Pound Foolish and Just Not Wise
The Truth about Title Insurance
While this is admittedly not the most interesting subject in the world, title insurance is a subject that has garnered some headlines and soundbites in the last year, and moreover, something that is generally misunderstood by politicos, the media, as well as the general public. As is frequently the case, the comments and articles generally miss some rather relevant information.
Having the security that you own the property for which you are paying a rather large sum and for which your lender is agreeing to lend you large sums is something that just makes sense. Title insurance is not a new concept. It has been around for almost 150 years. That is not to say that it is a perfect solution to protecting buyers and lenders from undiscovered past and especially future issues and claims of heirs, parties foreclosed upon, creditors, taxing authorities, contractors who improved the property and the list goes on; however, a better option or solution has not yet been proffered. Determining the matters of public record before a closing has certainly become easier and more reliable, but that is not the real point of title insurance. The point of title insurance is to protect owners and lenders from claims that come about after a transfer and usually for matters not identified in the public record.
The “solutions” that have attracted headlines certainly sound great, but fall short of what title insurance provides. One such option has been to provide for certain loans, notably refinances, to be eligible for a waiver of the requirement for lender’s title insurance. There is no disputing that the costs of purchasing a property can be prohibitive for many; however, this proposal does nothing to help with entry to market costs. Simply, this program would only be available for “certain” refinances and thereby does nothing to facilitate homeownership – you cannot refinance what you don’t already own. Either independent of waivers or in conjunction therewith, Attorney Opinion Letters (AOL) have been offered as an alternative to title insurance. As described above, title insurance covers claims that arise after closing. AOLs may give peace of mind at closing that the title is “clear” at the time an AOL is issued; however, this unregulated alternative does not provide buyers and lenders with ongoing protections for unforeseen risks. What about forgery and fraud coverage? What about defense costs for a title dispute? Who is going to oversee the standard for AOLs and regulate the issuance thereof?
A few other misnomers or omissions from this conversation that also deserve consideration in this discussion are: the actual costs of title insurance; the current regulation thereof; and how claims are handled. Title insurance is a one-time, non-recurring cost, for which there is currently regulation at the federal and state level. Insurance commissioners are responsible for overseeing the industry, licensure of title agents, and in most jurisdictions the regulation of premiums. The relatively small percentage of instances for which insurers payout claims completely disregards the expenses associated with curative efforts made both before and after closings as well as the time and costs associated with clearing titles and defending claims. Is it in the consumer’s best interest to promote self-insurance at a risk of all of their current and future equity in their homes? We live in a litigious society, for which the barriers to filing suits are minimal. What will it cost buyers and lenders to defend claims? And for the legitimate claims the financial risk/exposure is tremendous.
Fortunately, many jurisdictions have implemented programs that provide for grants and reduced transaction taxes that have lowered the hurdle for entry into the real estate market. That is certainly a step in the right direction for first time homebuyers. Instead of providing buyers with less security (or encouraging the same) in the largest investment of most people’s lives, how about some consideration to having the jurisdictions curb the ever increasing transfer and recordation taxes? Provide buyers with a real benefit and no harm… just a thought.
The opinions expressed herein are not to be construed as legal advice provided by the author or any affiliate thereof.
