Free Lunch (19 page)

The beneficiaries of this spending policy
were criminals, notably killers. When the police have identified the suspect they are convinced committed the crime, they count it
as solved, even if they never make an arrest. Over time, the ratio of unsolved cases rose from one-fifth to half of all
murders.

More significantly, the conviction rate fell. A study of more than 9,000 homicides
found that just 16 percent resulted in a murder conviction. Add in convictions for the lesser crime of manslaughter and the tiny
number of cases handled in juvenile court and the conviction rate was 30 percent. That is, 7 in 10 killers walked free, helped in part
by the diversion of police to checking out false burglar alarms for Tyco and others.

Thus do
the rules of government not just take from the many to enrich the few, but at the price of helping a majority of killers get away with
murder.

The burglar alarm industry charges hefty fees for a service that costs it very little. Then
the industry dumps onto the taxpayers the real costs of providing the very service it sells. This is economic pollution sold to people
under the guise of making them safe. In fact, it makes them less safe.

While the alarm industry
has found ways to profit by shifting costs onto taxpayers, another industry routinely commits crimes that balloon costs for
customers. When one government official began looking into this subsidy, her family found itself under a
microscope.

A
NYONE WHO HAS BOUGHT A HOUSE REMEMBERS THE RUSH OF
EMOTIONS
when the moment finally arrives to close the deal. There is the
excitement of owning your own home, the satisfaction of success, plus a touch of anxiety about whether you can really afford
it—and whether you paid too much. All that is kept in check by the rapid presentation of documents to sign and
initial.

Once the deed is done, the buyer receives an envelope with copies of all the documents
and a list of the closing costs: fees for preparing documents and for filing them, payments to the appraiser and the termite
inspector and perhaps one for a tax stamp. Among the bewildering array of little nips at your wallet of $15 here and $150 there, one
item stands out as a very big bite—title insurance.

On average, the title insurance premium
adds half of 1 percent to the purchase price of a home (except in Iowa, where it costs a lot less). As the price of real estate has
ballooned along the coasts, the title insurance industry has jacked up prices, making that bite deeper. Americans paid $16.4 billion
for title insurance in 2005, double what they paid five years earlier and four times what they paid in 1995.

Yet title insurance remains an expensive mystery. Why must you buy it? Who exactly is being insured? For
what? Why does it cost so much? And why do you have to pay again when you refinance even with the same
lender?

Answering those questions takes us inside a business that owes its riches entirely to
the government. The product itself costs next to nothing but, because of the way the market is organized, competition pushes
prices higher instead of lower and government regulations help hide the true cost. Here it is not Adam Smith's invisible hand of the
market producing unexpected benefits through competition, but instead the manipulative hand of government helping the
regulated insurers fleece the consumer.

A title proves ownership and it can come in different
forms for different possessions. Many communities require that bicycles be licensed, a minimal form of proof that eases recovery if
the bike is stolen. Every state has a reliable system to title cars and register outstanding liens that helps hold down the cost of car
loans. Yet even though some cars cost more than houses, there is no requirement for title insurance on new cars. Until recently no
such requirement existed for used vehicles, either, but the title insurance industry is working to create demand for such
coverage.

Establishing rights to land is more complicated than it is for objects like bicycles or
automobiles. For starters, there is the issue of where your property ends and your neighbor's begins.

In the United States property line boundaries often trace back to markers that are far from fixed: a bend in the
river that may have moved over time with the watercourse, or a landmark rock so large that selecting slightly different reference
points on its face results in different boundary lines radiating away from it. Some property records even refer to famous but
transitory markers, like a once-renowned oak that was chopped down a century ago.

Even
when surveyors mark plot lines from markers set out by the United States Geological Survey, imperfections arise because the
Earth is curved while a surveyor's transit measures in straight lines. Mistakes are made, too. Then there is the random outbuilding
that encroaches an inch or so onto a neighbor's property, or so he says. Or the easement for an underground pipe that runs right
under your garage and needs replacement. And what of the rights to the oil, water, or minerals underground? Or the inheritor who
shows up with a copy of his grandfather's will that says he was entitled to a share of the property, only no one told him when the
ancestor died two decades ago because he was only seven years old? The land title insurance companies point to examples like
these to make the case that the system cannot operate without them.

