Title Insurance Tips

By
Real Estate Agent with Pacific Platinum Properties CA BRE #01836161

Title insurance is a uniquely American form of protection.

The haphazardness of early American land sales - exemplified by the wild and wooly days of land rushes and frontier settlements - resulted in the first title insurance policy being sold in the 19th century.

Wild West land swaps, in turn, were based on the British colonial deed conveyance system in which land was sold and transferred along with a packet of deeds to the new owner. Despite careful review by a lawyer, titles could be easily be disputed, resulting in a surprise claim by the rightful owner.

The troubled history of American title claims, combined with regulations that continue to vary state by state (and sometimes within states) means that it is almost impossible to obtain a mortgage in the U.S. today without first buying a title insurance policy.

Title Insurance - Basic overview with examples of how title claims may arise, who is responsible for title claim disputes, and title insurance benefits to both lender and buyer.

Title Insurance

Title insurance is protection for the lender--and the buyer--against defects in the title (deed) of a property. Just because you purchase a home, got to settlement and move in does not mean that what you have purchased, title-wise, is what you thought you were purchasing. Title problems can arise that could affect the future value and marketability of the property. Some examples of problems that can arise with titles include:

An unknown or undisclosed heir with clams against the property.

A forged deed.

Public record errors.

Undisclosed liens.

Undisclosed encumbrances.

Fraudulent acts.

Easements.


Title insurance is a one-time premium, paid at closing. There are many variances, though, in costs, who is responsible for paying for the policy (seller or buyer) and policy inclusions and exclusions. These will vary depending on what is customary in your local area.

Title insurance, in effect, guarantees (subject to the limits of the policy) that the title is good and marketable. If there are problems with the title in the future, the title insurance company is responsible for any shortcomings--not the owner or the lender. There are 2 levels of coverage generally available.

Lender's Coverage: Virtually all lenders will require title insurance for at least the amount of the mortgage. This coverage amount will decrease as the mortgage balance decreases during the term of the loan.

Owner's Coverage: A title insurance policy with owner's coverage goes one step further. It is usually issued in the amount of the actual purchase price of the property, and maintains a constant coverage for that amount throughout the ownership period.

Title Companies & Title Insurance - Discussion on the types of title insurance, what happens when there is a lien on the property, and more on types of property liens.

Title Companies and Title Insurance

 

Types of Title Insurance
What Happens If There Is a Lien on the Property

Before signing on the various dotted lines, it's important to confirm that the seller truly owns the property and isn't overlooking problems, such as outstanding mortgage payments or debts.

A buyer can find out critical information about a piece of property by getting a preliminary title report (also referred to as a title search). Title companies research these reports using public records, and guarantee the findings by selling title insurance.

The preliminary title report, which takes several days to complete, establishes who legally owns the property. The report indicates if the seller is the only person authorized to sell the property, and includes a list of previous owners as well as purchase and sale dates. It also lists any liens against the property.

Sellers usually pay for the report because they are responsible for guaranteeing a clear title. The seller's real estate agent or attorney often orders the report after opening escrow.

Types of Title Insurance
Title insurance, issued by the title company and often required by lenders, guarantees the house is free of liens. There are two types of title insurance:

  1. A lender's policy protects the lender against loss due to unknown title defects, and guarantees that the lender has a valid first lien against the property.
  2. An owner's policy protects the buyer from unpredictable factors, ranging from human error to forged documents, that might emerge after a sale is complete. This type of title insurance has no annual premiums. The buyer pays when the policy is issued. In some states a seller purchases title insurance to guarantee that the buyer is receiving a clear title. In others, the buyer pays for the policy to protect the lender. Only an owner's policy will protect the owner from personal loss, such as legal expenses for a dispute after the sale.

The cost of title insurance depends on the findings of the title report, but since costs vary from county to county, comparison shopping is a good idea.

Once buyers have reviewed the title report, the buyer should discuss the findings with the seller, real estate agent and others involved in the sale. A buyer may demand that the seller clear anything on the report that could become a liability in the future, such as an existing lien.

 

What Happens If There Is a Lien on the Property
A title company often withholds proceeds from the sale of the house to pay the liens. The title company will refund the money to the seller if the seller clears up the issue.

 

Types of liens include:

Tax lien

Judgment lien

Mortgage lien

Mechanic's lien

Once clear title has been established, the buyer will have ownership and exclusive use of the property.

Cut Your Title Insurance Costs - From Kiplinger's, with a jaundiced view of why title insurance is necessary, basic costs, and advice on how to avoid overpaying.

