Title Insurance Premiums Rose With Housing Boom
Consumer Advocates, Government Reports Say the Industry's Costs Remained the Same

By Kathleen Lynn
The Record
Saturday, January 13, 2007

Of all the confusing and expensive things about buying a house or refinancing a mortgage -- and there are plenty -- title insurance just might take the prize.

"A lot of customers don't understand title insurance," said Samuel Ingram, president and chief executive of My Closing Space, which sells title insurance and other services. "It's the largest component of your closing costs, and yet people don't know anything about it."

Title insurance is drawing scrutiny from state regulators around the nation and other critics. They say:

· Title insurance prices -- and profits -- have unfairly soared because they're based on house prices, which skyrocketed from 2000 to 2005. "The real estate boom has been very profitable for title insurers," said J. Robert Hunter, director of insurance for the Consumer Federation of America.

· Some title insurance agents pay kickbacks to real estate agents, lawyers, builders and lenders to get buyers' business, and those kickbacks inflate prices. Some of those charges were detailed in a report last October by Washington state's insurance commissioner, and others last April by the U.S. Government Accountability Office.

· Consumers have not benefited as technology has made public records more accessible, lowering the cost of title searches.

· Real estate brokers and lenders are increasingly becoming owners of title agencies, creating potential conflicts of interest, according to the GAO.

The American Land Title Association defends the $17 billion industry. As an example of how title insurance can protect a homeowner, the association offers this story: A buyer purchases a home from a widow and her daughter. But then a child from the deceased man's first marriage turns up, claiming to be the rightful heir to at least part ownership of the property. In such a case, the title insurance would kick in to pay the missing heir's claim and preserve the buyer's ownership of the house.

Another example would be a lien on the property resulting from unpaid taxes or an unpaid contractor's bill. Occasionally, fraud turns up -- for example, a man who owns a house with his estranged wife sells it without her knowledge or consent.

Usually such problems are cleared up during the title search. Industry experts say only about 4 to 6 percent of title insurance premiums are paid out to satisfy claims. That's much lower than the 70 percent-plus rate typical of other lines of property and casualty insurance.

When they buy title insurance, which is required by mortgage lenders, most people pick companies recommended by their real estate agents or lawyers.

Several Web sites have sprung up, offering to help buyers find the best deals on title insurance. But in some states, comparison shopping for the insurance offers little payoff, because title insurance rates are set by a state insurance agency.

An average premium is $5.25 per $1,000 on the first $100,000 of a mortgage, then $4 per $1,000 on amounts from $101,000 to $500,000. Title insurance related to a mortgage refinancing is cheaper than for a house purchase.

Because the cost of title insurance is based on house prices, it has risen sharply since 2000, even though the title companies' costs have apparently not risen, according to the GAO.

Advocates of comparison shopping say that although the cost of the insurance itself does not vary, different companies charge different amounts for other services, including the title search and copying and sending documents. So, they argue, a homebuyer or owner can save hundreds of dollars by shopping around.

Several states have acted to curb abuses in title insurance, which, like most insurance, is regulated by the states, rather than the federal government.

In New York, two large title insurance companies recently agreed to reduce rates 15 percent to resolve an investigation of kickbacks allegedly paid to real estate developers.

In Washington state, regulators recently accused the title industry of giving kickbacks to real estate agents and other middlemen, in violation of state law.

My Closing Space advocates a business model used in Florida, where a court ruled that title companies could give rebates to customers, effectively cutting the price of title insurance. Not all states allow such rebates, though.

Iowa has gone even further and runs its own title insurance program, which charges a flat fee of $110 for insurance, plus an estimated $400 in lawyers' fees and other costs related to the title search.

Hunter of the Consumer Federation advocates an Iowa-style plan for the nation. Another alternative he likes would have mortgage lenders buy title insurance and pass along the cost to buyers in the mortgage. The theory is that big lenders, such as banks, would have the leverage to get better deals than individual buyers could ever get.

The U.S. Department Housing and Urban Development proposed such a plan a few years ago, but it was opposed by the title industry and died in Congress.