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Homebuying: Worse than a prostate exam...

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July 09, 2009 – Comments (10)

... by Dr. Edward Scissorshands

I'm headed toward close on a home in the DC area. Yes, it cost too much. No, it's not so fancy. (Still got the original 1965 tongue and groove pine paneling in the rumpus room.) But it is very well located for the family's respective commutes, is right on a bike trail and park network (important for us runner/biker types) and has enough space to accomodate our soon-to-be-one-larger family.

Finally, payments for us look like they'll be about equal to after-tax rent on a comparable home. (But we've never actually seen a comparable home that has all the stuff we want, like this one.) Let us not speak of the down payment, please. I still get queasy at the thought of writing a check to drain those years worth of savings...

Once things are finished up (closing and the stork are scheduled to arrive within a week of each other) I'll definitely have to blog about the horrors of this process. Currently, I'm mired in dealing with what I think is the biggest RE scam left standing: Title Insurance.

Read this GAO report, for a primer on just how bad this industry is. (And marvel that nothing's been done, except in Iowa, where they ran private insurers out of town and run their own program for a fraction of the cost.)

A tidbit:

Title insurance differs from other types of insurance in key ways.
First, in most property and casualty lines, losses incurred by the
underwriter account for most of the premium. For example, property-
casualty insurers' losses and loss adjustment expenses accounted for
approximately 73 percent of written premiums in 2005.[Footnote 9] In
contrast, losses and loss adjustment expenses incurred by title
insurers as a whole were approximately 5 percent of the total premiums
written, while the amount paid to or retained by agents (primarily for
work related to title searches and examinations and for commissions)
was approximately 70 percent
.

 

10 Comments – Post Your Own

#1) On July 09, 2009 at 7:42 AM, dbjella (< 20) wrote:

I used to work for a closing company in the accounting department.  The amount of money we had accrued on our balance sheet for title claims was enormous.  I remember asking my manager if we had ever had to pay a claim and he laughed hysterically. But we kept on accruing.

The only other insurance that seems as big of a scam to Title Insurance is Error and Omission insurance for contractors in the IT world.  I have never heard of any claims paid by that bundle of money either. 

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#2) On July 09, 2009 at 12:01 PM, stonewaredog (< 20) wrote:

The reason for the retention of approx 70% by the agents is that they do all the work of fixing the problems of title before your purchase is complete and a policy issued.  Thus helping you sleep better at night that someone is not going to come knocking on your door making you move out, because they have the legal ownership of what you thought was your property. 

Our incoming president of the American Land Title Association recently described it this way.  Lets say we are talking about the plumbing in your home. 

What a property-casualty company does is they take a risk that your plumber knew what they were doing and if a problem does occur with your plumbing then they pay to have it fixed.  Accounting for the large percentage of premiums paid out.  And you pay them each year to take this risk.

What a title insurer does is they would look to see if there are any current plumbing problems in your house, check to make sure all the plumbing was done to code, check to make sure there are no judgments against the plumbing, check to make sure the taxes were paid on the plumbing fixtures, check to makre sure that the plumber has no judgements against him that may attach to the plumbing in your house.  If they find any problems with these items in regard to your plumbing then they would come to your house and fix the plumbing to make sure it was to code, and make sure the plumber had satisfied any judgemnts or taxes due against your plumbing so that your plumbing was now up to goverment code and free of any incumberance against it.  The title insurer then will insure that you will have no future problems with your plumbing in regard to code, judgments, incumbrances that are currently against your plumbing, but we missed in doing our searches of your plumbing.  Because we do our due diligence before issuing your your insurance policy most of our work is done in repairing your plumbing before you complete your purchase.  Because we do our jobs well we only end up paying approx 5% out in premiums.  You only pay us once and we will insure you as long as you or your heirs have an interest in the property. 

As for Iowa check the coverage they provide as compared to the coverage by a real title insurer and you will see why their premium is so much smaller than other areas of the country.  Most lenders still require a policy to be written by a private title insurer on property sold in Iowa before they will make the loan, because of the coverage.

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#3) On July 09, 2009 at 12:05 PM, mndoug (< 20) wrote:

Title insurance is largely misunderstood.  It is an extremely corrupt part of an extremely corrupt residential real estate industry.  However, when it is done correctly, title companies provide an important safeguard to the transaction.

Title companies are supposed to uncover title defects and provide an important insurance product to both lenders and home owners.  Just like appraisers, home inspectors and lawyers, title companies are supposed to be safeguard to stop bad transactions.  However, just like appraisers, home inspectors and lawyers, title companies are pressured by Realtors (under threat of boycott) to close the transaction.  

Because title companies are a mystery to most consumers, it is this industry that has been manipulated the most to negatively affect consumers.  In fact, this important safeguard company is often owned by Realtors, builders or mortgage companies who have large commissions riding on the deal closing.  It begs the question, are title companies insuring the title or are they insuring that commissions get paid.  Judging by the real estate crisis, it would seem to me that this safeguard as well as others have been neutralized.

