The title insurance trap
TEXT OF INTERVIEW
Tess Vigeland: If you’re a homeowner, you’ve had the pleasure of sitting for an hour or two at closing to sign a stack of mortgage papers two to three inches high.
There’s the Truth in Lending Act statement, credit reports, servicing disclosure statements, the good faith estimate, recording fees and tax stamps and then there’s something called title insurance.
Everybody has to have it, but what does it actually do?
Los Angeles Times reporter Scott Wilson recently wrote that it’s an easy way to rip off homeowners, so we brought him in to crunch the numbers.
Vigeland: Welcome to the program, Scott.
Scott Wilson: Thank you.
Vigeland: First, for folks who haven’t gone through the process of buying a home, what is title insurance?
Wilson: Title insurance is a product that is designed to protect home buyers and mortgage lenders in case there is a problem or dispute over ownership of the property. Title insurance will then pay legal fees and compensate you if there’s a problem.
Vigeland: And how do you pay for that?
Wilson: It’s a part of every real estate transaction. The homebuyers and sometimes the homesellers pay the cost when they’re buying. You also pay for it when you’re refinancing.
Vigeland: What’s it actually supposed to do for you? What does it protect you from? You said it gives you an idea of previous owners, but what could go wrong in that process?
Wilson: There’s a long list of what they call “title defects,” ranging from if the previous owner didn’t pay their taxes or it could be a lien placed on the title. There can be disputes due to conflicting wills, a missing heir that suddenly appears and claims ownership of the property, but the fact is, those problems are very rare. To give you an example, in auto and homeowners insurance, those insurance companies pay back about 70 percent of the money they take in premiums go back out in claims. In title insurance, that figure’s only 5 percent — only 5 percent of the money that comes in goes back out in claims. To be fair to the title insurance companies, they say ours is a different business, because we spend part of our time doing the title search originally and preventing problems before they issue the policy.
Vigeland: Now the title of your article was “The Trouble with Title Insurance.” What is the trouble?
Wilson: For the consumer, the main problem is you’re paying too much. Some consumer advocates say that it could cost 50 or 75 percent less.
Vigeland: How is that price set?
Wilson: It’s based on a percentage of the purchase price.
Vigeland: So, what do people want to see happen? Should there be some national standard for what we’re paying on title insurance?
Wilson: One of the key things that needs to be addressed is kickbacks. There’s a history in the title insurance industry of paying kickbacks to real estate agents, lenders and builders to bring customers. Those kickbacks can be cash. They can be gifts. Sometimes they’re concert tickets, trips and so forth and those actually drive the price up rather than having price competition drive it down, so the consumer ends up paying for all those kickbacks. It’s an illegal practice and it’s widespread.
Vigeland: And that would be, for example, you’re using a certain real estate company and when you get to closing on the house, you are using whatever title insurance company they tell you to?
Wilson: Exactly. The consumer rarely chooses the title insurance company that they’re using. If you’re buying an existing house, you use the one your real estate agent chooses. If you’re refinancing, it’s the lender that chooses. If you’re buying a new house, it’s the builder.
Vigeland: You have no legal obligation to go with that title insurance company that works with your real estate company?
Wilson: Federal law gives you the right to choose your own title insurance company, though sometimes the pressure is so heavy, it’s hard for consumers to realize that.
Vigeland: Is it possible to work to get a better deal for yourself? Can you shop around for title insurance?
Wilson: You can shop around. I was contacted by one woman that… she and her husband shopped around and saved more than $1,000. They had to stand up to their real estate agent because she wanted them to go with her company.
Vigeland: I was struck by a comparison in your article where you talked about, for example, a $500,00 property here in California. You could pay $1,000-2,000 for title insurance here and yet, in Iowa, where the government runs the title insurance program, you’d only pay what? $150?
Wilson: Iowa is the only state that has a government run program. It’s not quite as cheap as $150 — there are some other fees, it might be as much as $500 — but the point is it’s a third or a quarter of the price you pay elsewhere.
Vigeland: So why are we paying more elsewhere?
Wilson: It’s an entrenched system. The title insurance companies control the process. They control the laws. Other insurers — let’s say State Farm and Allstate — are not allowed, by law, to get into the title insurance business to provide competition.
Vigeland: So what’s the solution here?
Wilson: Several options have been proposed. One is the Iowa model, which is government run insurance. No kickbacks there; the price is lower. Another option is having lenders pay for title insurance. Therefore, the lenders could bring their buying power to force lower prices in title insurance. A third option is opening up the market to other insurers like I said, State Farm or Allstate. so there could be more competition.
Vigeland: Any legislation in the works to that effect?
Wilson: Not really and it would take a tremendous amount of political will to make that happen because like I say, it’s an entrenched industry and they fight any kind of change.
Vigeland: So, I guess in the meantime, if you’re buying a house, shop around
Wilson: Absolutely.
Vigeland: Alright. Scott Wilson is a reporter with the Los Angeles Times. Thanks for coming in.
Wilson: Thank you.
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.