Cut Your Title Insurance Costs

Although you don't have a choice about whether to buy this insurance, you have some room to negotiate the cost.

By Melynda Dovel Wilcox

December 2005

Who would be foolish enough to shell out several thousand dollars for an overpriced product that they knew little about and would most likely never really need?

Just about everyone who has ever bought a house. Home buyers can spend days haggling with sellers over a few thousand dollars on the purchase price or whether the chandelier conveys. But once the deal is done they don't bat an eyelash at spending another 0.5% to 1% of the mortgage amount as a one-time premium for title insurance. What's more, they don't bother to look for the best deal and probably can't even name their insurer.

Home buyers are in this fix because you can't get a mortgage without title insurance. Lenders require it to protect themselves against any title problems that may surface after the property changes hands. But while it's the lender that benefits, it's generally the homeowner who pays the bill. Home buyers generally funnel all that money directly to the title insurer their real estate agent or settlement company recommends.

So this is title insurance in a nutshell: You, the homeowner, pay a premium to the title company to protect your lender from mistakes made by the company when it does a title search. Are you a sucker, or what?

To make matters worse, even though you're paying the bill, the title company's client is the real estate agent, lender, lawyer or homebuilder who brought in your business. Part of your premium likely goes toward rebates or other rewards for the referral (critics call them kickbacks), which many title insurers consider a cost of doing business.

"At one time, title companies would take entire real estate firms on ski trips," says Erin Toll, director of consumer affairs for the Colorado Division of Insurance, one of several state insurance departments that have been taking more aggressive action against insurers for their cozy business practices.

"It's a very creative industry, and they are extremely competitive with each other," says Toll. But it's the middlemen, not consumers, who benefit, because companies don't compete on price. "The consumer isn't in a position to exert market pressure to drive down the price of title insurance," says Birny Birnbaum, an economic consultant who has served as an expert witness at title-insurance-rate hearings.

Claims are rare

Most title problems are discovered and corrected during the title search at the time a property is sold. If a discrepancy comes up after the property has changed hands, the insurer will most likely pay to clear up the problem. In a worst-case scenario -- some long-lost cousin of a former owner resurfaces and lays a legitimate claim to the property, for instance -- you would lose the house but the insurance would kick in to pay off the mortgage and protect the lender from any loss.

Most claims occur within the first three years of a mortgage, before your equity has built up and while the lender is bearing the lion's share of the risk. If there's a claim, it's the lender, not the policyholder, who collects. Lenders hardly ever collect either, because claims are extremely rare.

Claims are so rare, in fact, that insurers spend as little as 5 cents to 10 cents of every premium dollar to pay them. In Texas, only 2 cents of every premium dollar goes to pay claims. The rest of the money goes toward expenses -- including the high fixed cost of maintaining a large database of title information (not to mention the cost of ski trips) -- or is retained by the company as profit. By contrast, companies that sell auto or health insurance typically spend 90 cents or more of every premium dollar on claims.

Industry sources say that the most common claims involve a forged signature somewhere in the title chain, which even the most diligent title searcher can't always discern at the time of sale. A classic example is a divorcing couple who own a piece of property jointly. The husband decides to sell it without his wife's knowledge and forges her signature. When she discovers the fraud and demands her half of the proceeds, the title insurer will most likely negotiate a settlement.

But data from title-company filings with the insurance department in New Mexico, for instance, show that over the past three years, forgeries accounted for an average of only 1% of losses. Errors made by the title company during its search, such as failing to unearth a tax lien or a judgment lien, accounted for more than half of losses, so home buyers end up paying for the company's mistakes.

Despite the combination of infrequent claims and lack of competition, industry profit margins from 1992 to 1996 were in line with other types of insurance, says Charles Nyce, professor of risk management and insurance at the University of Georgia's Terry College of Business. Nyce speculates that strong housing markets since the mid '90s have changed the picture, allowing companies to spread their expenses over more policies and increase their return. "In Texas, title companies have had rates of return in excess of 25% for eight to nine years running," says Birnbaum, well above other lines of insurance, such as auto or homeowners.

Coverage for homeowners

Once in a blue moon, title insurance pays off for homeowners -- but only for those who buy a separate policy for themselves. As you pay down your mortgage, the lender's exposure to a title defect declines and yours increases. For an additional one-time premium of as little as $30.00, you can buy an owner's policy (as opposed to the required lender's coverage) to protect your equity.

That's a relatively cheap price for peace of mind. "Without an owner's policy, there's no protection at all for the consumer,"

"Then you're just paying a substantial premium to protect the bank's interest."

