ALTA: Protecting property rights with title insurance

For most real estate industry professionals, title insurance needs no introduction. A trusted product, title insurance has been used to protect real estate transactions and property rights for over a century.

However, most Americans don’t learn about title insurance until they buy their first home and amid the often stressful, frenetic activity of the closing process, homebuyers can be confused about many of the settlement costs and why they need to purchase a title insurance policy.

Title insurance is different than most other insurance products. Unlike car and homeowners insurance, which requires a monthly premium and only helps you after there is a problem, a title search most often catches and addresses any problems before closing day and title insurance provides protection for as long as you or your heirs own the property.

For title insurance, a homebuyer only needs to pay a one-time fee at closing, which is typically issued in the amount of the real estate purchase price. For a home valued at $250,000, the cost of an owner’s title insurance policy would be just 11 cents a day on a 30-year mortgage.

While other forms of insurance have seen rate increases in recent years, the average cost of title insurance coverage has decreased 7.8% nationally since 2004 and roughly 5% the past two years, based on the most recent industry data from 2021.

Title insurance is a comprehensively regulated product.

Across the country, state departments of insurance oversee the industry’s practices and rates to ensure they are not excessive, inadequate or unfairly discriminatory. Insurers then must justify their rates, using actuarially supported data, to state regulators. State regulators capture annual revenue and expense data from title insurance agents and underwriters for the purpose of measuring the profitability, competitiveness and reasonableness of title rates and charges.

The title insurance industry is regulated not only across all 50 states, but also at the federal level, with title and settlement companies required to disclose all fees on both the Loan Estimate, which consumers receive three days after applying for a loan, and the Closing Disclosure, which is provided to homebuyers three days before closing.

There are also strict guidelines for the way title and settlement fees are disclosed to consumers and when changed circumstances allow for alterations to the disclosures. ALTA was proud to work closely with the Consumer Financial Protection Bureau (CFPB) to help develop these regulations, which went into effect in 2015.

Title insurers’ upfront, curative work involved in a title search is critical to help reduce risk of claims.

Unlike other insurance products where most of the upfront cost is marketing, the upfront expense for title insurance is related to conducting a search of public records to underwrite ownership and lien risks. Much of the expense is invested in the efforts of land title professionals to review the title and purchase title data from local governments.

It is the title insurance company’s willingness to stand behind this work – even if the defect originated in faulty public records – that provides lenders the confidence that they have a first lien mortgage.

There is a difference between a homeowner’s policy and a lender’s policy.

A lender’s policy primarily protects against claims that may affect the lender’s mortgage lien and does not directly protect the homeowner’s property rights, which is why title professionals recommend that consumers purchase a homeowner’s policy to protect one of life’s greatest investments.

With title insurance, a claim is serious, and a loss means homeownership is threatened. Having owner’s title insurance means the cost of defense and legal fees that typically would be the homeowner’s responsibility instead are paid by the title insurer.

Recently, an attorney shared with me how one of her clients purchased a home in Connecticut. The buyers purchased title insurance, which turned out to be an excellent investment. Due to a misfiling, nobody knew of an encroachment until months after closing. It did not appear on the title company’s title search or municipal search.

The policy covered the full cost of fixing the issue and the customer incurred no cost. As we know, the one-time fee for title insurance is the best bargain and other options can cost people their home. Should a title issue arise on a property covered by alternative title insurance products — such as certain attorney opinion letters — a claimant would need to prove negligence on the part of the attorney to pursue the claim with them.

If not proven, a claimant would likely need to pay the legal costs involved to litigate the title matter, posing a financial burden and a significant risk to losing the property.

Consumers can shop around and should compare policies.

Consumers are encouraged to ask their title professional how rates are determined where they live and what services are provided in the fee, as well as to shop around.

CFPB research shows that the TRID regulations have helped consumers better understand their closing costs and compare competing offers.

Government-operated title insurance approaches are not less expensive.

The current government-operated system in Iowa is often cited as an alternative to traditional title insurance. However, the Iowa model is not transferable to other states. A congressional study concluded a government-run system would not make buying a home or business any easier or cheaper because of other costs consumers must pay associated with the real estate transaction.

In fact, Iowa’s total closing costs were higher than 12 other states in 2021. This system would not reduce homebuyer costs and would result in job losses.

Title insurance remains essential.

Due to their complex nature, title searches are done by expert title insurance professionals. Beyond a public records search, these professionals review the title documents found in the search and help resolve outstanding issues, such as getting prior mortgages paid off or making sure there are no outstanding amounts owed to contractors.

Forged or falsified documents, invalid deeds and incorrect property descriptions are just a few of the issues that must be examined over the course of a comprehensive title search. Then, they prepare the new deed and ultimately facilitate the closing.

In every county across America, title professionals are working diligently to protect most Americans’ greatest investment — their home. Title insurance is — and will always be — essential.

Diane Tomb is chief executive officer of the American Land Title Association.