Free Lunch (20 page)

Even though kickbacks are illegal, they are thoroughly ingrained in the title insurance industry. Mike Kreidler,
the insurance commissioner in Washington State, ordered an investigation based on what Toll found in Colorado. His office found
a pervasive system of payments, some disguised and some quite open, and all illegal. His report found a “a clear pattern of
inducements and incentives. Although details and form varied from company to company, it became apparent that the
inducements and incentives represented similar patterns of behavior for all the companies.”

Title companies paid for lavish open houses with catered food and drinks where real estate agents previewed
properties understanding that whoever handled the sale would get their client to buy insurance from the host company. Kreidler
found golf outings, ski trips, and $900 dinners. Some title insurance companies paid excessive sums for advertising in publications
owned by real estate brokers. First American paid $23,000 in one such surreptitious kickback arrangement. Overall, First American
spent $120,000 per month on shopping sprees, football game tickets, and other payments to buy business. A state report
concluded, “First American offers a prime example of how illegal inducements can help a company attain superior market
share.”

Washington State found that LandAmerica “made extensive use of co-advertising, gift
cards, providing food and drinks at broker opens and meetings, paying for meals and giving away sporting event tickets.” Over the
course of a year and a half, the company spent more than $25,000 to take real estate agents, bankers, and lawyers on chartered
bay cruises paid for by unwitting home buyers.

There was also, and as of this writing still is,
quite literally, a free lunch. The title insurance companies take turns picking up the tab for the monthly luncheons of Seattle's board
of Realtors.

Everyone in the industry knows these payments are illegal, which is why they
create shams to hide them. In Washington State the law allows gifts of no more than $25 per person per year. “There is nothing
confusing about the limit,” Commissioner Kreidler wrote. The insurance commissioner's office adopted a rule in 1988 to curb these
illegal inducements and amended it in 1990. But the investigation showed that the industry was cleverly “skirting the law by
creating new schemes and methods for providing inducements in order to obtain title insurance business.”

The insurance regulators whose duty is to protect the public have instead mostly turned a blind eye to these
payoffs. Even in Washington State, the solution was not to enforce the law, but instead to try a softer approach.

Commissioner Kreidler, who described himself as a champion of consumer rights, wrote that despite the
“astonishing number of violations” what was needed to shake up the industry was a new set of recommendations and an
education program. He said he felt it would be too expensive to punish the real estate brokers and the insurance companies for
past crimes and helpfully suggested that the insurance commission should share some of the responsibility. That is to say, this
consumer champion decided to do next to nothing, only to threaten that if deliberate and concealed illegal conduct continued, the
law would be enforced some day.

Kreidler had good reason to fear that any serious
enforcement of the law would begin a nasty fight. The title insurance industry says it employs more than 100,000 people. It is part of
the whole real estate/insurance/lending complex that has long worked closely in the state capitals to shape government rules to
serve its interests. A regulatory crackdown could easily spawn legislation cutting the budget for insurance regulators or, worse,
passage of a subtle loophole that would make any future enforcement of the laws against kickbacks impossible.

Clearly the system of kickbacks and cover-ups is entrenched and self-sustaining unless the government
steps in to control it. Douglas Miller, the chief executive of Title One, a title insurer in Minneapolis, refuses to pay people for steering
business to him. “I've had many real estate professionals who were involved in these schemes tell me that they miss my company
because our service was better and our fees were lower, but that they are now locked into the partnership and feel that they had no
choice but to continue to refer ‘their' business to these shams,” Miller said.

Prices for land title
insurance have not dropped in California, Colorado, Washington, or anywhere else, and the indications are that these practices
continue. In paying all this money for title insurance, home buyers assume they are getting something of value. As so little of what
they pay is in fact spent on insurance, that raises the question of just how much of the premium for land title insurance is actually
needed to provide the protection the policy offers.

Title insurers say that the amount they pay
in losses does not fully describe their costs. Unlike fire, automobile, and life insurance companies that pay a claim only after the
event, title insurance covers unknown events in the past and so they spend some money on avoiding claims. They duplicate the
official property ownership records at government buildings and organize them not by name but by plot, each company carefully
guarding its duplicates of these public records. They collect new liens and easements as they are filed and add them to their
archives, which they call
plants.