In some states you may not have to pay more for owner's coverage. In fact, you may have purchased owner's insurance without realizing it (check your settlement sheet). You'll certainly want an owner's policy if you're paying cash or making a substantial down payment.

Cut your costs

You may not have a choice about whether to buy title insurance, but you can choose your insurer and you don't have to overpay for coverage. A Kiplinger's survey of title-insurance rates in Alexandria, Va., St. Louis, Mo., and Walnut Creek, Cal., showed that a couple of phone calls could save you $250 to $400 on a policy for a $350,000 house. (In Florida, Texas and a few other states, the insurance department sets uniform rates. Iowa uses a different system, described below).

When you purchase title insurance, you're generally also buying escrow and other services related to the closing. To compare prices, find out the total cost of doing business with each company for all services. In New Mexico, for instance, title-insurance premiums are set by the state, but closing and escrow fees are not.

Start shopping around as soon as you've received a good-faith estimate of your loan costs, which the lender is required by law to provide within three days of the loan application. First American has a title-fee calculator at its Web site, and Stewart Title, another large insurer, has a search engine to help you find a title agent in your area.

Ask the current owners which insurer holds the existing policy on their house. If a company can save time by updating the original search, you can get a lower reissue rate, says David Cox, a consulting actuary who specializes in title insurance. Similarly, ask for a discount if you're refinancing. You could save half the cost of a new policy.

If you're a first-time buyer struggling to raise enough cash to pay closing costs, ask the seller to pay for title insurance. That's common practice in California, New Mexico and Washington.

State insurance departments say they get very few complaints about title insurance. Caught up in the heady process of buying a home, consumers will do whatever it takes to get the house.

But if you weren't informed about what you were buying or weren't given adequate opportunity to select your title insurer, speak up. If there are enough complaints, state insurance departments will investigate.

Many departments are waiting to see whether the recent dismantling of barriers among providers of financial services will hurt consumers. For instance, a bank could set up its own title-insurance company to handle all the mortgages written by the bank. While efficient for the lender, it makes it dicier for borrowers to compare rates and could lead to higher prices.

Regulators in Colorado are also cracking down on companies that fail to file their rates or use rates other than those on file. "Companies might be charging a homeowner in a certain neighborhood one price and a builder another price, which could be illegal," says Toll of the Colorado Division of Insurance.

Title Insurance FAQ - Questions answered on title insurance requirement, how it protects the borrower, purchasing a new policy upon refinancing and related topics.

Question on Title Insurance

 

What is Title Insurance, Is it Required, Does it Protect the Borrower, Why Must I Purchase a New Policy When I Refinance, and Other Questions

What Is Title Insurance?

 

Title insurance is protection against loss arising from problems connected to the title to your property.

Before you purchased your home, it may have gone through several ownership changes, and the land on which it stands went through many more. There may be a weak link at any point in that chain that could emerge to cause trouble. For example, someone along the way may have forged a signature in transferring title. Or there may be unpaid real estate taxes or other liens. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.

Is Purchasing Title Insurance Obligatory?

 

It is if you need a mortgage, because all mortgage lenders require such protection for an amount equal to the loan. It lasts until the loan is repaid. As with mortgage insurance, it protects the lender but you pay the premium, which is a single-payment made upfront.

Does Title Insurance Do Anything For Me?

 

The required insurance protects the lender up to the amount of the mortgage, but it doesnâ€TMt protect your equity in the property. For that you need an ownerâ€TMs title policy for the full value of the home. In many areas, sellers pay for owner policies as part of their obligation to deliver good title to the buyer. In other areas, borrowers must buy it as an add-on to the lender policy. It is advisable to do this because the additional cost above the cost of the lender policy is relatively small.

Doesn't the Lender Policy Indirectly Protect Me?

 

No, title policies are indemnity policies, they protect against loss, and a lender policy would only cover the lender's loss. Of course, the fact that the insurer issued a policy to the lender indicates that the title has been searched and nothing amiss has been found, but no search is 100% dependable. That is why an insurance policy is issued.

When Does Title Insurance Protection Begin and End?

 

With the exception noted later, title insurance only protects against losses arising from events that occurred prior to the date of the policy. Coverage ends on the day the policy is issued and extends backward in time for an indefinite period. This is in marked contrast to property or life insurance, which protect against losses resulting from events that occur after the policy is issued, for a specified period into the future.

For How Long Is the Property Owner Purchasing Title Insurance Covered?

