Frequently Asked Questions About Title Insurance
From the American Land Title Association (ALTA). Click here for additional consumer information and education.
Some have criticized the cost for title insurance. Are premiums in line with the value of the product?
Absolutely. If you look at all of the closing or settlement costs involved in buying a home, and the fact that title insurance represents a one-time premium that covers the life of a loan and/or property ownership, it’s a bargain. Another consideration is that title insurance is a heavily regulated industry. As such, states oversee rates to ensure that they are not exorbitant, as well as not so low as to threaten the solvency and reserves of the insurer.
Why do title insurers only pay 5 percent of premiums in claims, when property and casualty companies pay roughly 70 percent? Aren’t you gouging consumers to increase your profits?
Title insurance is substantially different from other lines of insurance, which can often lead to a misunderstanding of the product. Title insurance emphasizes loss prevention rather than loss assumption. Loss assumption, which is based on what may occur in the future, relies on actuarial estimates to predict future losses. Loss prevention, on the other hand, means that title professionals must use every resource at their disposal to uncover and repair title defects that have already occurred (preventing claims from being filed in the future). This includes an exhaustive search of public records to look for things like unpaid taxes, liens, undisclosed second mortgages, utility easements, rights-of-way and other issues that can cloud a title. Title defects arise in one out of every four residential real estate transactions, and are typically remedied by a title professional before settlement or closing. Because of this major difference between title insurance and property and casualty insurance, title companies spend approximately 90 percent of the premium dollar on expenses, whereas property and casualty companies spent about 25 percent.
When closing services are largely selected by disinterested third parties (i.e. real estate and mortgage professionals), doesn’t that foster a non-competitive atmosphere, at least in terms of price?
When buying a home, most consumers choose to rely on a third party (typically a real estate agent) to select their settlement service providers for them. We see real benefits for consumers to get more involved in the process but, in reality, most simply don’t have the time or inclination to do so. Instead, they trust their agent (or other real estate professional) to select providers who will deliver quality products and services in a timely manner, at a reasonable cost. Title agents compete fiercely for business among these “third parties” on many levels, including service, which is becoming more important in states where rates are heavily regulated. We want to help educate consumers about the benefits of title insurance, the protection it provides, and their rights to choose their own title company. The American Land Title Association Web site (www.alta.org) contains extensive consumer information about title insurance and the closing process, how to choose a title company, and a listing of title representatives by city and state.
Haven’t advances in technology made it easier to do a title search, and shouldn’t prices reflect that?
There are more than 3,000 counties, parishes and independent cities in the United States. Real estate transactions within each of these geographic areas must be reported to the local county recorder’s office. The filing process with the majority of the recorders’ offices is manual, and the files themselves are actual paper archives. In fact, only 10-15 percent of the counties have automated title files. So, in the vast majority of the country, the data retrieval process is highly manual and paper based. Conducting a thorough title search is not instantaneous like you would find on a search engine like Google. Ultimately, it would seem that technology should play a material role in streamlining the process, but given the cost of such an undertaking and the priority that cost might have for a given county’s budget, it is unlikely that all of the recorders’ offices can switch to electronic record-keeping in the near future. Some larger title companies have made significant investments in “title plants” (their own electronic database of county records). These title plants must be organized and continuously maintained at considerable cost.
What are monoline restrictions, and are they still applicable today? Don’t they prevent competitors from entering the market, which would lower prices?
Monoline refers to the statutory restriction that limits companies writing a particular line of insurance to writing only that line. Enacted at the state level, these restrictions apply to title insurance, mortgage guaranty insurance and financial guaranty insurance. ALTA believes the monoline restrictions for title insurance continue to constitute sound economic and regulatory policy, and are an important safeguard to protect insurer solvency. These restrictions allow an insurer to isolate its surplus so that it can only be used for the protection of its policyholders, which is important because the term covered by a single title premium is for the duration of property ownership (or the term of the real estate loan). Since the potential loss can go back many years, the failure of a title insurance company would affect its customers for decades past—insurance protection they should rightly have for as long as they own their homes. Non-title insurance companies that specialize in other high-risk lines do not have the appropriate reserves to issue title insurance, have no title insurance underwriting experience, and simply cannot deliver the same quality of product as a title insurer.
Iowa’s system of title insurance is run by the state. Why haven’t other states followed Iowa’s example?
Title insurance in the state of Iowa is administered by the Iowa Title Guarantee Division (TGD), which is a government body. The way the process works is that title searches are performed by abstracters, whose findings are then reviewed by attorneys. From these documents, the TGD issues a certificate that serves as title insurance. A substantial number* of Iowa mortgage loans are currently being insured by private out-of-state title insurers because the coverage is more comprehensive. A major problem with the Iowa system is that only about half of the title losses that occur are covered by errors and omissions insurance (carried by abstracters and attorneys). Because this coverage is less than with traditional title insurance, approximately $1.6 million in losses was absorbed by Iowa homeowners, attorneys, lenders and borrowers in 2002, and $2.4 million in 2003. Finally, as a government monopoly, the state has had no competitive incentive to create products that meet the expanding needs of homeowners over the last 35 years as markets and consumer protection policies have evolved.
*TDG certificates are issued only to about 15 percent of owners, and 31 percent of lenders.
We keep hearing about agent defalcations, kickbacks and regulatory actions being taken against title companies. Is this an industry-wide problem?
No. Every industry has its share of “bad apples.” And, not unlike other industries, there are individuals who set up sham companies for the sole purpose of committing fraud. We fully support the prosecution of these individuals to the full extent of the law, as this kind of activity hurts everyone. ALTA supports practices that are in compliance with all applicable laws and regulations governing the title industry, and encourages its members to work closely with their regulators.
Why is the GAO looking into the title industry?
Because of the complexity of our business, and the fact that rules and regulations vary by state, there has been a lot of confusion in the marketplace leading to misinformation and misunderstanding. We have met with and are assisting the GAO, and view this as an opportunity to help clear up the confusion that exists, and foster a better understanding about title insurance and the value it provides. We will continue to work with the GAO and look forward to the release of its report.
Does the title industry support RESPA reform, and how will that impact your business?
We support HUD’s efforts to make the home buying process more transparent for consumers. ALTA actively participated in all six of the workshops sponsored by HUD last year, and provided feedback on the key issues that will likely be addressed in a future reform proposal. Two fairly consistent themes that emerged from the workshops dealt with improving the accuracy of the Good Faith Estimate, and clarifying HUD’s policy statements in the Section 8 (anti-kickback) provision. It is unclear at this time when HUD might publish a proposed rule, or what that rule might include.
FEDERAL REGULATION OF INSURANCE
What about regulating title insurance at the federal level. Will that work?
No. Of all the lines of insurance, none are as inextricably linked to state and local laws as title insurance. As well, local practices regarding real estate vary from state to state, and even from region to region within a state. The underwriting of title insurance involves a review and assessment of state and local records affecting titles to real estate, and title insurance policies are issued in connection with inherently local transactions—real estate settlements and mortgage loan closings. It would represent an enormous undertaking for a federal agency to establish federal regulations that would reflect variations in the real property law of all 50 states. State regulators are much closer to local practices and can respond to changes in the marketplace more quickly. Therefore, we believe that state regulation continues to be the most effective form of governmental supervision for our industry.