “A homeowner’s title insurance protects the owner for as long as they or their heirs on the property. And only need to be paid for once.”

  • Why then was my $625 title insurance fee necessary on my refinance? Chain-of-title, the major service provided by title insurance, was previously established in my case. A Lexis search would have turned up a lien or a judgment. Interestingly, though, according to CTLA’s Title Wizard, I would have paid LESS in title insurance if I had purchased my home instead of refinancing it.
  • How does ALTA explain the findings of “reverse competition” in the mortgage industry that date back to the 1980 Peat Marwick study for HUD? (Also see Consumer Federation of America, 2006 testimony before Congress; California insurance commission study on title insurance)
  • If title insurance is performing a valuable service and the “preventive measures” are keeping the title insurance industry’s loss ratio low as Jeremy suggests, why weren’t these savings passed along to me and others in the form of lower fees? Are title insurers colluding to keep prices high?
  • How is it that only one company, Entitle Direct, markets title insurance directly to consumers and, as a result, is able to offer me and many other the same service for 35 percent less? Why does Entitle Direct have such a small share of the industry? Am I a customer or merely a fee payer?
  • Why shouldn’t California copy Iowa and just put an end to the title insurance racket?

Curious to hear the answers.

CalPERS: A Legal Ponzi Scheme

June 28, 2010, by Seth Hettena. Closed

chart

California’s lame-duck Gov. Arnold Schwarzenegger likes to remind us, as he did last week, that California is facing an “unsustainable path that has taxpayers on the hook for $500 billion.”

Exhibit A is SB 400 of 1999, which  increased benefits for California state government employees between 20% and 50% — without the money to pay for them.

This is in essence a legal version of a Ponzi scheme where new investors pay old ones until the whole thing collapses.

Schwarzenegger aide David Crane has called SB 400 “the largest non-voter approved debt issuance in California history.”

The bill was signed during the dot-com boom and the legislature relied on vague promises that the investment wizards at California’s giant pension system would generate the money out of thin air.

Needless to say, that hasn’t exactly worked out.

On June 16th, Schwarzenegger struck a deal with four unions representing 23,000 of the state’s 170,00 unionized workers to roll back the benefits that were given away in SB 400. If similar agreements are reached with the state’s eight other employee unions, state savings in FY 2010-11 would total $2.2 billion, $1.2 billion General Fund.

Even with the cuts, Calpensions’ Ed Mendel notes, pension benefits for CHP officers are still more generous than the days before SB 400.

Democrats led by Gov. Gray Davis signed SB 400 as a thank-you to the unions that helped end 16 years of Republican rule in California the previous November.

Even though the legislature is controlled by Democrats. It needs to be said that the bill was supported by both parties. It passed unanimously in the Senate. Only seven members of the 80-member California Assembly voted against it.

The most notorious passage in the bill provided highway patrolmen with 3 percent of final pay for each year served at age 50, a significant improvement of the pre-SB 400 formula of “two at 50″ — 2 percent of final pay for each year served at age 50.

This is much, much more than 1 percent increase.

Before SB 400, a highway patrolman had to work 45 years before he could retire with 90 percent of pay. The bill shaved 15 years off that time, allowing them to retire with 90 percent of pay after 30 years on the job.

In 2008-2009, a full third of the payroll for all highway patrolman now goes into their retirement accounts.

CalPERS believed they could cover the additional costs through “continued excess returns” and said it expected that contributions from the state would hold steady at $350 million.

Instead, the compound annual growth rate of CalPERS investments grew a pathetic 1.6 percent from 1999 to the end of 2009. On June 16th, the same Schwarzenegger announced his deal with the unions, CalPERS announced that it was raising the state’s contribution to $3.9 billion.

CalPERS unfunded liability, the percentage of benefits promised that can be covered by the fund’s assets, has risen from $158 billion in 1999 to $238 billion last year.

With its myriad accounting trips, CalPERS can “smooth” (hide) losses for generations. Some day the bill will come due.

It’s looking increasingly doubtful that there will be anybody left to pay it.

The Scam Known as Title Insurance

June 25, 2010, by Seth Hettena. 2 Comments

“Ever feel like you’ve been cheated?” singer Johnny Rotten famously asked at the end of the Sex Pistols tour of America.

I sure did when I refinanced my home last year and I had to fork out $625 to Chicago Title for title insurance.

Title insurance for a refinanced home loan? This makes no sense.

I paid title insurance to ensure there were no issues when I first bought my home in 2002, so why was I paying for it again?

The answer is simple: Title insurance is a swindle. A scam. A shakedown, a hustle.

When Title Companies Compete, You Lose

Title insurance is less than 1 percent of the price of the home, so we tend to overlook it.