 

Indefinitely. The ownerâ€TMs protection lasts as long as the owner or any heirs have an interest in or any obligation with regard to the property. When they sell, however, the lender will require the purchaser to obtain a new policy. That protects the lender against any liens or other claims against the property that may have arisen since the date of the previous policy.

For example, if the contractor you failed to pay for remodeling your kitchen places a lien on your home, you are not protected by your title policy; the lien was placed after the date of the policy. You will probably be required to get the lien removed before you can sell the property. But in the event the lien hasnâ€TMt been removed and a search has failed to uncover it, the new lender will be protected by a new policy.

Will Title Insurance Protect Me Against False Claims That Arose After I Purchased the Property?

 

The standard policy does not, which is a weakness. Many events beyond your control can reduce the value of your house after you buy it. Identity theft can result in a new mortgage you know nothing about. A neighbor could build on your land without your knowledge, thereby adversely possessing and possibly eventually taking your land. Or you may suddenly be told that you must correct a zoning violation of the previous owner.

To deal with these issues, a new policy with expanded coverage has been developed. I am told it is virtually standard in California and is available in many other states, perhaps at a small price increase. It is usually referred to as the ALTA Homeownerâ€TMs Policy.

Does Title Insurance Coverage Rise With Increases in the Value of My Property?

 

No, but coverage under the ALTA policy referred to above increases by 10% a year for the first 5 years after issuance, to 150% of the initial amount. You can buy additional coverage as a rider to the policy.

If your policy does not have such a rider and your property has appreciated sharply in value, you may be able to purchase additional coverage on the same policy by paying an incremental fee. The fee should be modest because because no new title search is involved. The coverage will only apply to title defects that existed prior to the original date of the policy. To extend the coverage to events that may have clouded the title since the original policy, you would need to take out a new policy with a new search and pay the full rate.

Why Do I Need to Purchase a New Policy When I Refinance?

 

You donâ€TMt need a new ownerâ€TMs policy, but the lender will require you to purchase a new lender policy. Even if you refinance with the same lender, the existing lenderâ€TMs policy terminates when you pay off the mortgage. Furthermore, the lender is concerned about title issues that may have arisen since you purchased the property, such as the lien mentioned in an earlier question. A new title search will uncover the lien, and you will have to pay it off as a condition for the refinance.

Insurers generally offer discounts on policies taken out within short periods after the preceding policy. In some cases, discounts are available as far out as 6 years from the date of the previous policy. Ask for it, it may not be offered if you don't.

Does the Fact That Title Insurance Companies Pay Out Very Little in Claims Indicate That it Is Overpriced?

 

No, it may be overpriced, but not for that reason. Because title insurance protects against what may have happened in the past, most of the expense incurred by title companies or their agents is in loss reduction. They look to reduce losses by finding and fixing defects before the policy is issued, in much the same way as firms providing elevator or boiler insurance. These types of insurance are very different from life, property or mortgage insurance, which protect against losses from future events over which the insurers have no control.

Are Title Insurance Premiums Fair to Low-Income Borrowers?

 

Probably they are more than fair. Most title insurance costs arise in preventing loss rather than paying claims, and prevention costs are not much different for a small policy than for a large one. Despite this, premiums are scaled to the amount of the mortgage or the value of the property, which suggests that smaller policies may be under-priced and larger policies overpriced.

Does Title Insurance Guarantee Me That I Will Be Able to Sell My Property If An Unforeseen Claim Arises?

 

No. Title insurance does not prevent loss of marketability due to a title claim, any more than fire insurance prevents fire. If a claim arises, you probably wonâ€TMt be able to sell your property until the claim is settled by the title insurer. The interest of the owner and the insurer may clash in such cases. The owner usually wants settlement immediately, whereas the insurer wants to minimize the cost of settlement, which may require time-consuming negotiations with the claimant.

Why Are There Such Large Variations in the Cost of Title Insurance in Different Parts of the Country?

 

One major reason is that the services covered by the title insurance premium vary in different parts of the country. In some areas, the premium covers not only protection against loss but also the costs of search and examination, as well as closing services. In other areas, the premium covers protection only, and borrowers pay for the other related services separately.

To complicate it further, in some states the charges for title-related services are paid to title insurance companies, which perform the functions but charge separately for them. In other states, borrowers may pay attorneys or independent companies called abstractors or escrow companies.

Of course, what matters to the borrower is the sum total of all title-related charges. These also differ from one area to another in response to a variety of factors. The 50 states have 50 different regulatory regimes, which affect charges. So do local costs, competition in local markets, and other factors. This is a largely unstudied segment of the economy that would make a nice PhD dissertation for a student in economics!

