Sidnicious

January 20, 2016

Title Insurance

I’m buying my first apartment, and the process has had some interesting hiccups. The closing is less than a week away and I just got a final disclosure of costs from my bank. The breakdown includes this line:

Title Owner Pol(optional) to Counsel Abstract, Inc $3,138.00

Two immediate questions:

What is this?

Google suggests that other people have read their disclosures, too:

Let’s read some links. First conclusion: this is a title insurance policy. The disclosure shows that I’m buying two of them: one for the bank (for $544), and one for myself (for $3,138). The NY State Department of Financial Services explains title insurance like this:

Title insurance protects the owner of property and the mortgage lender against future claims for any unknown defects in the title to the property at the time of sale. Claims can arise as a result of fraud, forgery, unpaid real property taxes, judgments, liens, or other encumbrances that were not discovered during a search of the property’s title history conducted before the sale.

[…]

Lender’s Policy- Protects the lender’s interest in the property. The amount of insurance coverage is usually the loan amount, and the amount of coverage declines as the loan amount is reduced by mortgage payments.

Owner’s policy- Protects the property owner up to the full original sales price of the property. Unlike mortgage policies, an owner’s policy’s amount of coverage does not decline over time. An optional market value endorsement can be purchased with the owner’s policy to keep pace with increases in a property’s value over time. In the event of a claim, the full market value of the property would be recoverable. (An owners Policy could also apply to Leasehold Policies and Construction Loan Policies.)

The Wall Street Journal lays out this example of when title insurance might come into play:

Imagine that you’ve bought and settled in to this house. One day, a woman knocks on your door and says that she and her husband had split up shortly before he put the house on the market, and that he forged her name on the deed. She says the sale was invalid and that she’s still the owner—and she wants you out. You and the woman go to court where she proves that her story is true. She gets the house back, and you are evicted. Meanwhile, the husband has vanished with the money from the sale.

What does title insurance cover?

My proposed policy isn’t in the disclosure, but the American Land Title Association (ALTA), “the national trade association representing nearly 5,500 title insurance companies, title and settlement agents, independent abstracters, title searchers and real estate attorneys” (source: Wikipedia) has a standard owner’s policy available on their website. I skimmed it and drew these conclusions (IANAL):

Why is it optional?

I’m now wondering why the bank was able to opt me into this insurance policy at all. Regardless, the original question stands. ALTA explains it like this:

The Bureau [meaning the Consumer Financial Protection Bureau, a US government regulatory body] released its final rule for integrated mortgage disclosures in November. …owner’s title insurance must be labeled as “optional” on both the Loan Estimate and Closing Disclosure. This concerns many title agents because telling a consumer that owner’s title insurance is “optional” may dissuade homebuyers from purchasing the same protection that lenders receive.

[…]

“The new rule is going to absolutely devastate my owner’s title insurance business,” [Pamela Daley-Jennings, manager and co-owner of First Lima Title Agency in Ohio] added. “The fact that it is listed in a separate area with the word ‘optional’ by it makes it seem unimportant to the entire process.”

It sounds like it’s never been legally required, but until recently many banks gave the impression that it was. At this point, I decided (maybe hastily) that I didn’t need title insurance. Let’s do this.

Attempting to decline

I emailed my mortgage banker with a few questions about the disclosure, and a request to opt out. A few minutes later, an inline reply from the mortgage processor (who works with the banker):

Me:
I want to opt out of owner’s title insurance.

Processor:
we cannot allow it

Me:
I didn’t realize that owner’s title insurance was required, it says “optional” on the disclosures.

Processor:
Hi Sidney, here is the answer I received form our attorney in regards to opting out of owner’s title insurance:

Sidney should discuss it with his attorney before he makes that decision. He should be aware that opting out of owners insurance will cause the Lender’s insurance to rise dramatically so he will not see the savings he may be expecting.

Please let us know ASAP as this also may affect your closing date.

Banker:
Sidney
For your own protection I would not do this!!

My lawyer got back to me the next morning:

Attorney:
The Mortgage insurance will increase to the TRID amount: $1,812.00, which is the regular amount, without a 70% discount, which they provide when the buyer takes Fee insurance. So it is not required that you take the Fee insurance, but strongly advised. Without it your savings will be $1,870.00.

My mom asked a family friend with extensive real estate experience:

Mom to family friend:
Sidney wants to decline title insurance (about $2,000). Jackie advises not take the risk. Any words of wisdom?

Sent from my iPhone

Family friend to mom:
[Attorney] is right beyond any question.
It guarantees,for a small, one time cost,clear title.
It would be very stupid to buy a major real estate asset without this insurance. [emphasis mine]

Woah, a strong statement of support. But, what’s missing in everything I’ve read so far are numbers.

How likely is it, statistically, that I’ll ever use this policy for something minor (like an unpaid contractor bill)? What about something major (like a claim that the seller never owned the apartment)? That should let me decide, rationally, whether the insurance is worth $1,870.

First, a note on history.

Why is most of the world’s title insurance sold in the United States?

The Wikipedia article for title insurance paints a fascinating picture of its history.

Most of the industrialized world uses land registration systems for the transfer of land titles or interests in them. […] Governmental errors lead to monetary compensation to the person damaged by the error but that aggrieved party usually cannot recover the property.

A “land registration system” is a government truth store for land ownership. Changes in ownership are committed irrevocably to the (public) register. The U.S. has a different system:

…the vast majority of U.S. states have opted for a system of document recording in which no governmental official makes any determination of who owns the title or whether the instruments transferring it are valid.

Document recording” describes a system where the documents involved in a real estate transaction are photographed for public record. An interesting property of this system is that ownership can always be challenged in court, and can change retroactively. This property led to the development of the title insurance industry in the U.S.. Now, the industry is self-sustaining through lobbying (emphasis mine):

At least 20 U.S. states have experimented with […] title registration systems at one time or another, but most have retreated to title recording under pressure from title insurers. […] The U.S. title insurance industry has successfully opposed land registration systems by saying that they are vulnerable to fraud (a severe problem in most land registration jurisdictions) and that an inherently contingent property system more effectively protects property rights.[citation needed] While it is possible to fortify land registration systems to prevent the registration of forged deeds, the necessary countermeasures are complex and expensive.[citation needed]

It’s not clear that title insurance is entirely evil, though:

…a relatively small fraction of title insurance premiums are used to pay insured losses. The great majority of the premiums is used to finance the title research on each piece of property and to maintain the title plants used to efficiently do that research. There is significant social utility in this approach as the result conforms with the expectations of most property purchasers and mortgage lenders.

One more thing: a number of websites claim that, on average, 70% of the cost of title insurance is a commission paid to the title company (in this case, the title company hired by my bank).

What are my options?

Let’s try to find some statistics. ALTA itself publishes reports about the state of the title insurance industry. In 2014, of the $11,378,440,818 in premiums it collected, the title insurance industry paid out $670,501,141 in claims, or 5.89%. Health insurance companies, in contrast, are [required by the federal government] to reimburse customers if they spend less than 80% of premiums on medical care. This suggests that large, successful claims are exceptionally rare and I should opt out.

I’m still investigating. Here are some discussions online that I’m following: