Friday, October 08, 2010

AIG, Letting Houses Burn, Food Stamps and Soda, Tunnels

I have a few different topics for today.

First, revisiting AIG again - reader Mloss616 pointed me toward Jonathan Weil's Bloomberg article on a possible reason the Government didn't want to exceed 95% ownership in AIG, emphasis mine:

"Under AIG’s plan to repay the government, the Treasury would swap its current holdings, now valued at $49.1 billion, for a 92.1 percent stake in AIG’s common stock. Once the exchange is completed, the Treasury then would sell its shares on the open market, a process that could take years to complete. 

Just how much demand materializes for those shares will depend partly on whether investors believe they can trust AIG’s numbers. For many of them, an important question will be this: What are the items on AIG’s balance sheet actually worth? 

The government might not want the public to know the answer. Showing AIG’s assets and liabilities at fair value conceivably could scare some investors away, reducing the Treasury’s chances of recouping its money. As for taxpayers, divulging such information could reveal if the government paid more for its stake than it’s worth. 

Determining AIG’s Worth 

The rules for push-down accounting, which the Securities and Exchange Commission’s staff laid out in a 2001 memo, hinge on rigid numerical tests for determining if a company has become “substantially wholly owned” by another entity. The method is prohibited with less than 80 percent ownership, permitted if ownership is 80 percent or more but less than 95 percent, and required (with some exceptions) at 95 percent or more. 

The process works like this. When a transaction or series of deals results in a company becoming substantially owned by another entity, the new owner allocates its purchase price among the assets and liabilities it acquired, using their newly assigned fair values. Those values then are pushed down to the acquired company, which can cause either positive or negative adjustments to the items on its balance sheet."

NY Times Dealbook has a similar article from Steven Davidoff:

"There was also a secondary accounting issue with A.I.G. itself. If a party acquires an interest exceeding 90 percent of A.I.G., under Generally Accepted Accounting Principles, this could be deemed a “change in control” for the company. If so, the principles would require that all of A.I.G.’s assets and liabilities be revalued. This revaluation is mandatory when a shareholder surpasses the 95 percent level. Such a revaluation would be a spectacular undertaking and could throw the valuation of A.I.G. into significant doubt at a time when the Treasury is desiring to sell. Thus, this restructuring was set up to avoid touching off this accounting rule."

I find this troubling, obviously, as it seems that one goal is to obscure the valuation of the big tangled web of crap that is AIG's balance sheet.

In other news that is sure to draw ire from some readers, I'm positively in favor of the fire department who responded to the scene of a fire an watched the house burn.  There are several facts we need to know here: 1) this is an area where fire department fees are paid for by subscription - it costs $75 a year to have the fire department protect your home.  2) the fire department said that they would have entered the house if lives were in danger. 3) they also said that if the fire spread from a "subscribed" house to one that was not subscribed then they would have put out the fire.  4) they were on hand to protect the neighboring house that had paid the $75 protection fee.

Now, insurance doesn't work if you are allowed to buy it only when you need it.  That's the simplest reason I support the FD's actions here.  However, I do think they could reasonably allow some sort of "out of network" penalty rate, as a commenter elsewhere described it.  If 1% of the homes in a given area burn each year, that equates to roughly $7500 ($75 fee divided by 1%) as a breakeven cost per burning home.  The FD should have been happy to put out the fire for $10k, but the logistics of that transaction while the house is burning are not trivial either!

To the people who say "they were there - they should have put it out," I point out this simple truth:  services cost money.  This town elects to pay for the service as a subscriber fee instead of a tax rate (I heard on the radio today that lots of municipalities down South are like this).  If no one pays the subscription fee, there's no fire department.  If the fire department puts out everyone's fire regardless of their payment, there's no reason to pay the subscription fee.   See how that works?  Seriously - if people want to debate me on this in the comments, you better bring your "A" game - you can't buy insurance after you crash your car, after you get sick, or after your house burns down.  Period.  Otherwise it doesn't work.  (note:  try not to deviate into a discussion calling the subscription based fire protection plans stupid.  They may be stupid, but that's another topic.  The point is, this town has one, and it has to be enforced.) 

"Mayor Michael R. Bloomberg sought federal permission on Wednesday to bar New York City’s 1.7 million recipients of food stamps from using them to buy soda or other sugared drinks.