So how much
does this prophylactic cost? The American Land Title Association puts the figure at “millions of dollars each year.” Measured
against the billions of dollars collected in premiums, the cost would have to exceed $160 million annually to approach a penny on
the premium dollar paid. Birny Birnbaum, an insurance economist who studied the kickbacks for the California insurance
commissioner, said the costs are but a tiny fraction of 1 percent of premiums paid.
Forbes
says that with virtually all plots of land and buildings in America already in corporate
databases, the cost of a title search is as little as $25 or less than two cents out of each dollar on the typical premium paid by home
buyers.

If your boundary lines turn out to be different from what it says on your deed, or your
new swimming pool actually intrudes into the neighbor's land, don't expect the title insurance company to defend you. The
company may tell you to handle the litigation yourself. If you prevail, you can seek recompense from the title insurer, which no
doubt will assert that your legal bills are excessive and therefore they will pay only what they consider to be reasonable costs. Or
maybe you will have to sue the title insurance company, too.

The American Land Title
Association acknowledges that little is paid out in claims. It tells consumers that “occasionally, when a title problem can't be
cleared, the title insurance company pays a claim. The industry pays hundreds of millions of dollars in claims each
year.”

In 2005 the industry paid $748 million in claims. That is less than a nickel for each dollar
paid in premiums that year. Add in the cost of total searches and that leaves about 94 cents for operating expenses and profits. The
industry earned more in interest, dividends, and capital gains from its investments than it paid out in claims in 2005. For every
dollar paid to the insured for their losses, the industry made $1.16 in investment gains.

The
kickbacks are not hurting the title insurers, either. Stocks of large companies, over long periods of time, have historically earned
investors an average total return of a bit more than 10 percent. Shares of First American, which has a quarter of the national market
for title insurance, have earned a return of more than 11 percent annually since 1980, even though the company kicked back all but
a dime or two of each premium dollar it collected.

What this means is that if you just loaned the
title insurance company the amount of your premium interest free for three years and then got your money back, the investment
earnings alone would easily cover the insurance company's overhead and the payment of any claims. If the company earns 5
percent on your premium, the first-year interest alone would be greater than the cost of paying claims. Give the company the use of
your premium for two more years and you have covered all of the costs, except for those illegal, but never prosecuted,
bribes.

The federal government helps the title insurance companies gouge customers by
requiring disclosure of only the name of the title insurer and the amount paid on the mortgage application. By just adding a box
that discloses in large type the portion of your premium that will be used to pay claims, based on the average payout of, say, the
previous three years, customers would know when they are being charged a dollar for a product whose benefit is about four and a
half cents. This kind of disclosure would be a cost-effective way to eliminate 85 percent to 90 percent of the cost of title insurance
and it would at the same time reduce illegal behavior. Of course, it would come under attack as more costly government regulation,
too. In reality, though, the cost would be infinitesimally small compared to the savings for buyers.

Another more elegant approach to stop this gouging is to place the burden of title insurance where it really
matters—on the lender. Both the title insurance and mortgage industries acknowledge in their public statements that the lender
requires that the title to the property be insured to protect its interests. The home buyer, however, bears the cost.

Adjusting the payment mechanism by making lenders buy title insurance would surely result in less money
being spent on title insurance premiums. Banks, savings and loans, and credit unions are sophisticated about these issues, unlike
the home buyer. They could negotiate with title insurers for better prices and they could buy in bulk. They could even decide to
incorporate the costs of the occasional title problem that cannot be cleared into their cost structure, perhaps charging buyers
directly for the portion of the title insurance that covers the buyer's equity in a home.

If banks
insured themselves it would create a powerful incentive to be efficient and reduce liability and its associated costs. Then such
insurance, which now costs on average about 51 cents per $100 of the purchase price, could well fall to a cost of just a tenth of a
penny per $100.

Another way is to adopt the system used in Australia and Europe. Under these
systems, the government checks its records to see if there are any liens or claims and notifies the seller and buyer when the title is
clear. Fees are used to pay for checking the files and to fund insurance in the event a mistake is made.