Now in regards to the claims, I think there is one important fact that needs to be considered before you condemn this industry for not paying out on claims.  Most title insurance is written by title agents and there are NO records of claims paid by them.  There is only data on the underwriters claims.  This is important and rarely mentioned.

Title agencies keep most of the premium because they do most of the work and because they are largely responisble for claims.  When a claim is filed the agent will typically try to resolve the problem before it ever gets to the underwriter.  That's because they are contractually on the hook to the underwriter to pay for errors and ommissions as wells as their attorneys fees.  So it is an agent's best interests to often pay these claims out of their own pocket.  There is NO data kept on these payouts and they makeup most of the money being paid out.

 Doug Miller, Executive Director, CAARE.org a non-profit dedicated to consumerism in real estate

 

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#4) On July 09, 2009 at 12:42 PM, devoish (98.59) wrote:

In Suffolk County, for my first house I paid $400 for title insurance. The due diligence of the insurance company involved driving to Riverhead, paying a $20.00 fee and getting the title and reading that there were no judgements/leins additional owners.

Seemed expensive to me.

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#5) On July 09, 2009 at 4:45 PM, TMFBent (99.82) wrote:

The reason for the retention of approx 70% by the agents is that they do all the work of fixing the problems of title before your purchase is complete and a policy issued.  Thus helping you sleep better at night that someone is not going to come knocking on your door making you move out, because they have the legal ownership of what you thought was your property. 

That's the idea, but in reality, it's bunko. In many states, it takes all of 60 seconds to get this information. And as property prices inflated far beyond the inflation in title search costs, the rates (which are based on price) followed them right up. And since 80% of that money doesn't go to the policy writer, but the agent, you can't claim that the bigger fees are necessary to insure bigger policies. Instead, the bigger fees were just bigger profits for the closing agents representing the title insurance scheme.

And to pretend that title insurance agents are "fixing the problems of your title"before close runs counter to what I've seen. I know two people within 20 feet of me who came to closing and were told the titles weren't clean. When they questioned why they were closing despite title problems, the closing agents/title insurance shills -- the people paid to allegedly solve these problems, thereby earning those fat fees -- just said "Sign it. It doesn't matter. That's why you buy title insurance."

If the title insurers want to prove that their fees are necessary, lets see the aggregate numbers. I believe they're highway robbery because of localize soft collusion. Otherwise, there's no way out-of-state competitors could just come along and offer a 40% discount.

Upon pressing my title agent, he gave back half the overcharge he was trying to nail on me. Just like that. He did that because he's still making an obscene amount of money for a couple of hours work, and he knew I knew it, and he wanted to salvage what was left of his chances to get it.

I urge everyone out there to cut their local title agents out, and try www.entitledirect.com.

Sj

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#6) On July 09, 2009 at 5:27 PM, stonewaredog (< 20) wrote:

That title agent will not be in business long if his underwriter finds out that kind of attitude.  There are all kinds of people in all industries and it always seems those few bad apples make the headlines.  For the most part your local title agent has been in business for a very long time.  We have been in business for over 100 years.  We are proud of the work we do and would fire someone with that attitude.  We couldn't give back half of our charges and stay in business.  In fact we have been in the red for a couple of years since the real estate balloon popped.  Because we put money aside we can stay in business.  It is the long term agent who know's that title is cyclical and there will be highs and lows and you need to plan for the lows.  It's an odd little business, but there is value in having a title policy or the lender wouldn't require it.  They don't receive anything by requiring it.

There are many searches that don't take much time.  We have searched them before and only need to update our work or other reasons, but there are still a lot of properties out there that take hours or days to do thorough research on to be complete and accurate.  Because of the insurance regulators we can't charge a premium based on time, but have to charge based on price.  The easy ones pay for the hard ones.

Out of State competitors came along during the boom and were doing very shoddy work in general so they could give big discounts.  Most of them are no longer in business today since the volume is gone.

Your local agent knows the local info that is often missing in a search by a national company.  The nationals don't have the local knowledge that the locals have.  The nationals are in it just for the quick $$ and the locals care about thier reputation and quality of their work.

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#7) On July 09, 2009 at 6:23 PM, Chromantix (97.68) wrote:

+1

As a consumer who is in the market to buy a home by the end of the year, I find this discussion very educational.  Thanks to all who are participating.

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#8) On July 09, 2009 at 7:20 PM, TMFBent (99.82) wrote:

Out of State competitors came along during the boom and were doing very shoddy work in general so they could give big discounts.  Most of them are no longer in business today since the volume is gone.

Your local agent knows the local info that is often missing in a search by a national company.  The nationals don't have the local knowledge that the locals have.  The nationals are in it just for the quick $$ and the locals care about thier reputation and quality of their work.

This is precisely the scare tactic that all the local agents tried on me as I told them I was shopping for an alternative provider. Curiously, they almost all had a line about being in business for 100 years, too.

The service I got from the out-of-state competitor that I couldn't use because I found out about this scam too late, was much, much better than the service I got from the locals. The locals didn't bother returning my calls or answering emails or making decisions for days. The online out-of-state competitor typically answered me within minutes. And they were going to wrap everything up with a local real estate lawyer for escrow and closing.

