Misguided Attacks On Title Insurance Could Have Grave Consequences

In the last couple of years Fannie Mae
and its government overseer, the Federal Housing Finance Agency have taken aim at the title insurance industry – an often overlooked but important part of the housing finance infrastructure that protects homeowners from possible issues regarding the provenance of the title of any home they are attempting to purchase.

For instance, Fannie Mae’s recently-scrapped title waiver pilot program – which would have resulted in the GSE taking on an altogether new role in the primary market with which it has no experience nor authority – and recent expanded acceptance of unregulated attorney opinion letters in lieu of title insurance on certain loans are evidence of the reality that government regulators have gaping misconceptions about what title insurance entails and the risks involved with alternatives.

These attempts to sidestep title insurance is a mistake, and any ostensible cost savings would likely be outweighed by the lack of coverage and uncertainty these efforts would create in the real estate market.

Title insurance is fundamentally different from property and casualty insurance or other insurance products, where most of the upfront cost is marketing. Title companies incur significant upfront expenses related to conducting public records searches and rectifying any problems found before the buyer closes on the home. For a one-time fee that typically costs the borrower approximately 0.5% of the home’s purchase price, less than most all other fees involved in the mortgage process over the life of a loan, title insurance companies ensure clear property ownership rights for home buyers and provide comprehensive coverage if a problem arises.

Title insurance rates are regulated at the state level, and due to significant fixed costs to produce a title policy, the industry’s profit margins are much lower than other lines of insurance. The National Association of Insurance Commissioners reports the expense ratio for the title industry was 94.6% in 2022, compared to a 25.7% expense ratio for property and casualty lines. The expense ratio is the proportion of the premium used to pay all the costs of acquiring, writing, and servicing the insurance. The higher the expense ratio, the lower the profit.

And while other forms of insurance have seen rates increase dramatically in recent years – for instance, homeowners’ insurance has increased by fifty percent from 2021-2023 in several southern states – the cost of title insurance coverage has decreased 7.8% nationally since 2004.

In most states, home buyers do not pay for their title insurance policy: The seller in a transaction pays for the home buyer’s policy, which significantly reduces the cost of title insurance for consumers, and the home buyer just pays for the policy to protect the lender. What’s more, when a home buyer‘s policy and lender’s policy are issued simultaneously at a closing, many companies offer a reduced price for these policies. In “seller-pay states” these discounts usually result in sizable savings for consumers. And in refinance transactions, where a new lender’s policy is required to ensure clean title since the prior mortgage was issued, companies typically offer “reissue” rates that provide additional discounts as well.

A title policy requires much more than doing a simple Google search: While technology has advanced and more data is digitized, title companies must still invest resources to maintain databases, digitize documents and train workers. Technology is making the process more efficient, but a title search cannot be completed – and cannot be replaced – with the click of a mouse. Often, a public record search alone does not tell the whole story, hence the ongoing protection that title insurance ensures. According to the American Land Title Association, one-third of all of claims paid out by title insurers are for things that could not be found in a public records search.

Even when refinancing, homeowners still need to purchase a new lender’s policy because threats to property rights can occur between the origination of the loan and refinancing. For instance, it is not unusual for a homeowner to have a judgment or lien on their house due to unpaid taxes, homeowner association dues, or child support.

Title insurance plays a critical role in protecting home buyers and lenders, which is why bipartisan legislation was recently introduced in Congress – the Protecting America’s Property Rights Act, that would require title insurance on mortgages purchased by government-sponsored enterprises.

Title insurance helps make the real estate market much more robust and gives people a modicum of certainty with what is typically the biggest purchase they ever make, in a market they only encounter a handful of times in their life. Minimizing its importance and replacing it with a pale facsimile would weaken consumer’s property rights and harm the housing market.

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