The land title companies
are correct that a reliable system for tracking land ownership is crucial to building wealth, encouraging investment in property, and
avoiding violent disputes. Hernando de Soto, the thoughtful Peruvian economist, traces much of the lack of investment in Latin
America to uncertainty about land ownership and the failure of governments to enforce property rights. Through careful analysis of
land title records in Egypt, Haiti, Peru, and the Philippines, de Soto showed that about 85 percent of urban dwellings are on land
being used informally and thus subject to dispute about title.

He calls these buildings “dead
capital” and estimated their value, worldwide, at more than $9 trillion. He is among those who favor systems to register land titles,
saying this makes the property more valuable. When informally used land is registered with a named owner in Peru, its value
doubles instantly. Within a decade such land grows tenfold in value as owners invest in buildings and equipment, creating
value.

Much of the civilized world gets along just fine without title insurance. Australia, Europe,
and Puerto Rico do not have it. Neither did Canada until the 1990s, when American title insurers started promoting their product to
fill a need few imagined existed. In these places there are fewer title disputes per capita than in any of the 49 states that have
commercial title insurance (Iowa being the exception). America could eliminate title insurance with simple reforms that would save
billions of dollars in reduced litigation. Or we could keep the system, but place the burden of cost where it would be lowest, still
saving billions of dollars each year.

De Soto's work shows the value in having a reliable way to
tell who owns a piece of land and who has a lien on it. De Soto acknowledges that land title records maintained by government are
not perfect. American land title insurance companies exploit this flaw in record keeping to sell a product that costs next to nothing
at very high prices.

Based on all the names of land title companies operating in America, there
appears to be a vibrant market with hundreds of firms competing for your business, which should mean efficient pricing. But when
you follow the trail of ownership it turns out that five huge companies collect 92 percent of all the title insurance premiums paid in
America: Fidelity National Financial of Jacksonville, Florida; First American Corporation of Houston; LandAmerica Financial Group
of Glen Allen, Virginia; Stewart Information Services of Houston; and Old Republic International Corporation of Chicago. By
operating through dozens of subsidiaries these five companies create the appearance of a vibrant and competitive market when in
fact the five companies are so dominant that they collected $15.1 billion of the $16.4 billion in title insurance premiums paid in
2005.

The five major companies that are making billions off of this wildly overvalued insurance
have too much at stake to allow reform. When a state insurance regulator tried to expose a costly practice, she became the target of
a smear campaign orchestrated by one of the country's biggest title insurance companies.

Economists call the way these five companies control the market an
oligopoly.
It differs from a monopoly in that a scintilla of price competition may exist, though
not always. With just a handful of players it is easy for companies to tacitly keep prices artificially high without colluding outright,
which would be illegal.

The big five do compete, but not to sell at the lowest price and without
the normal discipline the market provides to squeeze out inefficiency and lower prices. Title insurance is sold in a bizarre kind of
market that economists call
reverse competition.

Just like it sounds, reverse competition means a market that drives prices up, not down. In title insurance,
this happens because the real customers are not the buyers of homes and other real property, although they pay the premiums.
The real customers, from the perspective of the title insurance companies, are the people who steer business to them. That is
exactly what the title insurance companies tell their shareholders and the Securities and Exchange Commission. Stewart
Information Services of Houston, which collected $1.9 billion in title insurance premiums in 2005, reported that its “primary sources
of title business are attorneys, builders, developers, lenders, and real estate brokers.” It made no mention of the people who pay
the premiums.

These lawyers, developers, bankers, and real estate salespeople want the
highest payments they can get for referring their clients to a particular title insurance company, money politely called “referral
fees.” The more accurate description is kickbacks and bribes. Kickbacks and commercial bribes are illegal, so the title insurance
industry has developed a complex and costly set of ruses to obscure them.

