In this conversation, Diego Sanchez discusses Fannie Mae's Title Insurance Pilot Program with Andrew Rodrigo Nigrinis and Todd Zwicky. They explore the program's potential to reduce costs and streamline the title insurance process, the findings of their study on its impact, and the concerns raised by the American Land Title Association regarding the program's implications for the market. The discussion also touches on the potential for expanding the pilot program beyond refinancing transactions and the role of technology in improving market efficiency.
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00:00I'm Diego Sanchez, President of Housing Wire, and this is a special 20-minute talk.
00:13My guests today are Andrew Rodrigo Negrinas and Todd Zawicki, authors of a recent study
00:20on the Fannie Mae title pilot.
00:23Andrew is an economist at Legal Economics, LLC, while Todd is a professor of law at George
00:30Mason University.
00:32Andrew, so we have a foundation for this discussion.
00:36What is Fannie Mae's title insurance pilot program?
00:40Well, I thought you were going to ask that to Todd because Todd is a former FTC man and
00:46he's grounded in the policies.
00:48But basically, in a nutshell, it's a new way of technology disrupting the market.
00:53It's a way for consumers, myself included, actually, because I bought a house in September,
00:58to buy their title insurance through this program at a much reduced price instead of
01:05having to use the traditional methods, which has often been fraught with legal problems
01:13such as RESPA violations, etc., like that.
01:17And also is highly restricted and regulated at the state level.
01:22And Todd, I've been through the title process as well, confusing, paper-driven process that
01:31takes two, three hours, maybe even longer in a conference room with a bunch of people.
01:37So tell me a little bit more about what they're thinking in terms of the cost and time reduction
01:45in this pilot.
01:47So one of the most important things to appreciate here, Diego, is this title pilot is quite
01:53limited and targeted a particular narrow problem.
02:00Title insurance itself and the closing process itself is a pain point for every American
02:05looking to buy a house.
02:08And housing affordability is a huge issue that both parties stressed during the election.
02:15So people are looking for ways to bring down costs.
02:17So this was introduced by the Biden administration a couple of years ago, or just this year,
02:23as a way of trying to bring down costs in the whole closing process.
02:29So now it could be as much as $4,000, $5,000 total to close, of which a substantial portion
02:36of that is title insurance, often second to the Real Estate Brokers Commission or things
02:43like that.
02:44So it's quite expensive, and it adds a lot of delay to the process.
02:49And this has been something that people focused on for a long time.
02:53Going back to when I was at the FTC during the Bush administration, for example, there
02:56was a proposal that will allow bundling of all closing costs, bundling or packaging,
03:03where right now everybody gets that horrible HUD one, like you're going to go out and you're
03:07going to like call around for the best price on pest inspections, or call around for the
03:12best price for title insurance, and there's like 50 different fees or whatever.
03:18And so one of the things we had proposed was to try to reduce costs, was to allow packaging
03:22of them, buy packages rather than all that disaggregated sort of stuff.
03:27And so as Andrew noted, this is a new way of doing title insurance.
03:32And it's targeted a particular area, which is this title pilot program only applies to
03:37very low risk refinance transactions.
03:40So it's refinance only LTVs of 80% or less, where the risk is very, very small.
03:50And so it can still create a lot of delay, they still have a lot of a drawn out process
03:58where people go and they look at the title, they pull all the title on that sort of thing.
04:03And it's still quite expensive.
04:04And so the idea here is, is for these very low risk transactions, this would be a way
04:09of accelerating the process, getting it done and recognizing that the market for title
04:15insurance, which I'm sure we'll talk about, just doesn't really work very well.
04:20Consumers don't shop for it well.
04:22You often get these proposals after you've, you know, late in the process, where very
04:27few people are going to slow down the process of closing out a home just to try to save
04:34another 100 bucks or 200 bucks or 300 bucks, shopping around, trying to find a title insurance
04:40insurer in a market that's kind of very concentrated and especially in local areas.
04:48Yeah, I mean, I don't recall having a shopping process or even really knowing that the title
04:53process was coming when I bought my first home.
04:57So Todd, sticking with you for a moment, what specifically did you and Andrew analyze in
05:05this study that you did?
05:07So the concerns about the structure of the market have been around for a long time.
05:13And the underlying problem here is what economists refer to as a reverse competition market.
05:21Because consumers don't really have the incentive or the ability to shop around for
05:25different title insurance companies, the way this market works is it works by title
05:30insurance companies competing for referrals from realtors.
05:36And so that's where the market competition operates, not by the consumer, but by the
05:43realtor, which is not a very good way to run a market.
05:47There's only four big companies that really do this to do for the whole country.