Does a Borrower Have the Right to Purchase Title Insurance on Her Own?

 

Yes, although few exercise it. Most leave it up to one of the professionals with whom they deal â€" real estate agent, lender or attorney â€" to select the carrier. This means that competition among title insurers is largely directed toward these professionals who can direct business rather than toward borrowers.

If a Borrower Does Shop For Title Insurance, Would it Pay?

 

Perhaps. It is difficult to generalize because market conditions vary state by state, and sometimes within states.

I would certainly shop in states that do not regulate title insurance rates: Alabama, District of Columbia, Georgia, Hawaii, Illinois, Indiana, Massachusetts, Oklahoma, and West Virginia.

You would be wasting your time shopping in Texas and New Mexico because these state set the prices for all carriers. Florida also sets title insurance premiums but not other title-related charges, which can vary.

In the remaining states, the situation is murky and it may or may not pay to shop. Insurance premiums are the same for all carriers in “rating bureau states”: Pennsylvania, New York, New Jersey, Ohio and Delaware. These states authorize title insurers to file for approval of a single rate schedule for all carriers through a cooperative entity. Yet in some there may be flexibility in title-related charges. More promising are “file and use” states â€" all those not mentioned above -- which permit premiums to vary between insurers.

It is a good idea to ask an informed but disinterested local whether it pays to shop in the area where the property is located. Just keep in mind that those likely to be the best informed are also likely to have an interest in directing your business in the direction that is most advantageous to them.

If a Property Changes Hands Very Quickly, Is a New Title Insurance Policy Required Each Time?

"My husband and I bought a piece of property in November 2001 and had to have title insurance. We began building in December, 2003 and we had to purchase a new policy in connection with our construction loan. Now, we are near completion and getting ready to convert the construction loan to a permanent loan and again we are being told we need title insurance. That will make 3 policies with premiums totaling about $9,000 in less than 3 years. Is this really necessary?"

The way the system works, three policies are necessary, but you should be getting substantial discounts because of the short time periods involved.

A lender policy cannot be transferred from one lender to another. Hence, when you pay off one mortgage when refinancing with another, the new lender wants a policy covering him. Even if the new lender is the same as the old one, that lender is going to want protection for the period since the previous policy.

Title insurance insures against events that might prejudice your title to the property that occurred before the date of the policy. This is just the opposite of other types of insurance, which insure against events that occur during some specified period beginning after the date of the policy.

This means that the lender who makes your permanent loan, even if he also made the construction loan, is not covered for anything that might have happened to your property after December 2003, the date of the last title policy. Because the period involved was so short, the risk might be negligible, but one cannot be completely sure about that.

If the risk was negligible and if the lender had to pay the premium, he might elect to forgo the title insurance, but since you are the one who must pay, why not? This is a good reason why lenders ought to be required to pay the premiums for lender title policies. Not only would redundant policies be avoided but premiums would fall.

A title insurance insider to whom I showed your letter pointed out to me that if the lender making your loan had to sell it in the secondary market, the requirements of secondary market investors would dictate the required title coverage. That is true, but if lenders were required to pay for title insurance, the secondary market would develop a very low-cost way of covering very small risks.

Meanwhile, the best you can do is negotiate the largest discount possible. Remember that it wonâ€TMt necessarily be offered to you if you donâ€TMt ask.

Is Title Insurance Overpriced?

"I recently read that some of the large title insurance companies have been kicking back to home builders 50% of the premiums collected from the people who buy houses from the builders. Doesnâ€TMt that mean that title insurance is seriously over-priced…?"

The price of title insurance must include the heavy referral costs incurred by the title companies, so in this sense it is overpriced. The referral costs that have come to light recently in Colorado, where companies funneled 50% of the premiums from builder customers to reinsurance affiliates owned by the builders, may be just the tip of the iceberg. Investigations have recently started in both Florida and California.

In Michigan, title companies pay referral fees to builders directly. House sellers in Michigan are required by state law to purchase an ownerâ€TMs title policy for the buyer. If the seller is a builder, however, the premium is a flat $25, provided the builder arranges for the buyer to purchase the loan policy required by the lender from the same title company. The premium on the loan policy is not discounted by 60%, as it is when the house seller is not a builder. This situation has stimulated a class action lawsuit against the 4 largest title companies in Michigan.