Erin Toll, the
Colorado real estate commissioner, spotted the misconduct in 2004. She noticed that a new type of land title insurance in the state,
sold only to buyers of new homes, had not resulted in a single claim in eight years. If no claims are made, is there any risk to insure
against? It's not surprising that buyers of new homes made no claims. As with new cars, there was little reason to think that a
builder would erect houses on land without clear title to it.

Toll found that the builders forced
new-home buyers to purchase insurance at inflated prices from title insurance companies that the builders owned, something they
called a captive company. The title insurance companies were mere shells, which bought the insurance through land title
companies for a tiny fraction of what the home buyers paid, an illegal form of price gouging.

One of the big five land title companies, LandAmerica, tried to stop Toll's investigation. Company e-mails
show Ted Chandler, the LandAmerica chief executive, authorizing his executives to use political influence to stop the investigation
and to smear Toll.

LandAmerica went to higher-ups in Colorado state government hoping to
shut Toll down. The company argued that Toll had a conflict of interest because her former husband, a lawyer, worked for the
insurance industry, although in a segment unrelated to title insurance. The higher-ups backed Toll and told LandAmerica its
complaints were baseless. LandAmerica was not deterred.

Peter Habenicht, LandAmerica's
chief publicity agent, wrote in March 2006 that he would “dig for facts regarding Ms. Toll's stepfather, mother and
sisters.”

The company asserted that Toll had a conflict because her sisters were partners in a
joint venture with LandAmerica in another state. That fact seemed to undercut their case. Assuming that Toll knew what her sisters
were doing 2,000 miles away, her investigation demonstrated that she put her public duty ahead of her sisters'
interests.

What disturbed LandAmerica the most, internal e-mails obtained by Congress show,
was that Toll's investigation had sparked interest by regulators in 19 other states. In one e-mail Peter Kolbe, LandAmerica's senior
vice president in charge of lobbying, discussed his efforts to get the National Association of Insurance Commissioners to “kill Erin
Toll's captive insurance investigation.”

Habenicht also crafted a damning letter that he planned
to send to her superiors through his company's outside counsel that was intended to thrust a political knife in Toll's back without
anyone noticing who had wielded the blade. In an e-mail, Habenicht described how the draft letter suggested impropriety by Toll
but “does not get specific about her alleged conflicts of interests…rather it merely identifies them broadly. That changes the media
game a bit…. Now one of the logical questions becomes ‘What conflicts are you referring to, LandAm? Explain what you mean.'
And then it gets gritty.”

As part of its smear campaign, Kolbe called insurance regulators in
other states. One of them, Paul Hansen of Minnesota, recorded the conversation. Kolbe began by saying that Toll “has extremely
serious ethical conflicts with the entire insurance industry.” He gave no specifics, but threatened, “If she doesn't back off we're
going public.” And if that happened, Kolbe said, “This is going to get real stinky real quick.”

Hansen made it clear he did not believe Toll had done anything wrong. He also suggested that most state
insurance regulators would see an attack on Toll as an attack on them. His own superiors, he noted, came to their appointed
offices with extensive connections to those they regulated and to people in related fields like building and banking.

Kolbe backpedaled. “We've tried to raise it in a discreet way,” Kolbe said. “If we were trying to hurt anybody,
which we absolutely are not, we would have picked up the phone to the newspapers.”

In
addition to Toll's discovery that no claims were made or paid, what prompted her inquiry was the fact that very little of the title
insurance premium paid by home buyers went to a real insurance company.

About 80 percent
of the premium is kicked back to the person steering the business to the title insurance companies. In California in the years 2003
to 2005 the five big title companies kept only 8 percent to 12 percent of the premium for themselves.

These numbers show reverse competition at work. The competition is for referrals, not the best insurance at
the lowest price. The mortgage broker, the banker, the real estate attorney, and the real estate agent bid up the price for steering
business to one insurer instead of to another. The New Jersey Supreme Court recognized this when it held that the lawyer whom
you think represents your interests in buying is really the agent of whatever title company issues the policy.