Critics of government per se will no doubt think that this just adds to taxpayer expense. But the cost of such
a system, which could be financed with fees paid by those selling their land, would surely be a tiny fraction of what consumers
now pay, and thus it would be a net gain to the economy. Indeed, just eliminating the taxpayer costs of land title litigation for
judges, court clerks, and recordkeeping might cancel out the cost of maintaining a proper land registry.

In Iowa there is no private title insurance. Instead, the state government runs the program. The cost is $500
on purchases of homes valued up to $500,000 and $90 for refinancing. Even those charges seem high. As the state improves the
quality of its records, the number of claims should dwindle, allowing lower fees in the future.

Legislatures also can enact time limits on title claims. The law lets virtually all criminals, except murderers,
escape prosecution if enough time passes before they are caught. In most states minor crimes must be prosecuted within 5 years
and most felonies within 10. The same could be done with title claims, allowing some wiggle room, just as the criminal statutes do.
For example, the law could start the clock on that seven-year-old boy only when he turns 18 or 21 and reaches his majority. Placing
such time limits on claims would decimate payments from land title insurance while at the same time reducing litigation. No system
will be perfect, but the goal of government policy should be to gain the most benefit at the lowest cost, not to enrich price
gougers.

Until consumers demand reform from their lawmakers, expect to pay 10 times as
much for land title insurance as it would cost if our governments enforced the laws on the books to protect consumers and end the
costly excesses of reverse competition. And expect to pay about a thousand times the cost of a system in which lenders took out
the insurance.

Next, let's look at government policies affecting our society's most valuable
assets, our common property, and our individual debts.

O
NE OF THE MOST SALIENT FEATURES OF THE NEW ECONOMIC
ORDER
is exploding levels of debt. Young people and home buyers, even the
government itself, face spiraling debt that is converting the ownership society into a debtor society with ever fewer reserves, either
individual or joint. In turn this new debt load, combined with the sale of public assets like roads and water systems, means huge
incomes for those positioned to take advantage of these burdens, all part of the new approach to using government to enrich the
few.

For three decades, government has been cutting back on investing in the nation's most
valuable asset, young minds. Adjusted for inflation, tuition at four-year public colleges more than doubled between 1980 and 2005,
a period when incomes for the vast majority were essentially unchanged. Tuition rose from an average of $2,175 to $5,100. Add to
this the costs of books, lab fees, meals, and either a dorm room or commuting to campus.

Seven out of ten taxpayers make less than $50,000 a year. For these families, even state college has become
an onerous and often impossible burden, especially for families with more than one child. For those in the bottom half, whose
average reported income is less than $15,000 per year according to the Tax Foundation, college is a goal too far, even for many
smart and motivated students.

As recently as the mideighties, federal Pell grants to poor
students covered 60 percent of the cost of attending a public college. That share has been nearly halved as Congress has cut the
so-called discretionary budget. An estimated 200,000 young people do not attend college each year simply because they lack the
resources. Many do not finish because they cannot sustain the cost for four or more years.

About two-thirds of college students who graduate are in debt, a prospect unimaginable in the fifties, sixties,
and most of the seventies. Many owe more than their parents make in one or even several years. And this debt limits their options
to develop themselves and to benefit society through important work, such as teaching, policing, and research.

Jason Clark learned to cook on the job. He wanted to do more than short-order work, so he sought formal
training. Because his father is disabled, Clark had to finance his schooling on his own. He applied to the Pennsylvania Culinary
Institute, a private, for-profit college, filling out applications for two loans totaling almost $30,000.

Six months after Clark graduated his first bill came, showing an interest rate of 13 percent. Clark did not recall
agreeing to such a high rate or even signing a promissory note. Clark asked the lender, Sallie Mae, for a copy of the promissory
note. He also asked for an extra six months before starting payments because he could not find work. Sallie Mae has never
produced a copy of any note signed by Clark, but it did raise his interest rate to 18 percent.

Clark is just one of hundreds of thousands of students who borrow money each year to improve themselves
through education. In all, students borrow about $85 billion
each year,
most of it at
single-digit interest rates with repayment guaranteed by the taxpayers.