The request, made to the United States Department of Agriculture, which finances and sets the rules for the food-stamp program, is part of an aggressive anti-obesity push by the mayor that has also included advertisements, stricter rules on food sold in schools and an unsuccessful attempt to have the state impose a tax on the sugared drinks. "

Again, if you're going to tell me that Mayor Bloomberg is out of line here, you better bring a damn good argument with you.  When the government provides benefits for people, the government has a right to dictate how those benefits are used.  If misuse of the benefits will  result in consequences that necessitate more benefits in other areas (ie, treating obesity and diabetes!), then it's an even easier decision.  It is absolutely positively reasonable for the government to say that you cannot use your benefits to buy things that lead to major health problems, like sugary sodas.  Someone on the NY Times website asked "why not ban Velveeta cheese and other unhealthy stuff too?"  That would also be legit - but perhaps harder to get done logistically and politically.  You can't buy alcohol and cigarettes with food stamps, and I support Bloomberg's push to prevent other unhealthy purchases which lead to further deterioration of health and then larger health care costs.  As the Op-ed argues:

"And substantial health care costs arise from this trend: obesity-related illnesses cost New York State residents nearly $8 billion a year in medical costs, or $770 per household. All of us pay the price through higher taxes. 

Every year, tens of millions of federal dollars are spent on sweetened beverages in New York City through the food stamp program — far more than is spent on obesity prevention. This amounts to an enormous subsidy to the sweetened beverage industry."

The Times article quotes some senior advisers who are worried about the "stigma" associated with such bans.  That's nonsense - food stamps are a legit method to help ensure that people don't go hungry in our country.  I'd be in favor of much more socialized support if it also came with stricter limitations.  People should be able to buy all the rice, grains, fruits, etc that they need to feed their families - but not all of the chocolate cake, candy bars, soda, Big Macs, etc. 

Oh - and speaking of how services cost money - there's some brew-ha-ha over NJ Governor Chris Christie's decision to scrap the new Hudson River Tunnel.   Paul Krugman called Christie an Idiot for thinking about scrapping the project and passing up Federal funds (hey - it's Other People's Money! of course Krugman loves it!), and the NY Times article has hundreds of comments ridiculing Christie as a "typical Republican." The problem is that Krugman lives in an economic lab and Christie lives in the real world.

Could NJ use a nice new tunnel to NYC?  Of course they could.  Do you think Gov Christie knows this?  I'm willing to bet a lot of money that he knows that a tunnel would make life easier for many of his constituents.  But he also thinks that his state can't afford it.  Remember kids, stuff costs money - so you can't complain about Christie's decision to scrap the project unless you're out there lobbying for higher taxes and volunteering to pay for it.  Last time I checked, I didn't see a lot of people who wanted to pay higher taxes.  Everyone wants OTHER people to pay higher taxes, but no one wants to pay higher taxes themselves...  As my friend Yanga put it - "Do you want teachers? or Tunnels?  Everything has to be paid for.  And so it goes.




Zachary said...

I wonder if it would be possible to make food stamps count double for buying vegetables.

Transor Z said...

Yep, can't really say the STO you talked to lied, but he kinda omitted the GAAP/SEC thing. And like you said, it puts the government in a game it has absolutely no business playing. We wouldn't think twice if we heard this about a private equity firm or a major for-profit investor.

But when the federal govt becomes conflicted about triggering a FMV revaluation that might (accurately) reveal "irregularities" in AIG bookkeeping, it's pretty fucking bad.

I know you agree but I figured I'd pound that greasy spot that used to be a horse carcass a few more times.

But What do I Know? said...

>>>Everything has to be paid for<<<

Say it ain't so, Kid. Are you sure we can't keep kicking the can further down the road? I mean, things are pretty good now--they'll get much worse if we start following this policy.

/only half kidding

Anonymous said...

Hopefully this will show voters that an opt-in fire protection subscription fee is deeply flawed for several reasons. 1. The FD would need a database of who paid, and it better be perfect. Imagine if you paid the fee, but were somehow not listed as paid. 2. How do they know for certain no one is inside if they don't go in? 3. What about dependents or other people who live there but are not the property owner - tenants, the elderly, children. They have no choice in the matter of paying the fee. 4. Any system that depends on severe and irreversible harm to people in order to function properly is immoral. You are right, that for this system to function at all, there must be severe penalties for freeloaders. It's a system that sets people up to act inhumanely. Imagine the firefighters standing there with gear in hand. Even at risk of their own health, I'm sure they wanted to put it out, and probably didn't give a damn about the $75. But no, although they signed up for the straightforward and honorable job of putting out fires and saving lives, they had been co-opted by a bizarre system that compelled them to do just the opposite in order to preserve itself.