05:52But what you quickly discover is that in local markets where all this is done, there's
05:56only only two or three companies.
05:59And so what you have is a highly concentrated market in a local area, which is by
06:03definition local, and we can talk about title plants and all that sort of stuff for one
06:08where the competitive structure doesn't work out very well.
06:11And so there's long been a suspicion that title insurance prices are much higher than
06:15they should be. And so what we were trying to do here is look at and I think what the
06:21Biden administration was doing was embracing this new structure of automatic
06:28underwriting, of using AI and big data, of basically scraping, collecting information
06:35out of local records and coming up with sort of algorithmic predictions to try to
06:42figure out whether or not there's going to be a problem in a particular transaction.
06:47And again, very narrow, just refinances that are low risk.
06:52I mean, we're talking about when the person bought the home, presumably did a whole
06:55title search.
06:57They still own the home, they're refinancing, all that sort of thing.
07:00And so what we did here was try to come up with what is the direct value to consumers in
07:06terms of the lower prices offered by these guys?
07:10What would be the indirect value from if these automatic underwriting companies were to
07:17take, say, 10 percent of the market, how would that impact basically what the market
07:24structures say? How much would it be if they took some of the market and what would be
07:28the competitive effects potentially if it caused the incumbents to reduce their costs by
07:3310 percent in order to try to meet market competition, which is, of course, what you see
07:36in every market in which you see entry.
07:38So it's really a vehicle to try to figure out what would happen if we could use this
07:43process to introduce more competition into the into the system, not so much by consumers
07:49doing it directly, but by Fannie Mae essentially relaxing the rules and allowing this
07:54this change in the underwriting process for these low risk refinance transactions.
08:00Yeah, just digging in on the low risk there, it totally makes sense to me to focus on
08:07refinancing. Is there a maximum amount of time that is in place in terms of how long it's
08:16been since the original mortgage?
08:17Because I can see like if it was just within the past five years, there's probably less
08:22risk and less change.
08:24But if the mortgage is 10 years old that you're refinancing, maybe there's a little bit
08:28more risk. Not the way that it's currently structured.
08:32The sort of the public sort of description of the process is somewhat bare bones.
08:39So, for example, one of the most important things that I want to make this very clear at the
08:43outset, Diego, is one of the most important things here is that the way this title pilot
08:51program is structured in lieu of getting title insurance, what essentially what happened is
08:56there would be a payment to Fannie Mae to compensate Fannie Mae for for the risk.
09:02Right. And for example, it's not publicly disclosed how much the basically the
09:09compensation has to be to Fannie Mae.
09:11And so one trade publication said it was seventy five dollars, which is obviously a lot
09:16less than a full blown title insurance process that the lender makes you buy.
09:21We estimated about, I think, sixty dollars for our purposes.
09:27But why that's important is there are two things I think that Andrew and I really believe
09:33that are important to this is, number one, this does not inherently increase Fannie Mae's
09:38footprint over the housing market.
09:41It simply is a vehicle to try to reduce the cost of this one pain point that consumers
09:47have that slow down transactions and increase transactions and to allow a different way
09:52of doing title insurance for these for these things.
09:54And second, our assumptions in the paper, our conclusions in the paper are dependent on
09:59the idea that whatever that risk premium would be, whatever that cost is, that would be
10:05paid to Fannie Mae for taking this on would fully compensate Fannie Mae over the long
10:11run for the potential of some of these mortgages going bad.
10:15So so the idea here is is Fannie Mae should remain in the same position with respect to
10:22this, but that we can deliver a lot more value and a lot more cost to consumers and a lot
10:27faster transaction in the way that this plays out on the through the through the closing
10:32process. I'm going to circle back on that in a moment because that is one of the key
10:37objections from the big trade organization, the American Land Title Association.
10:42So we'll circle back on that in like two or three minutes.
10:45But first, I don't want to bury the lead here.
10:48Andrew, what were the findings of this of this great study?
10:52Well, essentially, the findings are, well, depending on the interest rate you use, the
10:58lifetime of this program, if it continues indefinitely, it could be in the hundreds of
11:02billions in terms of savings to the consumers.
11:05And like Todd said, it's based on three core assumptions.
11:08One is the direct savings for those who pick up the program.
11:12The second is the market, what I call the market effect, which is the beauty of
11:17competitive markets, is that you don't actually have to do anything.
11:20Just the threat that you might decide to change your provider will cause prices to come
11:24down. So the market effect is that the big incumbent firms will lower their prices and
11:31we assume 10 percent.
11:32We had to do it by assumption rather than trying to do a whole demand and supply
11:36modeling that I think is a pretty conservative estimate.
