TITLE INSURANCE FACTS
|April 19, 2004|
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 of the key elements in this process. A prefatory step is the creation of the contract between the parties. This contract, called closing or escrow instructions in most areas, is usually prepared by a title company. It binds the parties and sets in motion the steps leading to the closing.
Title Search and Exam: The title company 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 duplicate the records and, usually arrange them by property rather than names. These are called title “plants.” Title companies invest millions of dollars each year in creating plants.
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 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, orders 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 loan and mortgage. Very often, the pieces are 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, quitclaim deeds may be needed from heirs, and ancient easements may threaten development rights. Title companies often issue a title policy which insures the new owner and new first mortgage lender before the documentation is complete.
Deed or Lien Perfection: The title company completes the documentation and records the deed and the mortgage in the appropriate jurisdiction with the necessary fees.
In the meantime, the lender has funded the loan and the buyer has moved in. Occasionally, when a title problem 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 is among the more expensive entries on a closing statement. However, title insurance fees actually subsidize the other, labor-intensive segments of the process, such as examination. Further, when viewed as a part of the process, the fees are modest. In looking at the whole transaction, the title and closing process is often less than 1 percent of the mortgage amount, in comparison to the 6 percent real estate brokerage fee, and the loan orginator fees that frequently begin at 1 percent.
For further information, please contact Ann vom Eigen, Legislative and Regulatory Counsel, at 1-800-787-ALTA.