Recently in various publications, the value of title insurance has been questioned, particularly in regard to the amount charged the buyer when the property changes hands. There are two issues: protection of property against unforeseen lawsuits and value for the cost.
Depending on where you live and the property laws in your state, a certified abstract of title may be required. This abstract is a complete historical record of the property with all transactions associated with it. It is organized in chronological order and notes all grants, conveyances, easements, wills, mortgages, tax liens, judgments, lawsuits, and so forth that affect that particular parcel. Typically, a professional abstracter searches the records and compiles an abstract of title. This information is often held at the county level in the recorder or clerk's office. Once the abstracter completes the abstract, it is handed to an attorney who renders an opinion of title as to who the fee owner is as well as naming any other parties with a legal right to or interest in the property. When the attorney has attached his opinion to the abstract, it then qualifies as a certificate of title. Each time the property changes hands, the certificate of title is updated with changes to the abstract and a new opinion. However, this process is not required by all states or counties.
With all this research and legal opinion, it would seem that all should be well. Unfortunately, this isn't the case. The abstracter or lawyer could make a mistake. Transactions duly recorded might have been illegal. Individuals have forged documents, sold property that wasn't theirs, and left spouses off the transaction. Documents can be misfiled or lost.
When the problems occur, though it is relatively unusual, the losses to an uninsured property owner can be substantial. Mortgage companies now are at the greatest risk in the transaction and almost every mortgage granted requires title insurance to protect its interest.
Title insurance has been with us in the US since before 1900, but has become more common since the 1920s with the advent of larger home mortgages. Originally, it was designed to protect attorneys rendering title opinions, but eventually became available to anyone. Now title insurance is required by mortgage lenders for virtually all real estate transactions, including many long-term leases.
A title company performs the same exercise as the county title abstracter by researching the history of the title. A title company attorney then reviews the abstract and issues an opinion. Once the abstract and opinion are complete, the title insurer issues a title commitment to insure the property, but may note conditions that need to be resolved before the property can be insured. The significant difference between the abstract of title and title commitment is that the abstract of title is a historical chronology of events and transactions whereas the title commitment is concerned with current issues that might impede insurance. The title company doesn't make any inspection of the property nor does it undertake boundary surveys. That is the responsibility of the buyer.
The title search and insurance may be paid by the seller or the buyer depending on where you live. The premium is based on the purchase price and remains in effect as long as that owner holds the property.
As already noted, mortgage companies require title insurance to protect their interest in the property. This lender's policy is distinctly different from the owner's policy. The lender's policy offers title protection for the property as loan collateral. As such, the mortgage company is only interested in the covering its risk.
The lender's policy protects only the amount owed on the mortgage loan and covers only title issues. Eventually the loan is paid off. At that point the lender's policy terminates. The lender's policy may be assigned to other holders of the same loan. One notable difference from the owner's policy is that the lender's policy doesn't make exceptions for claims to ownership that might have been discovered as a result of a physical inspection.
In its conditions and stipulations section, the title insurance policy describes how claims will be handled. If a claim comes up, the insurer decides whether to fight or pay the loss. For all practical purposes, the purchaser is protected from past events that might otherwise compromise his investment.
As is true of insurance companies generally, the goal is to minimize pay outs. Title companies have become extremely thorough and systematic in collecting and organizing property title information. According to an article in the New York Times (July 6, 2005), title insurers pay out only about 4% on claims.
Rates are filed with state insurance commissions and are extremely competitive—not necessarily to keep prices down for the consumer, but rather to compete for real estate agents, who are in turn competing for referrals elsewhere in the real estate food chain. Shopping for better rates is often a wasted exercise. Nevertheless, it's worth checking to see if the seller's title insurance company offers reissue rates if you update the seller's policy to cover your purchase price.
Title insurance is important, especially in our contemporary, litigious society. And no mortgage company will complete a mortgage loan without a lender's policy. Though it may seem the fiscal equivalent of being struck by lightening, having title insurance in the event of a claim is probably a good thing.
Nevertheless, billions of dollars are collected every year by the title insurance industry that are never paid out in claims or even used in litigation. It is, to quote one underwriter at a major insurer, "a very sweet deal."
Because most of us only see the title insurance as one of many line items included in the closing costs for our homes, we rarely question what we are getting for the money. Because the house can't close without it, consumers are over a barrel. Because of the relatively incestuous nature of real estate transactions with brokers, insurers, mortgage companies, and others providing referrals and routing the naive home buyer from one to another, it's not much different than shooting fish in a barrel.
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