Posted on Sunday, August 2, 2009
Once again our nation’s title insurance industry is coming under the regulatory microscope. And again all eyes are myopically focused on price.
Continual re-scrutiny of title insurance in this same tired vacuum, and evaluation by politicos with little knowledge of the product and service, will no doubt result in more of the same regulatory “improvement” in the wrong direction.
Title insurance emerged to combat challenges American pioneers faced consummating reliable real estate transfers. Prior to that time, it was not unusual for someone to dish out life savings only to find that the property they’d bought actually belonged to someone else.
Today, real estate buyers rest assured an owner’s title policy protects their most significant investment is protected from the likes of scam artists, fraudulent transfers and even human error. A lender’s title insurance policy likewise provides lenders and investors originating and trading mortgage loans with a guarantee that their borrower actually owns the property being financed, and that the property itself is free of encumbrances. When lenders are comforted with reduced risk, they loan money at lower rates. In the big picture title insurance saves us money.
Title insurance premiums are one of the larger costs in any real estate transaction, making them easy targets for criticism. But to be fair, the price of title insurance has to be evaluated, not only in comparison to similar insurance products, but also to similar services.
Take hazard insurance, a product that protects property owners from damage or destruction to the physical improvements on a property and related liabilities, assuring a potential dollar payment of whatever it would cost to rebuild. Hazard premiums vary based on such property-specific factors as price, size, condition, age and location, as well as policy deductible. The average annual hazard insurance premium in the U.S. is in the $1000 range. That sum is paid year after year, often increasing as time goes on.
While title insurance premiums vary from state to state, they do not vary from one property to another within a state. They are typically based on a set rate per $1000 of coverage, said to average about $3.50. In Florida, one of the most expensive states for title insurance, premiums are about $5.30 for every $1000. That translates to $1,325 for a $250,000 home. But the more important distinction is that, unlike hazard and other types of insurance, a homeowner’s title insurance premium is paid only once, at the time a property is purchased. This single one-time premium provides coverage for the entire time a property is owned.
Most of us consider an insurance premium, be it hazard, windstorm, flood, health, automobile or life insurance, as merely the price we pay an underwriter for taking the responsibility of certain risks off our own shoulders. We understand that the underwriter’s agent is paid a portion of the premium by the underwriter for putting the deal together, gathering information to complete the necessary forms, and generally overseeing customer service. But title insurance differs in this regard as well. Title insurance agents actually play two roles. The first is similar to that of most traditional insurance agents, but the second is fraught with tedious, stressful work and liabilities many consumers are not aware of.
Sometimes referred to “closing agents” or “settlement agents,” title agents are charged with completing all the due diligence and instructions required to be followed by their title underwriter and a buyer’s lender. It is painstakingly detailed work, often under time pressures and always with the threat of being held legally responsible for any mistakes. A single clerical error in a real estate legal description, for example, could easily result in a title claim costing hundreds of thousands of dollars. In return for this work, responsibility, and legal exposure, title agents are paid about 70% of the title insurance premium, plus some other fees which together total, on average, another $400 net per closing. The bottom line is that when fairly considered, in light of the cost of insurance products and similar services, the price of title insurance premiums is not excessive.
Title insurance agents are not, for the most part, rolling in the dough as it is, but incredibly there are still even more costs eating into the margins. For example, it is not uncommon for a lender’s written “closing instructions” to the title agent to exceed 20 pages, and be provided only minutes before a closing. The fine print may include such statements as, “Title agent closing this transaction represents and warrants to lender that title agent has reviewed all of lender’s loan documents and confirmed that the loan documents are fully enforceable in accordance with their terms,” a statement clearly more appropriately made by the lender’s own Legal Department, one most title agency staff could not possibly be qualified to make, and are certainly not being compensated to stand behind in the event that a future court determines otherwise. The same Closing Instructions also typically include fines to be paid by title agents in the event recorded are not returned to the Lender within a specified number of days and other contingencies sometimes beyond the title agent’s control. The Internal Revenue Service has likewise made title agents responsible for verifying whether or not a seller is a non-resident alien and, if so, making sure he pays his FIRPTA tax. And title agents have historically been held liable for insuring that a 1099 is filed for all real estate transactions.
But perhaps the biggest challenge facing title agents is guilt by association with their title underwriters, who are often perceived by the public as having deep pockets. As of 2008, title underwriters paid out about $5 for every $100 in premiums (Critics naively claim the rest goes towards marketing, selling more product, and profit). Because the other professionals involved in most real estate transaction are Realtors and mortgage brokers, often independent contractors, sometimes somewhat transient, and always perceived as less wealthy. It is not uncommon for a title agent to be targeted in legal claims that should rightfully be directed towards the Realtor or mortgage broker, merely in an ethically questionable effort by the buyer and his attorney to extort a settlement of convenience from the title agent and his underwriter.