Why Title Insurance Generates Substantial Referral Fees

 

Borrowers typically know little or nothing about title insurance, which is part of much larger transactions that they encounter very infrequently. In most cases, therefore, a borrower purchases policies from the title company recommended by the industry professional most closely involved in their transaction. On the purchase of a new house, this will be the builder. On the purchase of an existing house, it will probably be the Realtor. On a refinance, most likely it will be the lender.

Because the referrers select the title company, the companies must market to them rather than to the consumers who pay the premiums. For this reason, the price charged the consumer plays little role in the marketing of title insurance. Many referrers do not care how much the consumer pays. Indeed, their interest is best served by large profit margins which enable the title companies to pay hefty referral fees.

Title companies don't want to pay referral fees, but they must compete for the favor of the builders, brokers and lenders who can refer clients to them. Referrals have value and they want a piece of it.

Referral Fees are Illegal Under RESPA

 

Under the Real Estate Settlements and Procedures Act (RESPA), referral fees are illegal unless they constitute payment for services rendered, and the payments must not exceed the value of the services. However, the Department of Housing and Urban Development (HUD), which has responsibility for enforcing RESPA, does not have the army of examiners it would need to do the job effectively.

Violations of the anti-kickback provision of RESPA are widespread. Small players do it with many different varieties of under-the-table payments. Large players generally search for legal ways to comply with the letter of the law while violating its spirit. Title companies in Colorado viewed the reinsurance affiliate as such a device.

Reinsurance Affiliates as a Method of Complying With RESPA

 

Some large lenders have used this device to extract referral fees legally from mortgage insurance companies. The lenders have reinsurance affiliates that receive part of the mortgage insurance premiums paid by borrowers who have been referred to the mortgage insurers by the lenders. In exchange for the premiums, the affiliate shares the risk with the insurer. This is the legal cover for RESPA compliance.

The title companies in Colorado used the same device, reinsurance affiliates owned by builders, to pay off the builders. It boomeranged, however, because of the major difference between mortgage insurance risk and title insurance risk.

Losses from defaults are a major part of the costs of mortgage insurers. And while they can go for many years with no problems, losses will balloon when real estate prices collapse. Since one can never be sure when this will happen, nor how large the losses will be when it does, it would be very difficult for HUD or anyone else to establish beyond reasonable doubt that the reinsurance affiliates are being overpaid for the risks they assume.

Most title insurance costs, in contrast, stem from their risk prevention functions rather than from insurance losses. Title insurance losses account for a small part of the premium dollar, and are much less vulnerable to conditions in real estate markets than mortgage insurance losses. The finding in Colorado, that the buildersâ€TM reinsurance affiliates have had zero losses, is thus powerful evidence that the premiums paid to them were only thinly-disguised referral fees.

RESPA Enforcement Is Uneven

 

Why do the title companies get all the heat for paying referral fees? RESPA states very clearly that those who receive kickbacks are as guilty as those who pay them. Indeed, their demands drive the referral process. But the title industry has some large players, who make the best targets for district attorneys and class action lawyers.

The failure of the title companies has been their inability to resist the pressures to pay. It is difficult because they must compete for the patronage of builders and others in a position to refer customers to them, who can play one title company off against another. It would be easier for them to say no if the recipients of referral fees had as much to lose from exposure as the payers.

Is a Crack-Down the Best Response?

 

When news emerges of widespread payoffs, as it did recently in Colorado, the knee-jerk reaction is to demand a step-up in enforcement actions. In my view, this is the wrong response. Terminating referral fees by regulation would require an army of examiners, and even then it wouldnâ€TMt work. The financial incentives are too strong, there are too many ways that payoffs can be made, and there are too many people involved for regulation to be effective.

Another option which is being considered in some quarters is to socialize the title insurance industry. In Iowa, only a state agency is allowed to sell title insurance, although residents are permitted to buy policies from out-of-state firms. Some view Iowa as a possible model for a complete overhaul of the industry.

I favor a market-based solution, the goal of which would be to eliminate referral power and with it, referral fees and any need for RESPA examiners.

A market solution must be based on the following principal: whoever selects the title company from whom title insurance is purchased must pay for the policy.

Implementation of the principal requires three rules. The first would mandate that title loan policies, if required by mortgage lenders, had to be paid for by mortgage lenders. The second would mandate that on purchase transactions in which Realtors were involved, the ownersâ€TM policies had to be paid for by the Realtors.

These rules would eliminate "perverse competition" by insurers for the favor of referrers, which raises the price of title insurance. Instead, title companies would compete to sell to lenders and Realtors, which would reduce the price of title insurance.