Nearly a fourth of these
loans come from lenders, like Sallie Mae, EduCap, and Nelnet, that are free to charge any interest rate they want. Normally, the
riskier the loan, the higher the interest rate. That is how lenders make up for loans that sour. But the interest rates that these
lenders charge bear no relationship to risk that the loans will not be paid back. Thanks to Congress, these lenders operate almost
risk free. Yet they are allowed to charge high-risk rates and to collect about $18 billion a year in government
subsidies.

The reason their risk is small is that, under rules set by Congress, there are only
three ways to retire these debts: pay them back in full, become totally and permanently disabled (and convince the lender that is
so), or die broke.

Even if a student goes bankrupt, federal law prohibits the discharge of
student loans, both those guaranteed by the government and those made on onerous commercial terms. Our Congress, in
adopting these policies, has made the unstated assumption that everyone who gets a college education will succeed. That some
people will become sick or injured, that others will fail to find work in the field they prepared for or will go into occupations that pay
poorly, or will have a child requiring round-the-clock care, or any of a hundred other things that make life itself a risky venture, are
not contemplated under this government policy.

To buy the lucrative business of students,
many college lenders made under-the-table payments and other disguised forms of compensation to college admissions officers
and others at Johns Hopkins, Columbia, and many other colleges and universities. Some colleges even solicited money from the
lenders, promising in return to steer business to them.

Many students who were told they
would pay interest rates of perhaps 6 percent or so found their loans were at two or three times that rate. At the Web site
StudentLoanJustice.org hundreds of former students tell the same stories over and over again: how they were lied to, hit with
thousands of dollars in collection fees for supposedly disappearing when finding them was as easy as dialing 411, and told they
have to pay whatever interest rate the company picks, with no rights except to pay until they die. Under these one-sided rules,
loans of $20,000 become $50,000 and loans of $30,000 balloon to more than $112,000. Is this any way to perpetuate a
society?

While the government imposes harsh rules on students, it treats lenders with
extraordinary leniency. The Education Department inspector general found in 2007 that one lender, Nelnet, had received $278
million in improper subsidies. The government let Nelnet keep the money. Sara Martinez Tucker, the undersecretary of education,
told my colleague Jonathan Glater that seeking repayment would set a precedent that might require asking other lenders to return
improper subsidies they had received. That, in turn, might drive out of business some smaller firms that make student loans, thus
reducing competition. Translation: mercy for bankers, but not for borrowers.

That
consideration goes to lenders and virtually none to borrowers is central to the creed of government as a source of greater wealth
for those already rich enough to have money to lend.

For lenders, this government guarantee
that they will be repaid produces phenomenal profits. Albert Lord, who ran Sallie Mae for years, built a fortune so large that he tried
to buy the Washington Nationals baseball team. He built his own private golf course in Maryland, not far from Washington, using
the riches he made off students to separate himself from them and the rest of society, just as the Sun King commissioned a palace
in which his mistress could dine without having to even look at the servants.

Sallie Mae started
out in 1972 as a government-sponsored entity to help students. That was under the old government policy of nurturing the middle
class. Under the new rules of government as the helpmate of the rich, President Clinton signed legislation in 1997 making Sallie
Mae an independent, investor-owned business known as the SLM Corporation.

What Clinton,
and Congress, did not do was remove the stern loan repayment rules that show no mercy to student debtors. The result? Sallie
Mae earned an astonishing 51 percent return on equity in the five years through 2006. This is more than triple the rate of return on
equity earned by the banking industry.

Lord engineered the transformation to a private
concern and arranged to obtain about 2 percent of the company, mostly through stock options. In 2007, when the kickback
scandals and complaints from students and their parents about exorbitant interest rates finally began to get a hearing in Congress,
Lord arranged to sell the firm for $25 billion. The buyers included Bank of America and JPMorgan Chase, banks that instead of
competing in the market agreed to cooperate in this venture.

Jason Turner, a financial analyst,
is typical of those who are embittered by what they see as a corrupt system that enriched Sallie Mae owners and others. He
borrowed $16,000 in the eighties to attend college, but today with fees and deferred high-rate interest, Sallie Mae says he owes
more than $50,000. Turner believes improper fees totaling more than $10,000 inflate that figure.