Anonymous said...

"note: try not to deviate into a discussion calling the subscription based fire protection plans stupid. They may be stupid, but that's another topic."

hahahaha. and you called krugman a lab-rat? are you any different?

any comment on what the firemen did (regardless of which side one takes) is necessarily tied to the system/rules/society/community they were operating under. it is just useless trying to talk about the firemen's actions without talking about the "fire protection plan". simple as.

if a human, and not a robot, is doing the commenting/talking, anyway.

sorry for not bringing the "A" game here. but i call b.s. on your absurd ring-fencing of the debate.

Kid Dynamite said...

TZ - on AIG - i'm pretty annoyed that the STO didn't point this out to me, but then again, it's kinda like the suspect giving all the clues to the detective... the detective is responsible for doing his own digging, and if I were smarter, I would have figured that part out myself. I'm glad Davidoff and Weil did.

Kid Dynamite said...

anon @ 2:26 - I don't disagree at all. In our society, subscription based fire protection is probably massively flawed. After all, it is probably a given that the bank wouldn't give a mortgage if they knew he didn't have it (maybe he didn't have a mortgage) and the home insurance company would charge astronomically more than the $75 anyway, of course...

I like the idea of a flat fee per house - but make it mandatory!

Kid Dynamite said...

anon@ 3:33pm.

what I meant was this: they have chosen the system of subscription based fire protection. Given that system, should the FD put out this non-subscriber's fire? I say no.

Now, as a result of this, it may lead people to conclude that they should reconsider subscription based fire protection. I don't know why you'd actually need to reconsider it - it's a kind of natural Darwinism. Only an idiot would decline the fire protection. If we have to make it mandatory to protect idiots from themselves, well, that's yet another topic.

There is one kind of home related insurance that I think is a total f'n scam - TITLE INSURANCE (i wrote about this a year ago when I bought my house) - but I bought it anyway...

getyourselfconnected said...

I had the fire video as well. I think they were well withing their rights, it was clear no pay = no protection. What I worried about was servicers deciding how much is "enough" for them to do the job at some point.

Kid Dynamite said...

GYC - yes - that's yet another topic - if the subscription fee is "unreasonable"... but i think it's beyond debate that $75 is not unreasonable, and I'm quite comfortable making the statement: "if you can't afford $75 for fire protection, then you can't afford to own your home"

Anonymous said...

KD - Can you link to the post about title insurance please? A friend of mine recently entered the game and I've been trying to eloquently inform him of it's utter lack of use and fraudulence alas, to no avail.

Mind you, this guy worked for years underwriting subprime mortgages to horribly unworthy borrowers. Thanks

Kid Dynamite said...

Anon - i just looked for that post for 30 minutes but I couldn't find it. I swear I wrote it, but maybe it was all in my head.

bottom line - since you pay them to do a title search, you shouldn't also have to pay for title insurance. it's redundant. If they do the search correctly, you shouldn't need insurance that they didn't do the search correctly. I think it's a total scam, but I still wouldn't advise anyone to NOT take it... just look at the abundance of title issues now with multiple lenders trying to foreclose on the same property...

Anonymous said...

I definitely agree. I was hoping to have a post to send as back up as most of our other pals either don't know what title insurance actually is or don't care (we're still on the young side, few homeowners in the group).

I have several friends in the CRE sector that echo the same thoughts, i.e. it's a scam but wouldn't dream of not taking it.

Bernard said...

KD, I agree with you about everything except the food stamp part. I have a few problems with that. First its not Mayor Bloombergs program, if it was an NYC funded program, sure they can decide what conditions apply. Is the Fed going to have different rules for every state, county, or city?
Second, I'm uncomfortable with the concept of the government attaching conditions too money. Yes, thats the law, but its not good law. The government could take most of your money and then give it back with conditions attached. What if they pass that "fair tax", what kind of restrictions are going to come with the refunded money? Are the same food stamp restrictions going to apply to Medicare? If you are covered by medicare could the government require you to be tested to make sure your not smoking, drinking, or eating too much sugar? Are there any limits to the requirements the government can attach to money?

Kid Dynamite said...

