As an investor builder, the Watchdog has attended many settlements and mortgage closings and yet has never ceased to ask at each one: “Why must we pay $15,000 to $20,000 for title insurance, when title has been insured again and again over the decades…and perhaps even since we acquired the land?”
The pleasant gentleman or lady representing the title company replies while counsel sits sagely by: “It is a requirement of the lender.”
David Cay Johnston points out in “Free Lunch” that this is all b— s—-, a contrivance among an oligopolistic industry and especially the law firms who are supposed to represent their clients to gouge buyers and borrowers.
According to Johnston, “In 2005 the industry paid $748 million in claims. That is less than a nickel for each dollar paid in premiums for the year.”
An oligopoly dominated nationally by ten companies, the title insurance industry has sufficient control to maintain the high rates, approximately one half of one percent of the purchase price. But a great deal of the money is paid over to our law firms or lenders who arrange for the insurance! Again, according to Johnston: “About 80 percent of the premium is kicked back to the person steering the business to the title insurance companies. In California in the years 2003 to 2005 the five big title companies kept only 8 percent to 12 percent of the premium for themselves.”
In Iowa the state offers title insurance for $500 on purchases up to $500,000. It charges only $90 for refinancing up to $500,000.
Are some of these ‘kick back’ practices against the law? Johnston indicates they are. But over the past decades the government has stopped enforcing regulations. One of the reasons is that the super rich who exploit the middle class are major political donors. We see that same thread wherever we look these days, as the USA sinks towards second class economic status.
“A rip off”? Absolutely. And it is ridiculous as well. In fifty years a home may sell 3 times and each time a “title search” is required to determine if the title actually belongs to whomever is on the deed. So the first sale initiates a title search to make sure that the person who bought the land and built the house had a good title and included title insurance is to insure that no mistakes were made. Everything is cleared and the sale goes forward. OK.
Now, ten years later the house is sold to another person and a “title search” is made again to see if the guy who is selling it and whose title was cleared ten years earlier and whose title was insured before he bought it, is still valid today (Why would it not be?). They then “search” the records to make sure the first title search was valid, and finding that it was, still require a new title insurance policy with premium to insure that the first search and the second, with only one owner in the last ten years, is still valid.
Anyway, five years later, owner #2 decides to sell and a third title search is made and a new title insurance policy is required to insure that no mistakes were made in the first and second title searches etc etc. Ridiculous!
Insurance rates are usually based upon actuarial statistics, but in this case the statistical probability for error is so low (search upon search and insurance upon insurance) that the resulting insurance rates would be quite nominal. So, in order to make it more of a profit center for the industry the Insurance rate is not made on the actuarial incidence of claims but a percentage of the sale price! Title insurance is, as Martha might say, “a good thing” but insurance rates that are twenty times the actual claims history is nothing more than a legally sanctioned license to steal or theft by legislative fiat.
What the prisoners of Lancaster County fail to understand is that theft is not the reason they are in prison but only that they did not first procure a license. They can, and should, apply at their local representative’s office.