“It is impossible to get any documentation of the original debt or an honest accounting of how the current
balance on the loan is calculated,” Turner said, echoing a common complaint. Documents he was sent create the impression that
the federal government is after him to pay off this debt, but a close reading shows that, in fact, the letters come from collection arms
of Sallie Mae.

“My spouse and I have a solid middle-class income,” Turner said, “yet we can't
even pretend to think about buying a home because of these student loans. Al Lord gets to have his own golf course, but my child
can't have a backyard to play in.”

Another big beneficiary of the government's policy of
requiring most students to borrow money to get an education and then shielding the lenders from risk is Catherine B. Reynolds,
the head of a nonprofit foundation in McLean, Virginia, bearing her name. Despite its legal status as a charity, the Reynolds
Foundation does business as EduCap and refers to itself as a company. It pays like one, too. Reynolds makes a million dollars a
year from the foundation even though it has assets of only about $200 million. Her salary is many times what the executives of
charitable foundations of that size typically make.

Her job comes with an unusual perk. This
perk must be disclosed, but the foundation-cum-company did its best to obscure the perk, which it described this way: “Based on
the recommendation of an independent security review, the corporation has implemented certain security measures including
security-related services for officers and directors. The value of any services provided for any incidental personal use is treated as
a fringe benefit to the recipient.”

Could anyone reading that tell that the charity had bought a
$30 million Gulfstream jet that Reynolds uses as her personal taxi?

EduCap can afford that
perk and the big pay because of its skill at steering student applicants away from the lowest-cost aid and toward its expensive
loans. EduCap hands out brochures that imply that it is hard to get government-backed low-interest loans, that they have inflexible
payment terms and are too small to be of much help, none of which is true. The brochure instead touts what it claims are the
benefits of its loans, including the false claim that they are more flexible, while ignoring the higher interest rates, the fact that these
rates can be raised without warning, and the prospect of huge fees and costs.

The idea that
young minds should be a source of immediate profit is among the most coldly calculated changes in government which, over the
past three decades, have taken from the many to enrich the few. The idea that a borrower cannot escape a debt because of a
government rule is unlike that of any other modern country. Indeed, in Western Europe, students who borrow money do so on
terms related to their ability to pay, with investment bankers bearing more of the cost than nurses and forest
rangers.

In America, the trend is toward more financial aid to the affluent and less to the poor,
another example of widespread sacrifice for the rich. The nonprofit Education Trust compared financial aid to students at the top
public university in each state during 1995 and again for 2003. It found that aid to students from families with incomes of more than
$100,000 increased more than fivefold, while help for students from families making less than $20,000 dropped 13 percent. “Many
of these flagship institutions have become, more and more, enclaves for the most privileged of their state's young people,” the
Education Trust concluded.

President Bush, who likes to refer to himself as the education
president, vowed as a candidate in 2000 to increase Pell grants significantly. Instead, as president, his budgets cut Pell grants for
poor college students in two ways. The maximum grant was reduced. In addition, funding was cut so much that each year as many
as 375,000 students who qualified did not get Pell grants because the fund ran dry.

On another
front, in at least a dozen states, government seeks to make the foolish, the addicted, and the poor pay the costs of making sure
Johnny and Jane can read, write, and do their numbers. Some of the proposals seem fit for comedy routines rather than serious
policy.

Governor Rick Perry asked the Texas legislature in 2004 to give billions of dollars of tax
relief to homeowners, especially mansion owners. Under his plan the amount of money the state would have to spend on
education would depend in part on the skills of women like Vanity, Destiny, and Rio, who sell lap dances at the Yellow Rose, a
topless bar in Austin. In addition to a tax of five dollars on each admission at the nude dancing clubs, Perry wanted to raise taxes
on beer and cigarettes and install video lottery terminals at gasoline pumps.

Governor Perry's
proposal suggested that his own education came up short on 'rithmetic. His combination of onetime gimmicks and what he called
“taxes on unhealthy behavior” would have raised $10 billion less than the property tax relief he proposed, forcing massive cuts in
education spending after a few years. But then that was consistent with his budget. He was proposing over two years to cut state
spending on education by nearly a billion dollars, despite a finding by a state commission that most Texas children did not have an
education that prepared them for college. Making them fit for college would cost an additional $3 billion per year.