11:39And then the competitive effect is when of the customers of the big four decide to
11:46switch. And essentially we get really large numbers.
11:50For instance, it shouldn't be surprising to anyone who lives in Texas that big savings
11:53are in Texas, sixteen hundred dollars roughly, which shouldn't be surprising given that
11:58Texas has very high regulated rates.
12:01The savings tend to be lower in states that are more competitive and allow the markets to
12:05function more effectively.
12:08Like Todd said, you know, a lot of this comes down to market structure.
12:16If you believe that the markets are perfectly competitive and everything is efficient, then
12:21this program can never win because people won't switch.
12:24Right. However, I don't know if anyone's ever been through the process, but I don't think
12:31anyone can claim that such a heavily regulated industry is competitive and getting
12:36efficient outcomes, as an economist would say.
12:39And hence, injecting competition into the process is very beneficial.
12:46And to be clear, we used historical data on losses and we found that the loss rate was
12:52basically about eighteen dollars per policy.
12:55And we added administrative costs in there and then we even tripled that as a stress
12:59factor. And the exact number we got was fifty six dollars and eighty eight cents.
13:05Can't forget the eight cents, right?
13:08But, you know, roughly sixty dollars, which is essentially what the trade publications, I
13:13believe they said seventy or seventy five, is basically in the ballpark.
13:19As reported in Housing Wire.
13:22Pardon?
13:23As reported in Housing Wire.
13:25Sorry about that. How rude of me.
13:28My apologies.
13:31But so I guess he did a very good job because that was spot on.
13:35Right. You know, but even if you bump that up a bit more, it's still massive savings.
13:42And the government's own estimates were about five hundred to fifteen hundred dollars in
13:48terms of savings for consumers.
13:51And we essentially found numbers.
13:53I mean, sixteen hundred because that was the upper end, because every state is different.
13:58But essentially, we're right in that five hundred to fifteen hundred dollar range that they
14:01estimated, which is very reassuring.
14:04So, I mean, it'd be strange if we told people that they would be able to save all their
14:07money. That's obviously not true.
14:09But they are able to save a very large amount.
14:12And it's because technology can allow the GSEs to offer better prices.
14:19And when you really look at machine learning and artificial intelligence, I really
14:26dislike those two terms because essentially what they are is you're using statistical
14:31analysis to make better predictions.
14:33That's that's the core of machine learning.
14:36Whether it's your credit score or predicting what your your Microsoft Word next word is
14:42going to be, that's probably a bad example because I find this almost always wrong on
14:46that one, the Microsoft Word.
14:47But, you know, that's the core essence of what's happening here.
14:52And what's driving the results in this paper are twofold.
14:56One is the ability of technology to lower costs.
14:59And two is the sensitivity of consumers to being able to find better deals.
15:05And that's going to come down to is how competitive is the market in this reverse
15:10competition? Can consumers move away and not be locked in and offering them a better
15:17alternative will actually save a lot.
15:20And the more people switch, the more everyone gains.
15:25Yeah, that makes a lot of logical sense.
15:27So Todd, back to you and circling back on that question I had about Alta.
15:32So the American Land Title Association objects to the to the Fannie Mae pilot, believing
15:38that it will turn Fannie Mae into a title insurer.
15:42Do you have any concerns with the GSEs becoming title insurers?
15:52Yeah, I mean, it doesn't strike me that that's an accurate description of of what's
15:58going on here. Right.
16:00In the sense that that that they're basically being compensated for the risk that
16:07they're that they're that they're giving.
16:09Right. The title insurance is still being done by the by the companies.
16:15And, you know, and under the current system, you know, they I guess they retain the risk
16:22and Fannie Mae can put it back to them.
16:24But here it's more like maybe it's more like a reinsurance company or something like
16:29that. Right. Which is that so long as you get that risk premium right, it strikes me
16:36that that, you know, the market should basically be indifferent to it.
16:41So so I mean, it seems to me to be somewhat of a semantic objection to say that they're
16:49becoming a title insurer here to to put it to put it that way.
16:55I would like to say that I'm sorry if you might interject here, but they are not
17:02offering, you know, like the rate that's being offered includes both administrative
17:09fees and the stress factor.
17:12So it's not that the state is undercutting the private market.
17:17It's more along the lines of we have an oligopoly on our hands and an oligopoly extracts
17:23profits. They actually have a fiduciary responsibility to their shareholders to try to do
17:29the best they can within the terms of the law.
17:33When you have an insurance market with oligopoly and inefficiency that results from
17:37oligopoly, sometimes self-insurance becomes an answer.