Bernard - interesting point about how it's not NYC's money. I think one possible counter to that is that misuse of the food stamp money causes NYC to have to spend money on other stuff (treating diabetes, obesity, etc), but I see your point.

I have no problem at all with requirements for money recipients. As to your last example, I've previously suggested that I'd be in favor of more people receiving gov't healthcare if they weren't allowed to eat at McDonalds... it's kinda like how I'd be in favor of more people receiving mortgage assistance if they weren't allowed to blow their money on flat screen TVs and Iphones...

draconian? Maybe - all i'm saying is that if you're going to be on the Public dollar, you can't blow yourself up too so that the public has to pay more. It's kinda a lengthy topic for a comments section, but anyway...

if the gov't decides to take all of everyone's money, and decide how it gets spent, well, that's probably not the kind of country I'm going to live in (there are countries like that which exist - kinda - right? it's called communism...)

Bernard said...

The trouble is you don't have a choice. If a state want highway money, it has to meet the fed requirements. If Montana decides the fed requirements don't make sense for Montana, they don't get a discount on their fed taxes. If the states want education money they have to meet the NCLB requirements, but they again can't get a discount on their fed taxes, without that the states have a harder time raising the state taxes to pay for better education.

I'm actually ok with states setting requirements on money they hand out because if you don't like the requirements you can move and your votes for state government have more influence.

You can't get away from the fed though.

Kid Dynamite said...

Bernard - I thought of what I'm trying to say, which is this: if you want The State (and by that, I mean, the Gov't) to take care of you, you have to take care of yourself too. it all stems from that.

so maybe Bloomberg is trying to avoid being part of the problem, the "problem" being that states take the Federal money and subsidize unhealthy behavior for it. Good for him, again.

I'm not sure if your point is that NY doing the "right" thing doesn't really help them- because they still have to pay for everyone else doing the wrong thing? ok - sure. one step at a time. when everyone does the right thing, everyone wins... we'll take it one state at a time!

Cetamua said...

"Again, if you're going to tell me that Mayor Bloomberg is out of line here, you better bring a damn good argument with you."

How about this damn good argument?

Kid Dynamite said...

Nope, Cetamua - that's definitely not "A" game material.

Talking about the problems with our health care system OUTSIDE of obesity doesn't mean obesity shouldn't be prevented. There is also a major flaw in the article's claim that even if we kept Obesity from growing, costs would still increase 65% because of a continuation of the other trends in costs... you need to hold other costs constant if you want to find out the impact of obesity!!! Other costs are growing faster than obesity's costs. Great. that's yet ANOTHER issue.

from your own link:

"“From 1987 to 2007 the share of adult Americans who are obese has more than doubled –from 13 percent to 28 percent.” Over the same span, the amount that we spend on health problems associated with obesity has soared: “health care spending per adult grew substantially in all weight categories between 1987 and 2007,” the researchers write, but “the rate of growth was much more rapid among the obese. Spending per capita for obese adults exceeded spending for adults of normal weight by about 8 percent in 1987 and by about 38% in 2007.”"

so, Obesity rates doubled, and spending on obese patients increased at 4 1/2 times the rate as spending on others.

treating obesity costs a lot of money. it's a fact. just because other stuff costs money too doesn't mean we shouldn't battle obesity.

IF said...

I find it rather impractical to discriminate against individual food items.

If you really want to avoid obesity you should limit the caloric intake to something like 0.3 GJ per month, e.g. make SNAP use a dual currency, one limit in dollars and one in kcal. Then people could buy as much soda as they want, but never enough to get fat?

With this in place the only other thing you have to do is prevent SNAP recipients from making any extra money and they will slim to perfect size! A Gulag might do the trick. It seems such a program should be in the hand of the federal government, as this is where SNAP came from. The only remaining question is if one should have a single location somewhere in Nevada or have the Gulags be decentralized (one in most counties). How many people are we talking about here? And I presume none of them votes, right?

Cetamua said...


"Other costs are growing faster than obesity's costs. Great. that's yet ANOTHER issue."

That's exactly the point. Obesity, contrary to what is usually thought, isn't a simple problem to control. There are other costs which causes should be tackled first and foremost.

Mayor Bloomberg is getting into a potentially huge political, social and public health mess for a very uncertain return. I ought to know: it's been tried in Philly with the soda tax and it was an unmitigated disaster, even if the idea was sound.