I also got lines from my local guy -- the one I hate that I am forced to use anyway -- about "not being able to stay in business if he cut his rate." This is, of course, a BS argument. It's also not my problem. If there is someone -- anywhere -- who can do the job for less, that should be a valid price. The only reason that outside providers haven't become established more quickly is because of the cozy relationships (many of them no doubt illegal under RESPA) between agents, banks, etc.

They all talk about the horror stories of those darn discounters. But when you (as I just did above) talk about a known case of a terrible local agent (one of those folks who's been around 100 years, and therefore knows it's fine to insure a crummy title because the odds of it causing a problem are so low). When I tell a story about a terrible local guy, its the "one bad apple getting all the press."

One standard of evidence for the local guys, part of the soft collusion network. (I.E. bad examples are the exception, not the rule!)

But there's another for the outsiders. (I.E. bad examples are taken to be represetative of the norms.)

I'm actually contacting my Senators about this issue, I feel so strongly that the title insurance industry needs to be regulated or killed. Here's hoping they listen.

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#9) On July 09, 2009 at 9:14 PM, clearingtitle (< 20) wrote:

Title insurance is based on the theory of “loss prevention” which means that the greatest amount of time, and money, is spent preventing title problems from ever occurring in the first place.

 

Preventing potential loss and subsequent claims is a highly labor-intensive, and expensive, component of a title company’s operating budget. One reason is that in order to maintain current records, which are critical to the accuracy of a title search, new documents must be up-dated and indexed daily.

 

Skilled and trained researchers and underwriters must interpret the effects of these documents on the title. Forged documents, one of the most common title problems found, in addition to falsified documents, invalid deeds, and incorrect property descriptions, are just some of the title issues which must be examined. Other title risks include recording mistakes, deed indexing errors, unpaid mechanics' liens, judgment liens, income tax or property tax liens, undisclosed easements, claims by missing heirs, and claims by ex-spouses.

 

The cost of a title insurance policy relative to the cost of a property transaction is about one-half to one percent of the purchase price. The premium price is based on five factors, starting with the largest percentage and descending to the smallest.

1.      The cost of maintaining current title information on property local to that operation, the “title plant”

2.      The cost of searching and examining the title to subject properties

3.      The cost to resolve or clear defects to the title

4.      The claims costs covering title defects, including legal fees

5.      The allowance for a reasonable profit

 

When compared to other types of insurance lines, title insurance is inexpensive. The national average cost of a title insurance policy is $700, but homeowners only pay for a title insurance policy once. This means that the average cost per year of a title insurance policy declines rapidly as the time that a homeowner remains in a home increases. About 60 percent of homeowners remain in their homes for more than five years, and for these homeowners the annual average cost of a title insurance policy is less than $140. About 40 percent of all homeowners remain in their home for more than 10 years, and for these homeowners the average annual cost of a title insurance policy is less than $70. About 15 percent of homeowners remain in their homes for more than 25 years, and for these homeowners, the annual average cost of a title insurance policy is less than $28. The national average cost of a homeowner’s insurance policy is $765 dollars per year, and the homeowner pays it every year.

 

Those looking to learn more about title insurance can go to www.homeclosing101.com.

 

Jeremy Yohe, director of communications, American Land Title Association, www.alta.org

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#10) On July 14, 2009 at 4:34 PM, NeedaClue7 (59.11) wrote:

clearingtitle:

With all due respect, your defense of the current regime sounds like the sound bites that some public affairs department wrote. The fact that it only costs as little as $28 per year and comparisons to homeowners insurance is completely irrelevant. The point is that if the normal market mechanisms (competition, supply & demand, etc.) are in play then title insurance will be priced appropriately. There is a growing body of evidence to support the conclusion that the title insurance industry is not operating in a normal market environment and the public is being gouged. Here are some questions that come to mind from my own experience:

1. Why should title insurance be quoted based on the value of the property? Other than the pure insurance element in the event of a loss, the amount of work done to research the title, clear defects, et. al. bears no correlation to the value of the property and 70-90% of the premium is for this.

2. Why should an owners policy cost more than a small incremental amount when someone is already financing the property and obtaining lenders insurance? Again, all the work associated with the title search is done in connection with the lenders policy so the title agent has almost no work to do in connection with the owners policy, but yet they put 70-90% of that premium in their pocket as well.

3. Why should title insurance for a refinancing cost more than a small incremental amount (especially if one is using the same title agent as was used for the original financing). It seems that the only work required for a refinancing is to update the title search by verifying that no leins, easements or other encumberances were filed against the property since the last search.

The above issues have come to light just in my experience. I'm sure others have noticed other obvious abuses. The fact is that most people don't pay attention to title insurance. It is a relatively small cost imbedded in a major transaction which for most people is too complicated for them to ask the questions they should be asking. They rely on the closing attorney and their real estate agent, neither one of which has any incentive to act in the best interest of the consumer. All of which virtually guarantees that the industry has taken advantage through overpricing.

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