Fewer hands in the pie means more pie to go around

Happy Pi Day! What better day than Pi Day to remind homebuyers about all the hands in their "pie" so to speak when it comes to real estate closings.

It's no surprise that everyone wants a piece of the proverbial pie, from the real estate agent's commission to the lender's fees to the government's taxes and, yes, even the title company's charges.

Having to share some of your pie is a fact of life. Having to give up all of your pie is a tragedy of life.

Just like homebuyers, we don't like having to give up our entire pie. That's why we have held firmly as an independent title company – we will not share our pie, or profits, with referral sources through Affiliated Business Arrangements or Marketing Service Agreements.

Not all title companies feel the way we do. They happily share their pie with their referral sources because they believe they can make it up by taking more pie from unassuming homebuyers. Unfortunately, they are often right.

Homebuyers who understand how much dough is at stake, however, are often surprised by the cost difference between one title company to the next. When made fully aware of these differences, most homebuyers choose to spend less.

With fewer hands in the pie, as our company founder Todd Ewing likes to say, there's more pie for everybody. In this case it means a cost savings of up to $750 for our clients.

The cost savings we extend to our homebuyers is part of our revolutionary REAL Credit™ program, which reflects costs passed through to consumers who close with other, affiliated title companies. To date, the cost savings hovers above $8 million.

That's a lot of pie.

Split closings are (almost) never a good idea

The other day I handled a split closing – the buyer used Federal Title & Escrow Company and the seller used another title company – and things did not go so smoothly.

A closing already has many different parties involved: buyers, sellers, buyer’s agent, seller’s agent, loan officer.

But two title companies?

For a closing in the DC metro area, it just doesn’t make sense to complicate the transaction further by adding a superfluous second company.

Superfluous? Yes, that’s right, because the "seller’s title company" is going to perform the exact same tasks that the "buyer’s title company" would have performed, and almost certainly at a higher cost.

Since the "buyer’s title company" is responsible for sending out the payoff and issuing the title insurance, and consequently responsible for either releasing the mortgage lien on the property or following up to make sure it is released, most of the main functions will be handled by the buyer’s title company.

Really, all the seller’s title company will do is order a payoff (maybe), prepare the deed (maybe), and handle the closing for the seller, which is typically ten pages or less.

Despite having such a small role, the seller’s title company charges higher fees. They have to; they are handling virtually no major functions and are not issuing the title insurance and the only way to make it worth the title company’s time is to charge the seller a significant fee.

Here is a look at the closing fees from the last three closings in our office for which the seller chose to use another title company:

Closing Date Seller's Closing Fees if Seller Used FTE Seller's Closing Fees Since They Chose Another Title Company Additional Cost by Choosing to "Split" the Closing
March 2014 $435 $705 + $270
February 2014 $435 $675 + $240
January 2014 $435 $770 + $335

So if the seller is paying so much more, it must mean that the seller is being provided with better service, right? Wrong.

By adding a second title company you now have your classic "too many cooks in the kitchen" scenario.
Only one of the three closings above went smoothly, the other two had issues. Think about it, when has hiring more lawyers made for a smoother transaction?

So if it costs more to split the closing, and the service is not better (and often worse), why do people do it?

Well, most of the time, sellers don’t realize how much more it is costing them. That is why I strongly urge sellers to obtain quotes and make sure that it makes sense. 

We've posted a seller's fee schedule on our website. Unfortunately, since most title companies do not post their fees, you will have to call or email them – and shouldn’t the lack of transparency make you suspicious?

Another driver of increased closing costs - Marketing Service Agreements (MSAs)

Affiliated Business Arrangements (ABAs), once known as Controlled Business Arrangements (CBAs) are becoming a focus of the Consumer Financial Protection Bureau (CFPB).

Recent efforts by the CFPB, evidenced by enforcement actions and resulting settlements, are clear indications of the CFPB’s intent to better protect the consumer against sham ABAs. Many ABAs are nothing more than an arrangement by which title companies and mortgage lenders buy business from a referral source at the expense of the homebuyer. See here and here.

As harmful as ABAs are to the consumer, a little-known but similar arrangement between referral sources and vendors known as Marketing Service Agreements (or, MSAs), may be even more harmful. This article explains the difference between ABAs and MSAs in more detail.

Unlike an ABA, the MSA does not fall under any specific statutory authority and, as such, there is no requirement by the referring party to disclose its business relationship with a participating vendor to the consumer. Rather, a MSA is broadly covered under RESPA Section 8 that states: "No person shall receive and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding – oral or otherwise – that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." Therefore, fees paid through an MSA must be for actual marketing services performed by the referral source (i.e., real estate brokerage) on behalf of the mortgage or title company as vendor. In other words, the marketing services being performed by the real estate brokerage must be commensurate with the fixed monthly or annual fee paid by the mortgage or title company.

Over the course of the last year, the folks here at Federal Title & Escrow Company have been taking inventory of its competitors who participate in MSAs and their underlying fee structures. What we have learned reveals the harm to consumers. In one case, we learned that a competing title company is paying approximately $5,000 per month to a local real estate brokerage for “marketing services.” Yet, the only so-called "marketing services" being provided are "in-office access to the brokerage's sales associates to the exclusion of other competing title companies," "encouraging sales associates to write in to the sales contract the name of the participating title company," and "allowing the participating title company to set up a kiosk of brochures within the real estate brokerage office locations."