Of course, lenders and Realtors would embed the title insurance premiums in their own prices to consumers, but they would cost borrowers far less in that form than they pay now. Lenders and Realtors would be price-sensitive buyers because they are paying the premiums, and they would be knowledgeable buyers because they are in the market continually. Prices should drop sharply, provided that state regulation of title premiums doesnâ€TMt prevent it.

The third rule that is needed is one that eliminates state regulation of title insurance premiums. If lenders and Realtors purchase title insurance, regulation of premiums is not needed and can only impede the decline of title costs to consumers.

The most radical part of this proposal is the one involving Realtors. Unlike lenders, Realtors donâ€TMt need title insurance for themselves but would be pressed into service as purchase agents of home buyers. This makes all kinds of sense, although important details such as how the responsibility would be allocated when there is a buyerâ€TMs agent as well as a sellerâ€TMs agent, have to be worked out.

The title insurance industry is under the gun and it will be interesting to see how it responds. The market-based solution described above would be painful in the short-term, but the industry would survive and ultimately become stronger. If the industry hunkers down and resists all meaningful change, it might or might not outlast its critics, for many of whom the socialization model ala Iowa has a strong appeal.

The market for mortgage insurance works very much like the market for title insurance, but it is simpler. Mortgage insurance protects only the lender, there is no analogue to a buyer title policy. Further, the lender has all the referral power; no other entity involved in the settlement process has any say in the matter. The remedy is equally straightforward: lenders should be required to pay for their own mortgage insurance.


Title Insurance Glossary - Terms to know when reviewing a title insurance policy.

Title Insurance Glossary

 

Abstract of Title - A condensed history or summary of all transactions affecting a particular tract of land.

Adjustable Rate Mortgages - Mortgages with an interest rate that may change up or down depending on an indicator. These are usually based something like the current Treasury bill rate.

Affidavit - A sworn statement in writing.

All-Inclusive Title insurance - This means that most title insurance charges are included in one price.

Amortize - To reduce a debt by means of regular periodic payments which include amounts applicable to both principal and interest.

APR - Annual percentage rate. On some mortgages the APR is higher than your actual mortgage rate.

Assumption - A mortgage that allows a new owner to take over payments. The original borrower remains liable on the mortgage note.

Deed - A written document by which the ownership of land is transfered from one person to another.

Deed of Trust - Instrument used to secure a loan on real estate. Like a mortgage, generally used in the South. The major difference is in how forclosures are handled. Forclosures are much faster with a Deed of Trust than with a Mortgage.

Deposit or Earnest Money - Advance payment of part of the purchase price to bind a contract for property.

Due-on-Sale Clause - A provision in a mortgage or deed of trust which requires the loan to be paid in full if a property is sold or transfered.

Equity - The interest or value which an owner has in real estate over and above the debts against it.

Escrow - (1) A procedure whereby a disinterested third party handles legal documents and funds on behalf of a seller and buyer. (2) Money that is kept by the mortgage company to ensure that taxes can be paid in full when due. This is paid up front on settlement sheet lines 1001 - 1006 and is added to the mortgage payment monthly over the prinicial and interest figure.

FNMA (Fannie-Mae) - The Federal National Mortgage Association, a federally sponsored private corporation which provides a secondary market for housing mortgages.

Fixed Rate Mortgages - Mortgages with a fixed interest rate. You payment for principal and interest will not change for the life of the loan. Your monthly payment may change if taxes or insurance rates change.

FHA - The Federal Housing Administration. An agency of the federal government which insures private loans for financing of new and existing housing and for home repairs under government approved programs.

FHLMC (Freddie Mac) - Federal Home Loan Mortgage Corporation. An affiliate of the Federal Home Loan Bank, which creates a secondary market in conventional residential loan and FHA and VA loans by purchasing mortgages from members of the Federal Reserve System and the Federal Home Loan Bank System.

Foreclosure - Legal process by which a mortgagor of real property is deprived of his interest in that property due to failure to comply with terms and conditions of the mortgage.

Grantee - A person who acquires an interest in land by deed, grant or other written instrument.

Grantor - A person who, by a written instrument, transfers to another interest in land.

Hazard insurance - The homeowner's insurance policy.

Heir - One who might inherit or succeed to an interest in lands under the rules of law applicable where an individual dies without leaving a will.

In personam - Directed at specific persons rather than against property or generally for all people.

In rem - Pertaining to property or people in general.

Interest only payments - A mortgage where only the interest is paid on a monthly basis. This means that the buyer gets no equity. This is only used on some purchase money mortgages where the buyer is responsible for paying the seller the entire amount of the second mortgage at some time in the future.