There are plenty of other targets that would provide much more bang fro the buck instead of mucho fang for the f...

Kid Dynamite said...

Cetamua - to me you're saying "the engine is the biggest expense in the car, so you don't need to worry about the tires"... to use a stupid analogy...

just because Obesity isn't the biggest item driving cost doesn't mean we shouldn't try to prevent subsidizing it with entitlement programs.

If you want to give me a good reason why we should subsidize the ability of food stamp recipients to make themselves fat and sick, I'm still listening. But you haven't provided one, and I doubt you can.

Cetamua said...

"just because Obesity isn't the biggest item driving cost doesn't mean we shouldn't try to prevent subsidizing it with entitlement programs."

Grrr! I didn't say that. I'm just saying that attempts to do so are pretty much futile. Trying to prevent certain foods to be bought may make the policy makers and taxpayers feel good, but does it even has a chance to WORK?

As a simple example, (among many other troubles) what d'ya think food makers would do if this measure come to pass? Simple! They would require knowing all the precise rules and then lobby, negotiate and contest them until surrender:

Food Manufacturers: "So, what's prohibited now?"

Regulators: "Sodas!"

Food Manufacturers: Sodas? Define sodas. Where are your criteria that define a soda?

Regulators: We use the USDA criteria.

Food Manufacturers: Really? I see here that HFCS (High Fructose Corn Syrup) is a no-no but it says nada about cane sugar. Hmmm!

Regulators: Wait a minute here! This is still sugar, ergo calories and that's a no no.

Food Manufacturers: What? You wait a minute now! Criteria sez USDA definition of soda, nothing more. You cannot just make stuff up like that on the fly.

Regulators: Just watch me! I am not letting a loophole getting in the way of fighting obesity.

Food Manufacturers: Cane sugar is responsible for obesity now? The mere ingestion of cane sugar in a drink is obesogene? No shit Sherlock: got some studies to back this up? Think you could win that in a court of law, Buster?

I’ll spare you the rest of the saga that would include call to lawmakers, PR blitz about freedom of choice and the creeping specter of the big bad go-vermin mingling in the private lives of citizens and blah blah blah!

As I said before, the soda tax in Philly was tried; good intention, terrible idea that got quickly wrestled to the ground, and died.

Kid Dynamite said...

"Trying to prevent certain foods to be bought may make the policy makers and taxpayers feel good, but does it even has a chance to WORK?"

that's nonsense. of course it can work. anything they want to work can work. fyi, i think the proposal was for a limit to calories per ounce for soft drinks.

We're having a similar "that will never work" debate in my town, where we're moving our trash funding to "pay by bag" - people have to buy special bags to dispose of their trash in, the proceeds of which are used to fund the transfer station costs. The point is to remove it from the tax base and fund it on a per-use basis instead, but the morons in my town spout crap like "taxes never go down!" ummm - well, if you don't do this program, taxes will not go down. 100% guaranteed. if you DO do it, taxes will go down if the numbers work out right...

RFD said...

Re: Fire

The firefighters letting a house burn down is absurd. Granting that you can't purchase insurance after your house is on fire, they should put the fire out for some price. If you compare it to a medical setting, they are both the insurance company and the hospital. The firefighters were on scene because the neighbors were insured and the homeowner offered to pay. Everyone is worse off because of this stupidity, the fire company could have gotten paid and the family would still have a house, not to mention their dogs who were killed in the fire.

Kid Dynamite said...

RFD - I mentioned the penalty rate - I agree.

please cite your source for saying that the family's dogs died - and if the firefighters could have saved the dogs. you know I'm a dog lover.

here's the relevant quote for me: ""I thought they'd come out and put it out, even if you hadn't paid your $75, but I was wrong," said Gene Cranick."

he gambled that he wouldn't need insurance, and he lost.

by the way, not everyone is worse off. All of the other homeowners are better off for the LACK of moral hazard here, and the firefighters may or may not be better off as they didn't have to risk life and limb. The homeowner is clearly worse off, because he made a horrible decision to not buy insurance.

RFD said...

I think it's really hard to say he gambled and lost given they paid the fee in previous two years. This is a seems more like a bad system and poor judgement on the part of the fire chief/mayor. The homeowner offered to pay a penalty rate and they refused.

Read more: Brian Dickerson: No mercy in Tennessee | | Detroit Free Press

This article also notes it took 2 hours for the fire to spread from the trash barrel to the structure which leads me to conclude that the firefighters would not have been in a high risk situation.

