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Just Don't Buy It
by Robert Franco
 | 2008/02/21 |
In 2004, ALTA claimed that 48.8 million homeowners, an estimated 40 percent of U.S. Homeowners don't have an owner's policy of title insurance. I have shared a story about owner's policies before, but it is worth revisiting in light of a news article I came across today.
About ten years ago I took a couple of real estate classes at our local community college. They were the same courses that our Realtors take to get their realty agent's license. I thought it would be nice to know what kind of training they get so I could better serve them as a title agent. The text book we read said something like: "If you can get title insurance, you probably don't need it." That is "probably" true because title agents hate claims! It is our job to thoroughly search the title and correct any defects before issuing a policy, so there should be very few claims. However, the Realtor that taught the course boldly told the class that she recommended to her buyers that they NOT pay the extra premium for an owner's policy. She specialized as a "buyer's agent." Her logic was simple - the bank gets a policy, so the buyer doesn't need one. All I could do was cringe in my seat - and I tried to politely inject a bit of sanity into the discussion by telling her what kind of things could happen if the buyer opted NOT to get the coverage, but I don't think I had much of an impact. Like so many others, her attitude was basically, "if you do your job right, my buyer shouldn't have anything to worry about." Arrrg - it is tough to argue with that one, but some things are even beyond the agent's ability to discover.
Well... apparently she is not alone in her view that owners do not need title insurance. A recent article in the Los Angeles Times, Title Insurance Buying Tips, ends with similar advice.
Consider doing without: The risk of a title-related problem is so low that J. Robert Hunter, insurance director for the Consumer Federation of America, said people should think about not buying an owner's policy.
That advice may not be practical in Southern California, since home sellers here customarily provide the policy (and good luck trying to sell your house if you refuse to pay for title insurance). But in other locales, including the Bay Area, the buyer traditionally pays for the title insurance, so this may be an option there.
"Everybody has a different level of tolerance of risk," Hunter noted. "If you can't sleep at night, well sure, go ahead and get it. But just understand it's not a good economic risk."
I think a big part of the problem is the way we price title insurance. In some states, title insurance is an all-inclusive premium that includes the search and examination, as well as the time spent clearing the title. In other states, the search is a separate charge over and above the premium. But, either way, the agent gets a rather large share of the premium to at least subsidize the work that must be done before a policy can be issued. This is important work that must be paid for - and it should justify the cost of the premium.
Source of Title Blog ::
We "could" reduce title insurance premium by about 75 percent and make all of the skeptics happy. We could make title insurance "a good economic risk." But, in every closing, the buyer wants to be assured that a title search is done and the seller's mortgage and liens are all paid off before he takes title. They don't want to be surprised by a deed restriction that prevents him from building a home on the lot, operating a business on the premises, or raising goats if that is his desire. That takes some work and it must be paid for. If we were to reduce the title insurance premiums to appease the critics, the cost of the services that must be done to handle the transaction would naturally go up.
There are two main sticking points that the anti-title insurance crowd hang their hats on when they adamantly state that title insurance is over-priced. First, they claim that kickbacks have grown out of control and if there is money to pay kickbacks, the price must be inflated to allow for that illegal practice to flourish. Well... they are right! You just can't argue with that logic - for every dollar that goes into the pockets of Realtors and lenders for referring title orders, that is one dollar that the consumer should have saved. But, before you can start fiddling with the rates, you have to put an end to the kickbacks. Fines and penalties should be much steeper and they should start assessing them against both the party that pays them and the party that demands and accepts them. But, the states should do more than that - the departments of insurance should start suspending the licenses of the agents that pay kickbacks. If an agent knew that they may lose their license for a year if they pay a kickback, they would be much more inclined to just say no. Obviously, if after paying more than $100 million in fines companies are still willing to participate in such illegal arrangements, it must be profitable to do so.
The second rationale is the Iowa Title Guarantee Program is able to provide title insurance for about one-quarter of the cost of traditional title insurance. Again, it is hard to argue with the facts. But the title insurance industry claims that it takes longer to get a policy from the state of Iowa than a traditional title company. That may be true, but I think that most people would be willing to wait a little longer to save 75 percent on their closing costs. The real difference between the Iowa program and traditional title insurance is that Iowa limits the choice of the consumer. In addition to avoiding the kickback problems (I'm sure nobody has tried to extort a kickback from the State of Iowa), there is also no need for the state to incur any marketing expenses. They don't need to woo agents to write policies on their paper because they are the only game in town. And, there really are no agents in Iowa that get a split of the title insurance premium. As I understand it, participating abstractors and attorneys do their thing and charge for their services, then the application for the title guarantee is sent to the state.
Iowa has a good system in place - I like the model. But, would it really be practical for any other state to try to mimic it now? Probably not. Iowa has a long history of regulating their abstractors and many participating attorneys who know what they are doing. Most other states have not regulated their abstractors, and non-attorney title agents are much more common. And, I do not mean to say that a non-attorney can't do the job... but good luck finding them if they aren't going to be able to get a split of the premium. Basically, Iowa has the infrastructure in place for their system - the other states clearly do not.
Whatever the flaws are in the system, advising homebuyers not to purchase owner's policies seems like a very risky proposition. It is true that claims are fairly rare, but they do happen. I have read several cases where homeowners suffered a loss and did not have title insurance. In some they end up paying to clear their own title, in others they have been forced to remove buildings. Though rare, the losses can be substantial and title insurance, as a one-time premium for an owner's policy, is not an unreasonable investment for the peace of mind that it provides. Like all insurance, you always hope you will never have to file a claim. But, if you do, you will be glad you have the coverage.
Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com
Categories: Consumer Advocacy, Title Industry
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