Title Insurance: Monoline Restrictions

One of the more bizarre aspects of the title insurance industry is the so-called monoline restriction.  Essentially, what this means is that an insurer which sells title policies must only sell title policies; a company is ineligible by law to sell title insurance if it sells any other type of insurance.  These laws are not uniform throughout the country and can vary by state, but in practice, just about all states have a law which is more or less identical to what I’ve described (Iowa being one notable exception, about which I’ll probably have to write a separate post later). You may wonder, as I certainly did when I first learned of it, how on earth these laws came to be?  It’s a little complicated…

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MID Finances

Here’s another way of looking at the MID from a purely financial perspective.  As I discussed at length in the main series of posts about the MID, the two real economic effects of repealing it would be a ~10% estimated drop in housing values on average, and an increase of about $120 billion in total tax liability for current homeowners.  I had the following idea, which I would definitely not advocate as a practical plan for unwinding the MID, but I think it demonstrates how poorly it works as an “investment” in home ownership.

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MID Tangent: Consistency

The Mortgage Professor (don’t let the hideous, 90s-style formatting fool you, this site is actually quite good!) makes an interesting point that I hadn’t thought of:  As long as mortgage interest is tax deductible, so should mortgage insurance and title insurance premiums.

Interest payments on home mortgages are deductible, and no distinction is made by IRS between the portion of the interest payment that represents compensation for the time value of money, and the portion that represents compensation for risk. If a low-risk borrower pays 7%, for example, while a high-risk borrower- pays 9%, the entire interest payment of the high-risk borrower is deductible. However, if the lender charges both borrowers 7% but requires that the high-risk borrower purchase mortgage insurance, with the mortgage insurer now collecting the 2% or its equivalent, IRS will not allow the 2% to be deducted. That is inconsistent.

Yep, spot on.  On title insurance:

Title insurance premiums on a policy that protects the lender only also should be deductible, but aren’t. The same is true of expenses billed to the borrower that are incurred by a lender in connection with a loan, such as a credit check or appraisal. IRS says they are not deductible because the borrower receives a service for them, but this is a fiction. The lender requires these services as condition for granting the loan, and they provide little or nothing of value to the borrower beyond the loan itself. Furthermore, if the lender elects to cover these expenses in the interest rate or points, they are fully deductible.

That last sentence, especially, is very insightful.  I remember that my mortgage lender offered to waive all lender fees in exchange for a higher interest rate on my loan.  It worked out to be a terrible deal for me (pay ~$20 / month more to save $800 upfront), so I elected not to, but I hadn’t thought about how those 2 different ways of paying lender fees had different tax implications.  The extra $20 / month would have been 100% deductible, while the $800 I chose to pay upfront was not deductible at all.

When I think about all the different mortgage loan choices that are available, I’m reminded of a Carmax commercial from several years ago, where a man held up a balloon and said that other dealers might give you a lower price, but they’ll “squeeze” you and make up for it some other way:  They’ll charge you a higher rate on your loan, or give you less for your trade-in, or put in some other junk fee to make up the difference.  I think mortgages are very similar in the way that some loans give you a lower rate but more points, or fewer points but higher lender fees, or lower fees but a higher rate.  It seems to me that lenders treat these as interchangeable ways to charge you the real cost of the loan (and possibly as a way to confuse the consumer with the wide array of choices.)  I think the professor makes a great point that the IRS’s distinction between points/interest payments and lender fees makes for an inconsistent tax policy.

 

 

 

 

Mortgage Interest Deduction, part 3

Now that the softball arguments are out of the way, it’s time to tackle what I consider the one real argument for the MID that might have a wee bit of merit.  As our good old friend Lawrence Yun puts it:

One thing that is indisputable is that eliminating the mortgage interest deduction will lower the home ownership rate in the U.S.,” he said. “While we must ensure that the conditions that led to the artificially inflated home ownership rate of the bubble years do not resurface, we also need to create the conditions for sustainable home ownership, which has been shown to provide myriad social benefits for families and communities.

Hold on to your hats, folks, because I’m about to do the impossible, and dispute the indisputable!  In fact, I disagree with his premise, both in a more theoretical sense and from a practical, empirical perspective.  For now, I’ll just look at whether the MID actually does increase the home ownership rate, and later on in the series I’ll come back to whether the government should care about the home ownership rate at all.

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