ALTA® Responds to Kiplinger Article
October 1, 2001
Melynda Dovel Wilcox
1729 H St., N.W.
Washington, D.C. 20006
Dear Ms. Wilcox:
I was greatly disappointed in your article in Kiplinger’s Personal Finance magazine, "Home Buyers Beware." As your article notes, title insurance is poorly understood by the general public. Consequently, we are always in hope that we can take full advantage of the relatively few opportunities we get for finance and real estate writers to educate the public on our product and industry. Unfortunately, your article’s highly negative title and lead, together with numerous errors and mis-characterizations, overshadowed the valuable information buried later in the piece. Much of this could have been avoided if the you could have merely contacted us and discussed the article and your often erroneous conclusions with us. We’re just down the street!
East vs West
Beyond the obviously highly negative perspective, there is a typical but unfortunate beginning point taken in the article: The world as seen through the Washington, D.C. area filter. While there are occasional references to other places and how business is done there (frequently mis-stating such practices), the article assumes home buyers must purchase lender’s title insurance and, if they wish, owner’s title insurance for an added premium. While this is true in the D.C. area and much of the east coast, it is decidedly not correct for a great portion of the country. Throughout much of the west, in Illinois, Florida, and many other parts of the country (in fact, most major title insurance markets), the seller pays for the owner’s title insurance policy and buyer pays a "simultaneous issue" charge (ranging from $50 to $200) for the lender’s coverage. In many other areas, the total costs of title insurance are customarily split between buyer and seller, as is the cost of settlement. Consequently the financial impact of title insurance on the borrower as stated in the article is highly misleading.
Obviously, your characterization of the pricing for owner’s title insurance ("as little as $30") also is clearly incorrect on several counts. Incidentally, with reissue rates in most jurisdictions, even the seller’s costs on behalf of the borrower can be significantly reduced.
The article makes much of the lender’s requirement that the home buyer purchase title insurance for the lender’s protection–as if that’s somehow inherently wrong. Title insurance is one of those important cogs in the wheel of national mortgage finance which, in part, enables a New York lender to loan mortgage funds on a property in Louisiana it has never seen. Without title insurance, no out-of-town lender would probably take on the title risks based solely on the representations and work product of local attorneys or abstracters relating to those risks. Lenders could have incorporated the costs of such insurance into their general loan costs, just as they do with other, credit-related risks–but at what real net cost to the borrower? And, as noted above, many borrowers pay only nominal costs for the lender’s protection in any event.
Another classic misconception is embodied in the article’s discussion of claims. The assumption is that, if a great majority of the premium dollar isn’t paid out in claims, there’s no value in the product. Since P&C insurers payout 80% or more in claims, that must be the standard. Nothing could be further from the truth. If the title industry had that level of claims, the entire system of real property conveyancing in this country would be under attack in Congress and in every state legislature.
The fact is that every line of insurance allocates its premium dollar for the same purposes: Losses; policy acquisition (commissions, policy preparation, etc.); reserves; taxes; profit; risk avoidance. In most P&C lines, this allocation occurs in exactly the order stated, with the largest percentage for losses and descending from there. In title insurance, it’s reversed. Instead of paying 80% or more in losses, we pay that and more in risk avoidance costs. Our search and examination of title is largely funded by the premium. And that’s how you want it to be–you don’t want a title claim. While the P&C insurer’s societal value can be measured in the losses it pays, a title insurer’s societal value may well be measured in how few losses it pays.
Moreover, commentators always seem to look at the title insurance policy itself, not the underlying process that produces it and the steps taken, pre-issuance, to assure consumers they won’t need to avail themselves of the policy’s benefits. For instance, recent surveys show that in at least 25% of transactions, curative work by the title agent or insurer is necessary in order to close. And in all transactions, numerous documents must be reviewed and interpreted to assure that all interests intended to be created are, in fact, established as desired by the parties. The title insurance policy is the end of that process and the assurance that it was conducted properly.
Nonetheless, it should be noted that the title industry paid out more than $350 million in loss and loss adjustment expenses last year.
