No one cares about monoline restrictions
As a demonstration of how little attention monoline restrictions in the insurance industry get, if you google “monoline title insurance”, my post on it comes up in the 9th position (for me, at least). I wrote the post less than a week ago, and it has gotten fewer than a dozen hits. The internet seems to have little else to say on the subject, other than the one paper I referred to in the post.
The Fed and the Torrens system
Apparently all I had to do was ask: Thanks to Dwight Jaffee (author of the monoline paper) for bringing to my attention the fact that the Fed recently proposed to create a national database of liens, akin to the Torrens system I wrote about. Says the Fed:
A final potential area for improvement in mortgage servicing would involve creating an online registry of liens. Among other problems, the current system for lien registration in many jurisdictions is antiquated, largely manual, and not reliably available in cross-jurisdictional form. Jurisdictions do not record liens in a consistent manner, and moreover, not all lien holders are required to register their liens. This lack of organization has made it difficult for regulators and policymakers to assess and address the issues raised by junior lien holders when a senior mortgage is being considered for modification.
Requiring all holders of loans backed by
residential real estate to register with a national lien registry would mitigate this information gap and would allow regulators, policymakers, and market participants to construct a more comprehensive picture of housing debt.
We’ll see what comes of all that, but meanwhile I’ll try to find a response from the title insurance industry to this idea.
Tangent on the nature of insurance
When I discussed the difference between “safe” and “catastrophe” lines of insurance, I didn’t mention what I consider to be the most catastrophic line of insurance in existence (in fact, I would actually call it inherently un-insurable): deposit insurance. The risk that deposit insurance is supposed to protect you from (panicked depositors making runs on the banks, rendering your bank insolvent and your balance worthless) is the worst kind of risk imaginable to an actuary. Of course most of the time the insurance is unnecessary, but if for whatever reason, people suddenly become uneasy with the nature of fractional reserve banking and worry about the security of their deposits, then it’s a perfectly plausible outcome that every single bank in the country could fail all in one day. When the FDIC claims that your deposits are covered up to $250,000 per depositor, it’s almost entirely an illusion. Don’t delude yourself: the FDIC doesn’t actually have enough money to cover everyone’s deposits. No, there are not 250,000 dollars sitting in a vault somewhere waiting to be paid to you, the individual depositor, in the event of a calamity. Not even close, in fact. The FDIC has about $50 billion to cover $4 trillion in deposits, barely a 1% reserve rate. I referred to the risk of panics as un-insurable because really, the only way to insure $4 trillion in deposits against this type of catastrophe is… to have an extra $4 trillion sitting around as a reserve, which of course is economically ridiculous. Other insurance lines essentially benefit from the so-called law of averages, a statistical assurance that their claims rates will be stable over time (which crucially depends on the fact that individual claims are independent of one another: one person making a claim doesn’t make anyone else more likely to file a claim themselves.) But the risk that depositors face when they hand their money over to a bank that invests most of their money is intrinsically different, since the panics that the FDIC is insuring against are, by their very nature, panics by large groups of people (in extreme cases all depositors). With this kind of behavior, the “average” claims rate for deposit insurance will not behave in the predictable manner that makes other kinds of insurance work. The FDIC claims that no depositor has ever lost a penny that they’ve insured, but then again, there haven’t been any serious panics since the FDIC existed. Sometimes I think that if everyone understood how fractional reserve banking works, and how the FDIC works, this knowledge alone might cause the panic that would bring the whole system down.
But I try not to think about that too much.