I'm not sure I buy your the lack of moral hazard makes the neighbors better off. If it is anything like the small town where I grew up neighbors are already raising money for these people.

Here is a source on the pets.

Kid Dynamite said...

thanks - I don't want to argue the facts here, but I'm somewhat suspicious of that thing about the pets. I haven't read that anywhere else, and I"m surprised the wife in the video didn't mention her pets when she was talking about possessions she lost.

I thought that the FD had said that they would intervene if there were lives at risk (pets too).

I agree with you that this is a bad system. I"m somewhat surprised that the homeowner doesn't really blame the FD at all - he says they were just "following orders"... kinda like the Code Red in A Few Good Men...

Steve said...

"since you pay them to do a title search, you shouldn't also have to pay for title insurance."

A search is not enough to make a policy committment - it is a mechanical search ("here's all the relevant documents - have fun interpreting that on your own"). Then there is abstracting & underwriting work beyond the search before you get to guarantee (which is really what a title policy is).

In short, a title policy means "we did a search, abstracted all of the various sources of relevant information, interpreted what all of that means, and are now comfortable enough to guarantee your title and/or lien priority"

You can buy a search-only packet in most areas, but that charge only covers the cost of doing the search, not the time incurred to interpret the results and guarantee the resulting opinion. If you have confidence in your dirt-law knowledge of easement conflicts and lien priority, then buy a search packet, come to a conclusion and insure yourself.

"I still wouldn't advise anyone to NOT take it... " and you couldn't advise that, because no lender will loan you money without one.

(disclosure-I work for a large title company/underwriter)

Kid Dynamite said...


"and you couldn't advise that, because no lender will loan you money without one. "

not everyone takes out a mortgage.

Steve said...

KD: "not everyone takes out a mortgage."

True, maybe 15% don't (not including recently-increased hard-money purchases by investors in Miami, Maricopa, et al), but in my opinion, that's even MORE reason to be worried about integrity of title, and be willing to pay to guarantee it.

(nothing to do with my employer - I'm not on the operational side)

If that is my actual $300k leaving my bank account, and not just my signature on a promise to pay a big bank involved in the transaction, then I damn sure want to know that I am getting what I think I am buying - clear title to an unencumbered house that is now mine.

That's not even talking about identity theft by the seller, latent claims by family members or heirs - how do you know the person singing over a deed in exchange for your $500k wire is the actual person on the deed? Think you're still gonna own that house when the real owner gets back from Europe?

I wouldn't buy a large diamond without paying for a GIA certification, I wouldn't buy a car without a demonstrably clean correct title, and I wouldn't buy a house without a title guaranteed by deep pockets.

I am biased due to my career, but there is too much fraud in the world for me to be assuming that risk in the largest financial transaction of my life. Know your competencies, and outsource the rest at a fair price, particularly catastrophic risks.

But I'm also somewhat risk averse, so take that into account.

RFD said...

If we are willing to agree it is a bad system, should we even be worrying about moral hazard? Change the system. An opt out system and a sensible policy on a penalty rate eliminate the problem.

Here is another source mentioning the pets and stating they could have been saved.

Kid Dynamite said...

Steve, as an insider, let me ask you this question. You wrote:

"In short, a title policy means "we did a search, abstracted all of the various sources of relevant information, interpreted what all of that means, and are now comfortable enough to guarantee your title and/or lien priority""

Are the people in your business largely really good at this? By that I mean, are they really doing analysis? Or are they just putting a stamp of approval on it? Do you find problems often?

I'm not saying that I'd be comfortable interpreting my own title search, only that I was under the impression, no offense, that title insurance was one of those bubble industries that any mook off the street could go into - like being a realtor during the bubble. Again, I don't mean to offend at all, and I hope you'll correct me if I'm wrong, but I had the impression that "title insurance" was a job where you took a day or week long class, and then rode the bubble...

I'm sure there are lots of really good title insurers out there too, like you.. When I bought title insurance, I asked the woman more about the finances of the company - I can't evaluate her ability, I need to evaluate the company's financial ability.

I asked her what % of title policies they have had claims on, by the way, and she was shocked at the question - I was clearly the first person to ever ask it. she never got back to me with an answer.

Steve - where are you located (what market?) and how often does your company actually pay out on title claims?

Kid Dynamite said...