Clearly, for $5,000 per month ($60,000 per year), a title company could hire a marketing firm to provide a whole lot more in the way of marketing its services. This is just one of many instances we have discovered in which the fee being paid is clearly excessive in relation to the marketing services being performed. The truth is that the title company is buying business from a referral source – plain and simple.

So is it really the title company paying the MSA fee to the real estate brokerage? No, it’s the consumer paying the fee since the title company is simply passing on the cost to the homebuyer. Since the real estate brokerage has a vested interest in making sure the transaction is referred to the participating title company, they have little incentive in making the homebuyer aware of his right to shop and select his own title company. As industry insiders, we know for a fact that if a homebuyer shops and selects their own title company, they will pay far less than what they will pay by using the MSA-participating title company.

The homebuyer, as consumer, is also under-served by the inherent conflict of interest created by an MSA. The MSA-participating real estate brokerage is less likely to hold its partnering title company accountable for actions of malfeasance. In other words, they are more likely to “cover” for the title company since the title company is paying a handsome monthly fee to the broker. In the alternative, we are aware of several cases in which a partnering title company, without the knowledge of the homebuyer, has insured over title defects (i.e., unreleased mortgages, etc.) so as to timely complete a closing. Such a maneuver ensures the payment of the real estate brokerage commissions without delay and further solidifies the relationship between the MSA partners.

MSAs are little more than the act of buying business from referral sources – the “marketing service” being performed is only part of the ruse. At the end of the day, the MSA causes the consumer to pay more and corrupts the integrity of client advocacy. At Federal Title, we advocate for all real estate professionals to a transaction to act independently for the benefit of the consumer and not at the expense of the consumer. We don’t buy business – we earn it.

The Closing Costs Calculator Company

With the exception of Federal Title & Escrow Company, nearly all major title companies write a check to real estate brokers or mortgage companies as a "Thank You" for the referral of business. 

In some cases, the payment is made through a Marketing Service Agreement (MSA) in which, ostensibly, the referring party provides marketing services on behalf of the title company.

In other cases, the payment is made through an Affiliated Business Arrangement (ABA) in which a portion of the profits from each transaction is deposited into an entity account commonly owned by both the referring party and the title company.

In either case, such arrangements are very likely nothing more than the title company buying business from a referring party which drives up the costs for the consumer.

If you are a prospective homebuyer or refinancing homeowner and are referred to a title company by your real estate agent or mortgage lender, ask them if his or her company has a MSA or ABA with the title company.

If so, you are likely paying more for title services than if you were to shop and choose your own title company.

Federal Title & Escrow Company does not participate in MSA or ABA arrangements. As a result, we can afford to be completely transparent to our customers.

This is why we offer consumers highly sophisticated online closing costs calculators with guaranteed quotes and other tools such as our new Close It!™ mobile app.

Because we have nothing to hide, we are the only title company that invests heavily in delivering the message to consumers the importance of shopping for and choosing your own title company.

So much so that some have referred to us as the "Closing Costs Calculator Company."

DC title insurance rates decrease

It seems like prices never go down. Gas prices have gone up, taxes have gone up, the 5-cent bag tax has increased the cost of shopping, etc. And yet, sometimes, if you look closely enough, you can find prices that actually do drop. In this case, prices have dropped for refinancing borrowers by 40%.

First American Title Insurance Company, our title insurance underwriter, published their new title insurance rates effective April 1, 2011. The purchase title insurance rates remained unchanged, except for purchase prices in the highest brackets where the rate dropped considerably.

The big change is in the refinance category. First American has dropped their refinance loan policy rates by 40%! In essence, every refinance in Washington, DC will obtain a discount equal to what was previously the full reissue rate discount.

Previously a 40% discount on title insurance was available on a refinance, but the borrower had to jump through some hoops to be eligible. The full 40% discount was only available if the borrower had previously purchased a title insurance policy and if the policy was under 10 years old and if the prior policy was for an amount greater than the amount of the new loan.

Often clients either did not know where or how to find their title policy, and often clients who may have been eligible for the discount were not obtaining it. And frankly, often title companies kept the reissue discount a secret, not revealing it to a client unless the client asked for it.

Well, with this new change by First American, every refinance will obtain the equivalent of the old reissue rate discount, even if the refinance would not have been eligible under the prior guidelines. What does this mean for a borrower? It means that refinancing borrowers will save hundreds of dollars on their closing! For example, previously a refinance for $500,000 would have included a $2,100 for lender’s title insurance. As of April 1, 2011, a refinance for $500,000 will now include a charge of $1,260 for lender’s title insurance – a savings of $840.00!

We've updated the refinance rate chart is posted on our website. While you're there, check out our homebuyer videos for a better understanding of title insurance and what title insurance does for you.

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Our blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. Rate tables and figures that appear on our blog are deemed reliable but not guaranteed. For current rates & policies, refer to our Quick Quote and Consumer Guide. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on our blog.