Most buyers don’t know anything about title insurance until they are deep into the homebuying process. At this point, buyers are tired from the stress of purchasing a home and often brush it off as a necessary expense, minuscule in comparison to the six-figure mortgage they are taking out.
The four major title insurance companies in the U.S. are taking advantage of buyers, making them pay exorbitant premiums for policies that insurers rarely pay out. Modern-day record-keeping and technology have minimized the cost of providing title guarantees to a fraction of what it used to be, but title companies are still charging unjustifiable premiums.
- Title insurers only pay around 3-4% premium dollars on claims, compared to upwards of 80% for car insurance companies
- Four major title companies account for between 85-90% of the industry and manipulate pricing mechanisms
- Iowa’s state-run title insurance agency provides the same service as private title companies for 1/20th the price
Title insurance doesn’t need to be nearly as expensive as it is. Given the availability of online records, providing a title guarantee is as easy and cheap as it’s ever been. The exorbitant cost is the result of a title insurance cartel that sets its own prices, doesn’t give consumers choice, and gives kickbacks through a web of affiliated companies.
Meanwhile, Iowa’s state-run title insurance agency, Iowa Title Guaranty, provides the same service for a flat rate of $110 for mortgages up to $500,000 in a market where the median home price is $131,600, according to Zillow. Iowa also has the lowest claim rate of any state, in some years falling below 1 percent.
For decades, conservative dogma has preached that private enterprise is both cheaper and more efficient than a government entity. With title insurance, nothing could be further from the truth, as a handful of companies are forcing people to buy a largely unnecessary product for 20 times the cost.
It’s time for a change. It’s time for a government takeover of title insurance.
Title insurance is a scam
Title insurance began in the mid-19th century as a way to certify that the person selling you land did in fact own the land.
Today, title insurance protects against errors in public records, unknown liens or easements, or missing heirs. Homebuyers can buy title insurance to protect themselves, but mostly, they’re buying title insurance to protect their mortgage lender. Most lenders don’t buy their own title insurance; they force borrowers to buy it for them.
Unlike health insurance or car insurance, title insurance protects against an event that happened in the past, so thanks to modern-day digital record-keeping, these issues can be found and corrected with routine (and low-cost) due diligence.
The ease with which companies can guard against a claim shows in the claim rates. While home insurance and car insurance companies can pay upwards of 80 percent of their premium dollars on claims, title insurers only pay around 3 or 4 percent of their premium dollars on claims.
That means 95 percent of their revenue goes toward operating expenses, which are minimal at least as they relate to insuring a title and paying claims, but end up rising and falling in lockstep with revenue.
The title insurance market has proven hard to change because it is dominated by four companies: First American Title, Fidelity, Stewart, and Old Republic account for somewhere between 85 and 90 percent of the industry.
These companies control most of the pricing mechanisms related to title insurance. Title insurance rates, which are generally structured as dollars per $1,000 worth of mortgage debt, differ state-to-state.
Some states have “rating bureaus” that influence rates, but the big four title insurers are often members of these rating bureaus. In other states, those companies control rates just by the sheer force of their market dominance. This keeps rates artificially inflated.
Title insurers also don’t market their services to homebuyers, but to real estate professionals—real estate agents, mortgage lenders and brokers, attorneys. Title insurers woo real estate middlemen with lavish parties, tickets to sporting events, and in some cases direct kickbacks from title insurance agents for guiding homebuyers to their company. In fact, much of the premium from title insurance goes to kickbacks.
Kickbacks take a number of forms in the industry, but one example is “reinsurance.” A mortgage lender might have a homebuyer purchase title insurance from a particular title insurer. That title insurer will then buy “reinsurance” on that title from a company affiliated with the the mortgage lender, as if more insurance was needed on a policy that pays out only 5 percent of premiums on claims.
View the original article at Curbed