"An opt out system and a sensible policy on a penalty rate eliminate the problem. "

I agree completely.

Steve said...

"How often does your company actually pay out on title claims?"

The value of obtaining title insurance is not simply, or even mostly, about the tail-risk coverage. Title insurance is much different than P&C, life or health insurance you're used to, in that the source of underwriting risk is historical and theoretically knowable, as opposed to most insurance where risk is due to some unknown, future event. Title insurance is more like a guarantee, or an indemnity.

The goal of the title underwriting process is to identify and eliminate all title problems before the real estate transaction is closed and the title policy is issued. It would be optimum for everyone involved to have no title claims, because that means all of the title problems were properly cleared. That title-cleansing process is valuable to owners and lien-holders (lenders), and is an important part of the proper functioning of the real-estate markets - as we are seeing right now with the problems with lenders in foreclosures.

Not all problems are caught, of course, and the title industry does pay claims. But you shouldn't focus on Loss Ratios, because a great deal of cost and effort is incurred to AVOID (identify & fix) the presence of title problems that might give rise to future claims. Most of the title premium pays for pre-closing work done to make sure there aren't any title problems remaining, with some reserved to make sure that any problems that do crop up are able to be fixed.

And yes, doing THAT correctly takes experience & skill, and the search/abstract/underwriting process itself takes a large amount of capital investment in technology systems & processes. Quick - how do you find out if your house in NH has a lien? The county recorders office? What about city tax liens, or state child support garnishments that attach to property, or a contractor's statutory mechanic lien that isn't yet on record? Should a purchaser care about a court judgment verdict several counties over? Federal, state or municipal easements or development restrictions that encumber property?

How do you find all that out? Non-governmental, private title plants that have been developed at great private cost over the past 100 years. That's what title premiums pay for.


"...I was under the impression, no offense, that title insurance was one of those bubble being a realtor during the bubble...I had the impression that "title insurance" was a job where you took a day or week long class, and then rode the bubble..."

One could argue the same about stock brokers in 1999 or 2006, without questioning the underlying concept or validity of a equity share or debenture.

A lot of what you're talking about are local escrow & settlement companies, which provide many closing services that are not title insurance. When you sit at a table buying or selling a house, signing contracts & deeds, signing HUD-1 settlement/closing statements, and giving/receiving large amounts of money - those are real-estate escrow/settlement services. Those businesses popped up left & right during the boom. Now, some of those entities might also have had an agreement with a title underwriter that allowed them to issue title policies along with their closing of escrow on the transaction, but the title work was done under the guidelines of the title underwriter and often using underwriter search & abstracting services. Confusing, I know.

Your concerns could have applied to some real-estate settlement AGENTS who issued title policies during 2004-2007, but certainly not to the title insurance underwriters or the title insurance product. My company, for instance, has around $5 billion in cash+investments, and $2.4 billion in loss reserves, and portions of my company have been around for 100+ years.


KD - great blog & comments section. Disagree with you on HFT (at least how it appears to the masses), and now turnabout is fair play :)

Kid Dynamite said...

Steve - "One could argue the same about stock brokers in 1999 or 2006" - yes - EXACTLY my point...

I don't know - this was the first house I've bought, and the title insurance company (who was a big company, I checked them out) was the one that did the closing also.

As you know, I'm a big believer in personal responsibility, and i've never felt like "the system" made me buy something I didn't want to buy in my life - until Title Insurance. But who knows - maybe someday we'll sit down and have a beer and I can thoroughly grill you on your business.

Steve said...

KD wrote: "I've never felt like "the system" made me buy something I didn't want to buy in my life - until Title Insurance"

You didn't have to! A lender might require a policy to protect their lien position, but that's the free market talking and you're welcome to find another lender that doesn't require it, or pay cash yourself.

Title insurance is voluntary, after all.

Kid Dynamite said...

yes - i am fully aware that I didn't have to... but i didn't want to be penny wise and pound foolish... which brings us right back to the $75 fee in this post which the homeowner didn't pay... full circle.

vjk said...


Title insurance is tricky in that it does not usually cover some title defects people *assume* it should. One of the nastiest is so-called adverse possession / squatters rights.

E.g. typical exclusion:
"Easements or claims of easements not shown by the public records, boundary-line disputes, overlaps, encroachments, title to filled lands (if any) and any matters not of record which would be disclosed by an accurate survey and inspection of the premises"