Your article also characterizes the risks title insurance addresses as protecting "your lender from mistakes made by the company when it does a title search." That is certainly a significant part of the risk but by no means does it accurately state all the risks covered by the policy. Forgery, mis-indexed documents, unknown heirs, incompetency, and dozens of other so-called "off-record" matters are also covered. The most perfect title search in the world would not discover such defects. You focused on one state and one category of these off-record risk coverages in your article. In fact, nearly half of all claims may well fall into this general category.
Moreover, to the homeowner, the issue is not what caused the title problem, it’s getting it corrected without having to hire one’s own attorney and bringing a lawsuit–that’s the real benefit of title insurance. As you noted (albeit much later in the article), we pay to defend an insured’s title against challenges based on covered risks as well as indemnify the insured either as settlement of the claim or if such defense is not wholly successful.
Finally, it’s ironic that the article should characterize insurance against errors in searching and examining title so negatively since title insurance was specifically developed in response to the need for the public to have a contract–not a tort–based system for recovering precisely in the event of such errors.
The article’s discussion of "middlemen" and "rebates" is also overblown. Section 8 of the Real Estate Settlement Procedures Act, a 1974 Federal statue, makes the giving or receiving of anything of value between settlement service providers illegal. Many state insurance regulations establish similar restrictions. While there are certainly violations of these restrictions, it is hardly fair or accurate to suggest that "part of your [title insurance] premium likely goes toward rebates or other rewards for the referral" of the title order. The article implies that this is the regular course of business but cites only one state regulator ("at one time..."), and fines in California (which involved complex interpretations of state regulations). Not a persuasive case for massive kickbacks which are currently prohibited by federal and state law.
It is correct that title insurers and their agents compete vigorously with one another, as the article states. However, it is not accurate to state that "middlemen..benefit." First, price competition does exist in many states as your own article chronicles; as with many other lines of insurance, however, state regulatory concerns regarding insurer solvency and other matters often limit such competition intentionally. Second, competition on quality and speed of service is very evident in every market and that kind of competition clearly benefits the consumer. The article seems to ignore that altogether.
Characterizations in the article of title industry profitability are also misleading. Clearly, recent years have seen significant home value increase, unusually strong real estate markets generally, and large volumes of refinancings. All this has contributed towards some of the best years in the history of the title industry. However, title insurer profitability has historically lagged significantly behind other insurance lines and, in addition, has proven far more volatile. Unlike P&C lines where operating profits are generally non-existent and profitability is largely dependent upon investment income, title insurers almost have to be profitable on operations in order to generate net profits. That’s because investment income, the heart and soul of the rest of the insurance industry’s balance sheet, is not nearly as important in the title insurance industry–because investments make up a much smaller portion of the title insurer’s balance sheet to begin with! And operating revenues in the title industry are tied to the generally volatile real estate cycle. You chose a period of that cycle that has been unusually stable and kind to our industry and most others in the mortgage finance and sales area and drew broad conclusions based on that period. That, like many of your other conclusions, was simply unfair.
The sidebar on the Iowan title "insurance" experience is a neat microcosm of the problems with the article as a whole: You get it wrong! You mention the comparatively low cost for their state-run title insurance and the cost for an attorney’s involvement. What you neglected to add to the discussion was the fact that, by law, that title insurance policy cannot be issued without the preparation of an abstract or the updating of an existing abstract. The very low incidence of title problems in Iowa is the direct result of the hard working title professionals–abstractors–in Iowa carefully re-creating the public record in their title "plants" and their strict observance of very sophisticated professional standards in the preparation of their abstracts of the public record. Attorneys are then required to review and certify such abstracts. Then, and only then, can a state agency issue a title insurance "policy." Your cost comparison simply neglected significant components of cost for that product in Iowa. On that basis, the actual cost for the "insurance" product alone is substantially more than in other jurisdictions.
The premise for your article–that the public is largely uninformed regarding title insurance–was quite correct. Again, it’s unfortunate that your tone and tenor was so biased against the product. A great opportunity was missed to provide the home buying public with clear, useful information about a regrettably obscure but important financial service. Such an article might not have had the "zinger" title or the sexy lead, but it would have served that public far better.
James R. Maher
Executive Vice President
American Land Title Association
1828 L St., N.W. Suite 705
Washington, D.C. 20036-5104
Source: Freddie Mac