title insurance is the talk of the town

Major media turned their eyes to the business of title insurance this week. It started with two articles and one blog post in the LA Times over the weekend followed by the news of a class action suit in New York which everybody picked up. I love the press and for those who have followed the crusade of the title bloggers over this last year, we’re starting to feel like someone is listening.

So, what’s going on in title insurance? Like it’s parallel world, mortgage lending, title insurance has been corrupted both in the underwriting and the system of delivery.

Hey, I hear you, I hear lots of you out there crying foul, but I also hear many many of you saying, thank heavens that the truth is being told.

First, let me defend title insurance as a product. Title insurance, whether in the form of a loan policy or an owner policy, is a critical component of prudent mortgage lending and safe homeownership. Title insurance, the product in its traditional form, provides a vetting of title combined with a safety net that no mortgage lender or homeowner should be without.

With that on the table, let’s talk about underwriting. Formal search standards, those published by title underwriters as guidelines for agents and in their consumer facing brochures and web pages, have largely been abandoned. Title underwriters in the quest for volume, like their mortgage lending brethren, abandoned traditional search and examination processes in favor of automation and other short cuts.

So, what’s wrong with that? How is the purchaser of title insurance harmed if they have a policy? The harm to the consumer is two-fold.

Harm #1 - The consumer is being overcharged. Traditional title insurance had built into the price the costs of a full search and expert examination. In fact, MOST of the premium paid by a consumer covered the process of pre-insurance examination. The idea was that you paid for experts to vet the title and fix problems before you closed. Once the examination process was complete, the actual title insurance policy was put in place as a safety net to cover errors, items missed by the examination experts and also risks that could not be found by a prudent examiner. So, the title premium would be split between an agent and the title underwriter. Let’s say, as an example, that the consumer paid $1000 and the agent retained $850 to cover their examination services and a commission for selling a policy and the title underwriter received $150 to provide the safety net.

If you gut the title insurance product by divorcing it from the traditional title examination, what is the consumer paying for? If the agent provides no real examination services, why should they receive $850? A traditional title agent who pays to staff an office with experts who perform full examination deserves payment for services rendered but not an office full of order takers and copy makers.

Harm #2- You’ve got to consider the difference in policies. Compare the policy issued by a traditional title agent to one that has been issued without the expert examination process. They both are covered with an ALTA jacket and kinda look the same, but are they really the same product at all? No. No. No - a thousand times, no. A gutted policy - one with little or no examination - is a product rife with risk. Should a consumer be charged the same price for a policy that carries with it a much greater likelihood of having to face a claim? I don’t think so. You might argue that there is a place for a cheaper policy in the market but at least let’s give the consumer a choice. Maybe we as an industry offer an econo-policy. I have no problem with that as long as the consumer gets a break and an informed choice.

OK, so what’s wrong with the delivery system of title insurance? Oh, you’ve heard it all before, reverse competition, legal and illegal affiliations, all that STUFF. You’re hearing that from everywhere and so I don’t think I need to expound on it except to say that all these schemes for the distribution of the title insurance premium dollar diverted the money flow from real title work into payola streams. In other words, for title underwriters to compete with each other for volume, they needed to play in a world in which revenue sharing streams could flow into the referral networks and since that cash needed to come from somewhere and it’s pretty hard to raise premiums, they decided instead to forgo the costs of examination.

That’s the crux of it. Consumers and regulators are looking at title insurance and asking what are we really paying for? In a gutted title insurance transaction, I’d say they are paying for a corrupt payola system. In a traditional title insurance transaction, I’d say they are paying a fair price for an essential product.

My hope is that traditional title insurance will be protected and restored because the consuming public is well served by the product. I really don’t know how the story will play itself out, but for now, I believe the media attention is welcome.

Mortgage Industry Professionals. Like what you see?
SUBSCRIBE for free by RSS or email, and never miss a post!