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How does regulation improve the basic efficiency of the system? My approach has been to get rid of the kickbacks, the fraud, the socalled abuses. There you have the problem to deal with. I can be wrong, but it has been my experience that when Government steps in to regulate, rather than enhancing efficiency with reform and correction of the system, it tends to rigidify it. It tends to create a situation where people say, as you say in the statement, maximum rates tend to become minimum, and all of a sudden, you have a situation where there is no thrust for reform.
Throughout your entire statement, you call on certain actions by the Federal Government, action with regard to titles.
That sort of thing is worthy of very serious consideration. We have seen the situation where when the Federal Government enters a field and the local people withdraw they do not pursue remedial legislation at that level. It is a philosophical argument.
We all agree on where we want to end up. We want to eliminate the problem—the abuse, the kickbacks. That is true of you, of the Senator from Wisconsin, of Mr. Cramer as well as me. We are all in agreement.
I would like to point out one fact to you, Mr. Cramer. My proposal has never contained any section which would have, as you say, the effect of legalizing kickbacks. That was in the House, and I would by no means support that.
I should point out that I am interested in your comment, because I have an awful lot of good friends in your organization in my State.
Mr. CRAMER. Yes, we know.
I would point out that when you are talking about all of the problems that you list, it is important that we not overstate to people what we can accomplish in this kind of legislation. It is a very limited bill. Even the Senator from Wisconsin, even Senator Proxmire's bill, deals with a limit on no more than 15 percent of settlement costs, so we are not proposing a panacea to homebuyers, whatever we do.
The reason I wanted to make a few remarks was to express my gratitude to you for having brought our attention to bear on specific points, and you have made specific recommendations, one of which I disagree with, but most of which you do support, and I very much appreciate that. Thank you.
Senator PROXMIRE. Let me just ask Mr. Burke if he would like to comment on the very able and eloquent and persuasive argument that Senator Brock made, with which I disagree, but I would like you to answer it.
That is, that regulation would rigidify the situation, and whereas we do have abuses in some areas with a settlement cost that we know is too high, and in other areas people are getting a pretty good bargain.
Wouldn't we lose that bargain in areas where settlement costs are low; and if not, why not?
Mr. BURKE. I don't think so, primarily because this is an area in which change is already underway. There are economic forces at work that are going to mean that in the next 15 years the system of transferring title to real property is going to be changed quite drastically. One is going to see as many changes in the law in this area in the next couple of decades as we have seen in the landlord-tenant area in the last couple of decades.
Senator PROXMIRE. Would regulation enable the change to be translated into lower costs?
Mr. BURKE. Regulation could, in effect, telescope history and force change somewhat faster. It is a problem that, as Senator Brock indicates, is extremely complex and varies from State to State, but I think that the underlying forces which are going to change our abstract system, our recording system, our title insurance system, are really at work in any case.
We are the only country in the world that still relies on a recording system. That uniqueness is of great concern to me, because it makes us a backward nation as far as conveyancing is concerned.
Senator BROCK. I don't argue with that at all. But let me pose to you—I think somewhere in your statement you mentioned the fact that you feel, and I think it is a legitimate request, that the rate that is paid by the home buyer should be the same as is paid by the lender for title insurance.
I think you made that general point, didn't you?
Mr. BURKE. I disagree with the argument that the risks are different, but I would say that when title insurance is offered, I would prefer to see it offered in one contract instead of two. Currently, it is offered to the homeowner in a separate policy and to the mortgagee in another separate policy. There is no reason why a comprehensive policy couldn't be written covering both of them. The risks would be no greater.
Senator BROCK. I agree, but I don't think you could say the two would carry the same rate, if the amount of insurance came down, whereas the value of the property went up. You have two different situations there.
Mr. BURKE. A comprehensive policy covering both the mortgagee and owner would, I think, tend to make rate regulation easier, in that the risk would be level across time. The lender's risk goes down, as the loan is paid; the homeowners is going up, as he builds up equity in the property. The two balance out. If you have a comprehensive policy, you could set the rate over the whole course of the loan. The risk would be the same.
Senator BROCK. You see, that is something that can and should be effectuated within the marketplace today.
Mr. BURKE. I really don't think that will happen unless the insurance laws or HUD-VA requirements are changed to mandate that type of policy. I would say that a comprehensive policy would tend to make mortgages more liquid in the secondary market, and that is of great benefit to the economy as a whole.
Senator BROCK. Thank you.
Senator PROXMIRE. Could regulation be used to put pressure on the system so that there is no room for kickbacks and a lot less room for fat?
Mr. BURKE. Yes; over the long term, I think that would be the effect, that lawyers who search titles and certify titles would find that they have to maintain a given level of abstracts or a given number of abstract files in order to stay in business. So that it would tend to make title plants and lawyers' files more efficient.
Senator BROCK. It also would make it more concentrated.
Mr. BURKE. That would depend, Senator. In urban areas, it's concentrating anyway, for economic reasons. In rural areas, I don't think you would have a problem, because in a lot or rural areas, the closing and settlement costs are not a problem. We are dealing here with an urban problem, with economic concentration occurring since 1955 when the title insurance companies started expanding.
Senator PROXMIRE. Gentlemen, thank you very, very much. We needed this record, and you have done a fine job.
The committee will stand in recess until tomorrow morning at 10 o'clock. The Subcommittee on Consumer Credit will meet this afternoon at 2 p.m.
(Whereupon, at 12:33 p.m., the hearing was recessed, to reconvene at 10 a.m., Thursday, October 4, 1973.)
(Complete statement of Barlow Burke, Jr., follows:)
Barlow Burke, Jr.
My name is Barlow Burke, and I am an Associate Professor
of Law at American University Law School, where I teach in
the areas of real property and conveyancing law.
years ago, I authored studies for the Department of Housing
and Urban Development on the transfer of residential real pro
legislation, both concerned with closing and settlement costs,
have recently been introduced.
In pertinent part, one proposes
that the HUD Secretary be ordered to set maximum rates for various
types of settlement charges, while the other would repeal
existing statutory authority to do this.
Mr. Chairman, it is a poor time to deny HUD such authority.
of the problem that should not be cut off in mid-stream.
Currently the states are considering new model regula
tions for title insurers; at such times, federal controls
should not be relaxed, but must be available in case
of state inaction or permissiveness.
Expanding on this outline, let me take up the foregoing points in the order presented.
On the matter of rising costs, it is important to note
that any legislation can help to control future rises in
charges as much as to reduce present costs.
A reduction is costs
is much harder to achieve than a reduction of future increases.
Committee on Banking and Currency, United States Senate,
First Session, Hearings on s. 750, Part 2, at 1250 (1964); H.U.D.
V.A., Preliminary Report on Mortgage Settlement Costs, App. B,
Table IV (1971).