In economics, this is “inelastic” demand, meaning it is not sensitive to price.

Title insurers can virtually charge whatever they wants — even, as in my case, for doing nothing at all.

The result is an industry devoid of competition.

A 2005 report to California Insurance Commissioner John Garamendi found that competition for title insurance and escrow services in California “does not exist.”

A total of four companies control virtually the entire market for title insurance. Chicago Title is owned by Fidelity National Financial Inc., which is the nation’s biggest title company with more than 45 percent of the market.

In California — the big money maker for the industry — title insurance is marked by “reverse competition.” The title insurers don’t compete for business from homebuyers like me, the ones who actually  pay for the service. Instead they pay illegal rebates and kickbacks to a real estate agent, a lender or homebuilder in exchange for business referrals.

The California Land Title Assocation’s Title Wizard service lets you compare prices for title insurers. Here is what the big four would have charged for my home refinance:

Chicago Title $625
Old Republic $645
Stewart Title $625
First American $605

This is a pretty clear cut picture of what collusion looks like.

A toll on the road to home ownership

Title insurers would do quite well in Afghanistan and Iraq or any place where nothing gets done unless certain people are paid.

You don’t get a mortgage without title insurance. It’s that simple. My title insurance “expired” when my first mortgage was paid off. If I wanted to refinance, I had to have title insurance.

Title insurers have managed to set up a toll booth at the entrance to the U.S. housing market, which at its peak was worth more than $20 trillion.

All those tolls add up: During the housing bubble, operating income for title insurers grew 270 percent, soaring $4.8 billion in 1995 to $17.8 billion in 2005.

The money pours in, but it doesn’t come back out. Do you know anyone who actually filed a title insurance claim?

Chicago Title paid out a meager 5 percent on nearly $4 billion worth of title premiums, according to the company’s SEC filing.

In the insurance world, this percentage is known as the “loss ratio.” The loss ratio for title insurance is among the very lowest in the insurance industry. Auto and home insurers pay 80 percent of premiums.

What is Chicago Title doing with my money? The biggest expense on Chicago Title’s 2009 income statement isn’t personnel costs. It’s the whopping $1.9 billion in commissions paid to agents who drum up business.

What you can do.

Title insurance is not required by law in California. However, it’s standard operating procedures as most lenders won’t fund a mortgage without it. But you can shop around.

One alternative is Entitle Direct, which sells title insurance direct to the consumer. Entitle Direct doesn’t pay agents so it is able to charge a third less than most of the big title firms.

I could have saved $268 if I had gone with Entitle Direct. If you don’t feel that it’s worth the trouble, well, I guess then Johnny Rotten had it right.

The State of San Diego’s Pensions

June 23, 2010, by Seth Hettena. Closed

In a little noticed report, two finance professors examined the true cost of state government pension underfunding.

Their findings are mind-boggling.

Robert Novy-Marx and Joshua Rauh found that collectively, the pensions of the 50 U.S. states are underfunded by $3.23 trillion. And that doesn’t even include local government pensions.

Most pensions calculate future obligations using a method that only an actuary could love: the “individual entry-age normal cost method.”

The exceedingly dull explanation of this is that a worker’s retirement benefits are funded over the course of his or her entire career.

But this measurement doesn’t show how much the pension owes right now.

Novy-Marx and Rauh ask how much would a pension plan owe if the entire workforce were laid off today.

They call this the “accumulated benefit obligation.” In San Diego, it’s known as the “present value of future benefits”  They both refer to the same thing: the amount of money needed to pay off the entire plan if the workforce were laid off today:

For a pension plan to be considered fully funded, its assets should be at a minimum be equal to the accumulated benefit obligation.

The city of San Diego’s official unfunded liability stands at $2.1 billion using the entry-age normal method. The county’s is less than a billion.
When we look at what the plan would owe if it were terminated today, those figures rise considerably.

2010 Top San Diego Money Managers

June 12, 2010, by Seth Hettena. Closed

The top San Diego money management firms with more than $1 billion in assets under management based on SEC regulatory filings as of June 12, 2010.

