Title Insurance: Background Information, September 7, 2001
September 7, 2001
(Attachment to a Letter to Senator Phil Gram)
The American Land Title Association appreciates the opportunity to address your concerns about the title insurance product, and provide some information to inform your opinions about the product, its? pricing, and its? regulation. We understand that you have three major concerns about title insurance: First, that the price is too high, and composes too large a part of the cost of a real estate transaction. Second, we understand that you are concerned that a borrower would have to purchase a full policy even if the property had been transferred and title work had been performed recently. Third, you are concerned, about "price competion" limits inherent in Texas law. We also explain why the trust department of a bank would not perform the title process, particularly the title plant function.
ALTA believes it is important to note that title insurance is more than a product, it is a process. When a homebuyer and a home seller come to terms, the process opens with the preparation of a contract and closes with the issuance of a title policy. Title insurance is one, but only one, of the key elements in this process that title companies and title agents perform. The first step is the creation of the contract between the parties. Title companies usually prepare these closing or escrow instructions to effectuate the contract.
Title Search and Exam: The title company then orders the information needed to analyze the condition of the title. A title search is performed and real estate tax amounts are obtained. The title searching process is difficult because the public records in the vast majority of jurisdictions are organized by the names of the parties to a recorded document. For instance, a deed from Tom Smith to Bill Jones is indexed in the grantor books under the name Smith and the grantee books under Jones. A search of a property owned by Bill Jones requires analysis of each recorded document involving Bill Jones. Since Bill Jones is a common name, in a large county many documents involving other people named Bill Jones (and other properties) must be analyzed. It is a slow and expensive way to search. Consequently, in most areas title companies reproduce the records and, usually arrange them by property rather than names. These new databases are called title "plants." Title companies invest hundreds of millions of dollars in creating plants. Texas law requires title companies to maintain a title plant covering at least 25 years of records for each and every county in which it does business. It is unlikely that a bank trust department would want to invest in the systems and personnel necessary to develop plants and keep them current.
Title Commitment: Deeds, mortgages, easements, covenants and other matters disclosed by the search are analyzed and summarized in a title commitment. This commitment forms the basis of the process of title clearing.
Closing and Settlement: The title company then prepares the documents needed to transfer the title, create a first mortgage in favor of the lender, and release the prior mortgage. In most cases the title company prepares the deed, asks the lender who currently holds a mortgage against the property for the amounts due on the existing loan, and acts as a clearinghouse for the new loan documents and the pay-off and release of the old mortgage loan. Very often, the process is not complete when the new lender is ready to fund and the buyer is ready to move in. The old mortgage may not be released, quitclam deeds may be needed from heirs, and ancient easements may threaten development rights. Title companies often issue a title policy insuring the new owner and new first mortgage lender before the documentation is complete. They thus assume the risk before the process is completed. Later, the title company completes the documentation and puts the record in proper order. In the meantime, the lender has funded the loan and the buyer has moved in. When an insured title has a problem that can?t be cleared, the title insurance company pays a claim. The industry pays hundreds of millions of dollars in claims each year. Title insurance speeds the process and makes it more efficient and less expensive than it would be if closing personnel waited until the documentation was complete.
Price: When viewed as a part of the process, title fees are modest. The mortgage loan originator alone typically earns 1-2% of the transaction amount while the entire title and closing process generally is less than 3% of the mortgage amount. For example, on a typical $100,000 residential real estate transaction, title insurance in Texas is less than $1,000.00, while the real estate brokers fee is typically $6,000.00. According to a 1995 McKinsey study, of the $110 billion in annual revenues generated in real estate closings nation wide, about 35%, just over one third went to the real estate broker. Homeowner?s insurance logged in at 10% and title and escrow costs were only around 2% of the total.
As in other industries, technology is making the title process better, but not necessarily cheaper. Because of the investment required, it is often economically inefficient to automate title plants in rural areas, where the volume of transactions is small. However, even when automation is economically justified, the total cost of processing a title transaction has generally risen because the amount of work needed for the settlement has increased. The complexity of the public records has exploded as refinances have increased exponentially with falling interest rates, and second mortgages have become common. It has also become more difficult to track mortgage payoff lien releases as lenders trade loans in the secondary market. In addition, many county recorders, suffering under the constraints of local tax base and personnel limits, can be so far behind in addressing these releases that the checks to cover the payment to the county can?t be cashed, and releases can?t be recorded.
One concern you expressed was the lender "requiring" the product while the consumer pays for it. Ultimately, it is the consumer who pays for everything because all the costs of the transaction are incorporated in the market price no mater who the nominal payer is. The lender requires the lender?s title insurance, which insures the validity of the first lien, in order to lower the lender?s risk. This lower risk is reflected in lower interest rates on the loan. Saving even one-quarter a percent on the interest rate saves the consumer far more over the life of the loan than the cost of a lender?s title insurance policy. Lenders similarly require homeowners insurance, mortgage insurance, and appraisals to lower the risk of the loan, so the same issue arises in those product lines as well. Lenders do not require borrowers to purchase owners title insurance. Owner?s title insurance, which protects the owner?s use and enjoyment of the property, is priced separately, and is purchased completely at the option of the consumer.
Refinance and Reissue Rates: Most states have reissue rates, and ALTA has issued press releases encouraging consumers to ask for reissue rates.
Texas Law: Texas law does provide a discounted rate for refinanced loans. However it does not currently have an owner?s reissue rate. Within the last few months, the Texas Office of Public Insurance Counsel has proposed an owner?s reissue rate, which will be actively considered in the next ratemaking cycle.
Every state places some restrictions on insurer?s pricing flexibility because of the need to guarantee insurer solvency. Texas is one of three states in which title insurance rates are actually set by the Commissioner of Insurance. Texas also promulgates rates in other insurance lines, including auto fire and workman?s compensation. Title insurance prices in Texas have in fact declined over the last decade. Rates dropped 1% in 1992, and another 3% in 1998, despite the continuing increase in industry operating costs.
This rate drop is a testament not only to regulatory vigilance, but to title industry efficiency as well. Because of the rate structure, premium revenues rise up only about 60% as fast as insured liabilities, while expenses feel the full brunt of inflation. It was only possible to reduce rates through any regulatory process because of the industry?s increased inefficiency.