For example, we now know that during the recent real estate bubble a tremendous number of mortgage brokers utilized predatory lending practices, defrauding homeowners by way of “foreclosure rescue” and other scams. Honorable, hard-working title agents are being accused of having participated in schemes with mortgage brokers they did not know allegedly in return for payments that cannot be proven because they do not exist -- this by buyers who selected their own mortgage brokers, often committed fraud themselves by lying on loan application and who, over the course of the years their cases are pending often refuse to pay their mortgage or any other sum in return for continuing to occupy the property, essentially living for free. The result is that mortgage fraud claims are up a reported 83.4% with a corresponding increase in lawsuits against title agents and their underwriters. This is certainly not to say that all mortgage brokers are bad or title agents innocent, but rather that the world of title agents is fraught with liability landmines mines arguably not justified by fair compensation.
Regulatory efforts aimed at reducing the cost of title insurance premiums with no regard to the impact on title agents have caused more consumer harm than good. Title agencies are America’s small businesses, already decimated by the real estate crash. With employee salaries among the highest operating expenses, cutting title agent income has the immediate consequence of cost-cutting layoffs, all at a time when our country can ill afford it. More files on each remaining employee’s desk means consumer telephone calls get returned later, if at all. Other reactions to premium reductions have included reduced staff pay, reflecting lower quality and experience among those performing important due diligence, a recipe for a cycle of stress, dissatisfaction, turnover and clerical error. And increased errors result in costly increased title insurance claims. The result is that mortgage fraud claims are up a reported 83.4% with a corresponding increase in lawsuits against title agents and their underwriters. Anyone who has ever found himself in the Kafkaesque world of a title insurance claim knows how time-consuming and unnerving it can be and would gladly have paid an even higher one-time title insurance premium to avoid the headache. While we can only speculate about the exact dollar impact of reduced title insurance premiums on increased errors and claims, few will deny the nexus between experienced, well-compensated staff with reasonable work loads and better quality work product and service.
But that is not to say there is no need for change. The U.S. Department of Housing and Urban Development (HUD) has been ambiguous in interpreting existing industry regulations, including provisions of the Real Estate Settlement Procedure Act (RESPA). Some clarity on that front would be welcome. Various state agencies charged with regulating title agents and underwriters are naively aggressive when it comes to pursuing allegations against title agents (initiated for the most part by disgruntled ex-employees and customers). While lack of industry transparency may apply to some title underwriters known for insider arrangements with national lenders and others, throwing all of our nation’s title underwriters and agents into that same bucket is not justified.
President Obama’s Consumer Financial Protection Agency review of the title industry is a welcome proposal. One area ripe for reform is conflicts of interests and kickbacks, well known illegal practices in the industry which are likely to increase further as pressure on title insurance premiums and competition for legitimate business mounts. When opportunities for high quality work and fair pay disappear, the only alternative is a high volume, low quality, low pay model.
Also a problem is the fact that consumers tend to not read or understand their title insurance policies, costs, or the business itself. Rules requiring mortgage brokers to provide good faith estimates reflecting closing costs just don’t work. Rules requiring lenders to provide closing documents and fees in advance of closing are not being followed. And consumer remedies are not practical. Even when good faith efforts are made to insure that title insurance premiums are properly explained, many consumers don’t care. The more paperwork, explanations and consumer disclosures regulators add, the less consumers seem to pay attention.
Suggestions that consumers shop online to negotiate the lowest title insurance premium price ignores the reality that delocalization and lack of long-term trusted relationships in the mortgage industry was a significant factor contributing to the subprime crisis. Let’s at least learn from that mistake. Instead, perhaps regulators should take more heed of the different dynamics impacting title insurance underwriters and agents, dole out responsibilities accordingly, and encourage consumers to focus a little less on finding the lowest premium and a little more on finding the most qualified title agent.
How can consumers know? Simple, start by asking the right questions. How many title claims has the agent had?; How much experience does the staff have?; How long have staff been with the company?; How many files is each staff person required to handle?; How well are staff paid in comparison to competitors?; Has the agency ever operated under another name or been subject to disciplinary proceedings?; Is there a full-time real estate attorney on staff?
Title insurance is arguably more important for buyers now than ever. As falling real estate prices tempt consumers into the market, it is no secret that increasingly more properties have tainted histories involving foreclosure and even fraud, enhancing the risk of a title claim. Our country’s biggest title insurance underwriters have each reported losses in part as a result of the increased volume of often baseless claims.
Whether it’s regulators considering title insurance industry reform or real estate consumers preparing for a purchase, when evaluating title underwriters and agencies, there’s more than just the price of premiums to consider.