17:42So it's not that you're becoming an insurance company, but you're you have more than
17:47enough margin due to the oligopoly profits that you're able to offer a better deal.
17:53And if anything, wouldn't it be great if the big insurance companies responded with
18:02competition? So that could be investing in more efficient search processes.
18:08So maybe a combination of hand search that they do now with title plans and machine
18:13learning themselves. Maybe they can drop their margins.
18:18Maybe they can streamline the closing process so that the package goes down, even if
18:24they're able to maintain some margins on their particular piece of the package.
18:27I don't want to sit here and hypothesize what the solution will be because markets are
18:32very complex and only central planners and big government bureaucrats believe they can
18:38predict the market perfectly.
18:40But I will go on a limb and say that the easiest solution is to compete.
18:47Yeah, I completely agree.
18:49And actually, if you look at the big four title insurers, they have their primary title
18:55insurance business, but they pushed into lots of different aspects of the housing ecosystem
19:01and have built businesses in mortgage, mortgage services, technology, real estate.
19:07All the closing services, right?
19:10Yeah. So OK, so that makes a lot of sense to me.
19:15How do you expand this pilot concept beyond refis?
19:21And I'll throw that question to both of you, whoever wants to jump in first.
19:26Well, I just want to say that I think the upshot of the last conversations that the
19:30Bush administration should have listened to Todd.
19:34But how to expand this into other markets?
19:36So it's always difficult to say that because every market is unique with its own unique
19:40challenges.
19:41But I would say that the commonality here is the use of technology to better make predictions
19:48and thus more efficiently predict probability of payment of paying out and to more efficiently
19:55price out insurance.
19:57Honestly, I think the best thing to do is just to do this one function and do it extremely
20:01well and then worry about expanding elsewhere because success will build on success.
20:10But I don't know, Todd, I don't want to speculate about other types of title insurance, but
20:16there definitely is a technological component that can be ported to other markets.
20:21Yeah, I would say, how do we expand this to other markets?
20:24I would say cautiously that what we're trying to do here that hasn't been done before with
20:32this is to really specifically in a very specific case, try to get good estimates of what the
20:40benefits to consumers are and does this actually increase risk?
20:43And what we found is on this small set of cases, we found that there is no overall increase
20:50overall increase in risk in terms of loss rates, that this does at least as well as the
20:56traditional model, which also has become some extent uses artificial intelligence and the
21:05like, but also has human error built into it, which seems to be some of the reason why
21:11things are missed there.
21:12But this is very specific.
21:14It's sort of a way of going at trying to find out what would be the risk of this and what
21:19are the benefits to consumers?
21:21And I think what I think our conclusion here is, is that we believe that the Trump administration
21:28should continue this pilot, continue to study it, continue to do the kind of analysis that we do
21:36here and see how it plays out, see how the market plays out.
21:41And then perhaps look at where it might be expanded more gradually to the next one, right?
21:45Are there different refi transactions that this might apply to?
21:52Purchase money will obviously be more difficult, but coming up with good estimates of the numbers.
21:58And one of the things I think is inevitable that we say in the paper is that over time,
22:04these models are going to just keep getting better and better, right?
22:06That's the thing with machine learning and artificial intelligence is as these models
22:11get up and going and more and more data comes into the system as they become more and more
22:15mature, they're going to get better and better at predicting risk, and they're going to get
22:19better and better at spotting patterns, and they're presumably going to become
22:23less and less expensive.
22:24And so once that technology is harnessed, it becomes easier to start imagining the potential
22:30for expanding beyond this.
22:34And I think this is the kind of model, which is even if the GSEs went away, even if Fannie Mae
22:40went away, as some people have talked about doing, that I think this is going to persist,
22:48right?
22:49This is where this market is headed, and it's going to expand more and more.
22:55And the logjam, as Andrew said right now, seems to be the competitive structure of the market,
23:01which seems to kind of lock in this traditional model and the reverse competition model of
23:07referrals.
23:08And so to the extent that if all this does is crack open the market and make people more
23:14aware of this option and perhaps allow the market to accelerate and to adopt this more,
23:22even if Fannie Mae doesn't do anything beyond this, right, to introduce this more into the
23:28market could be in and of itself one of the great virtues of this if it spreads to more
23:33title insurance markets after that.
23:36Well, you have a very powerful lender in United Wholesale Mortgage that seems pretty bought
23:42into the concept of lowering title costs.
23:46So we'll have to leave it there.
23:48Gentlemen, really appreciate you joining me on this special 20-minute talk today.
23:52Really interesting study and really appreciate your time.
23:55Thanks.
23:56Thanks.