Firm Name Location Assets Under Management
Brandes Investment Partners, LP San Diego $53,111,776,127
Pacific Corporate Group LLC La Jolla $19,823,150,992
Guided Choice Asset Management, Inc. San Diego $19,238,786,500
PCG Asset Management, LLC La Jolla $19,203,420,729
Nicholas-Applegate Capital Management LLC San Diego $9,916,244,833
Gurtin Fixed Income Management, LLC Solana Beach $6,747,183,972
Relational Investors LLC San Diego $6,033,534,431
Chandler Asset Management Inc San Diego $5,005,221,338
Globeflex Capital LP San Diego $4,182,000,000
LM Capital Group, LLC San Diego $4,010,525,407
Clarivest Asset Management LLC San Diego $1,800,000,000
First Allied Securities, Inc. San Diego $1,654,019,937
Stolper & Co., Inc. San Diego $1,574,982,908
Wall Street Associates La Jolla $1,528,000,000
Dowling & Yahnke, LLC San Diego $1,473,382,112
Denali Advisors, LLC La Jolla $1,274,412,604
Rice Hall James & Associates LLC San Diego $1,203,218,265
Caywood-Scholl Capital Management LLC San Diego $1,094,183,050
Independent Financial Group, LLC San Diego $1,043,692,374
Macquarie Funds Management Carlsbad $1,005,232,323

@ 2010 Seth Hettena

Negative Equity in the San Diego Housing Market

June 8, 2010, by Seth Hettena. Closed

San Diego’s housing market may have much further to fall.

So says a new report from the NY Federal Reserve that calculates how many homeowners will become renters over the next few years.

In San Diego, 16 percent of homeowners will become renters, according to the study

This measure assumes that homeowners who owe more than their homes are worth — i.e. negative equity — are in effect renters.

Since the homeownership gap reflects the extent of negative equity in the housing market, it is also a gauge of the potential downward pressure on the offcial homeownership rate. Assuming that house prices do not appreciate over the next several years, negative equity households will very likely convert to renters when they move out of their current homes because they will be unable to save enough to cover the negative equity, the transaction costs of selling their existing home, and a down payment on another home. As these transitions from owning to renting take place, the homeownership gap will narrow, with the offcial homeownership rate dropping toward the effective rate.
The official rate of homeownership in San Diego is 55 percent. But the Fed’s analysis of federal loan data shows that only 39 percent of homeowners will get some money back when they sell.
The difference between these two numbers yields the homeownership gap. And barring a huge rise in prices, that’s where we are headed.
It’s bad, and it may even be worse. According to the paper, these numbers may actually understate the extent of the problem.If you use Case-Shiller’s numbers, only 35 percent of San Diego homeowners have positive equity.  So the gap grows to 20 percentage points.
This has far-reaching implications:
Consider, for example, that the Case-Shiller-based effective homeownership rates for … Detroit, New York City, San Diego, and San Francisco are all under 50 percent. That is, the median household in these areas is in a negative equity position and no longer has strong financial incentives to behave as an owner. While the effects will vary with the distribution of negative equity households across the municipalities within these metro areas, a high share of these households could result in reduced maintenance of the housing stock, an increased risk of housing vacancies, and less stable neighborhoods over time—developments that could have repercussions for local law enforcement. Moreover, the predominance of “non-homeowners” in these metropolitan areas could lead to a decline in citizen participation in local affairs, with a concomitant loss of vigilance over the quality and ef?ciency of public services and institutions.

San Diego County Pension Lowers Rate of Return

June 4, 2010, by Seth Hettena. 1 Comment

San Diego County’s pension fund just handed the county bill for more than $30 million a year yet no one seems to have noticed.

Every three years, San Diego County’s pension fund looks into its crystal ball and decides what it expects investments returns will be over the next 50 years.

It’s arguably the most important and difficult decision the board has to make. Even a small change can force the county to cough up millions of dollars each year.

Yesterday, the board of the San Diego County Employee Retirement Association lowered its assumed net rate of return from 8.25 percent to 8 percent effective July 1, 2011. (Watch the meeting online here.)

A quarter percent may not sound like much, but it’s a change that will force the county to pay 3 percent of payroll each year. Using last year’s payroll numbers, that works out to roughly $33.88 million.

The 8 percent assumed rate of return represents the pension’s best guess about how the fund will do in the future, so that the county can set aside money to ensure the plan is well funded.

The shift to an 8 percent assumed rate of return moves San Diego County’s pension more in line with other big state pension funds. CalPERS, the $200 billion retirement system, is reviewing its assumed 7.75 percent rate of return and will make a recommendation to the board whether to lower it later this year.

Three years ago, the pension’s actuarial consultant, Segal Group, recommended an assumed rate of return but the then chief investment officer, David Deutsch, promised that he could generate the additional 8.25 percent with his Alpha Engine.

Deutsch resigned under pressure shortly before the pension reported losses of $2.4 billion for the 2008-2009 fiscal year.

The assumed rate of return is perhaps the most important variable in calculating a key barometer of a pension’s health known as the funding ratio — the ratio of assets to liabilities. SDCERA’s funding ratio stands officially at 91.5 percent, but that’s only because of an accounting practice that defers losses over several years.

If last year’s $2.1 billion loss were to be recognized right away, San Diego County’s pension fund would only be 65 percent funded, according to a report by an independent consultant. That’s well below the 80 percent that pension experts regard as healthy.