Instrument - A written document.

Loan origination fees - Money required by the lender to be paid to start the work of approving a mortgage.

Judgment - A decree of a court.

Lien - A hold, a claim or charge allowed a creditor upon the lands of a debtor.

Mortgage Note - An instrument used to encumber land as security for a debt. This document gives the mortgage company "in rem" jurisdiction over the mortgagor.

Mortgagee - A designation for the mortgage lender on lands.

Mortgagor - A designation for the mortgage borrower on lands.

MIP - Mortgage insurance protection

Note - A written promise to pay a certain amount of money, at a certain time, or in a certain number of installments. It usually provides for payment of interest and its payment is at times secured by a mortgage.

The mortgage note document gives the mortgage company "in rem" jurisdiction over the mortgagor.

The promisory note document gives the mortgage company "in personam" jurisdiction over the mortgagor.

P.O.C. - Paid outside of closing. Sometimes the lender requests this money before settlement. If you pay any charges before settlement they should be written on the settlement sheet. They are written on the proper line outside of your column. They should also be marked P.O.C.

Point - a percentage point. Equal to one percent of the loan amount.

Power of Attorney - An instrument authorizing another to act on one's behalf as his agent or attorney.

PMI - Private mortgage insurance.

PMM - Purchase money mortgage. A mortgage given by the seller simultaneously with the purchase of real estate to secure the unpaid balance of the purchase price.

Pro-Rate - To allocate between seller and buyer their proportionate share of an obligation paid or due.

Promisory NoteA promise to pay. The promisory note document gives the mortgage company "in personam" jurisdiction over the mortgagor.

Real Property - Land and that which is affixed to it.

Reissue Rate - A reduced rate of title insurance premium applicable in cases where the owner of the land has been previously insured in an owner's policy by the insurer within a certain time.

Second Mortgage - A mortgage, the lien of which is subordinate to that of another mortgage.

Survey - The process of measuring land to determine its size, location and physical description and the resulting drawing or map.

Tax Service Fee - A fee paid to the mortgage company to verify that they actually pay the real estate taxes.

Title - The evidence or right a person has to the ownership and possession of land.

Title Insurance - Insurance against loss or damage resulting in defects or failure of title to a particular parcel of real property.

Title Insurance Binder or Commitment - A report issued by a title insurance company binding or committing the title insurance company to issue the form of policy designated in the commitment or binder upon compliance with and satisfaction of requirements set forth in the commitment or binder.

Title Search - An examination of public records and court decisions to disclose the current facts regarding ownership of real estate.

Transfer taxes - Money paid to the county and or state when property is sold.

VA - The Veterans Administration. They insure mortgages.

Will - A written document properly witnessed, providing for the distribution of property owned by the deceased.

Overview: Title insurance prevents the property owner from suffering financial loss if, at any time during his ownership of the property, someone comes along who can show that they have full, or partial, ownership of the property instead. Every mortgage lender one is aware of requires title insurance be purchased to cover the amount of the mortgage. They're not in business to lose money.

Most home sellers and buyers have been informed that obtaining title insurance will provide them necessary protection over possible title defects; but many remain uncertain about why this is so - or even about what title insurance is. At the Chicago Title and Trust Family of Companies, they believe they have everything to gain by throwing some light on the subject.

A title search is a means of determining that the person who is selling the property really has the right to sell it, and that the buyer is getting all the rights to the property (title) that he or she is paying for. The search process can be undertaken by the title company in those jurisdictions where the company maintains offices. In some areas, however, searches are made only by practicing attorneys. However the search is performed, in most real estate transactions today a title insurance policy is purchased to assure the buyer that he or she has purchased a valid title. In those transactions where title insurance is involved, the title company must determine insurability of the title as part of the search process.

Title to a property is a record detailing the owners of the property and rights associated with the ownership. Title typically shows a progression of ownership from the first owner to the current one. Title is a fairly simple concept, but when it goes wrong it is a nightmare. That is where title insurance comes in. Title insurance guarantees that the title on a property is marketable when one purchases the home, condo, land, etc.

A title is a written document that shows ownership of property. It includes the signatures of current owners and a legal description of the property. A title is also known as a deed. Before one closes on a new home, a title examiner will conduct a title search. This is a review of public records and legal documents to ensure that the seller is the true, legal owner of the property, and that there are no unsettled claims or liens against the property. Title insurance protects the lender (and possibly the homeowner) against losses that might arise from property ownership disputes.

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