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Title Insurance: A Totally Legal Scam
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When my friend refinanced her mortgage, I was surprised that she had to pay for title insurance all over again (and title insurance is not cheap, in fact, it’s pretty ridiculously expensive for what you get). See, the way I saw it, she paid for title insurance the first time around and it insured that her title was clean for her. So… if it was clean then (and insured against mistakes, fraud, etc.), why would she have to get it again considering there was only one change between the first time she bought it and the second time, the lender providing the loan. When you get title insurance, they’re supposed to double check that all the t’s are cross and all the i’s are dotted, and then insure you against their own mistakes. If you’re still the owner, why do you need to buy it again?
Well, it turns out that the title insurance follows the loan and the insurance policy expires when the loan is paid off. When you refinance, the new lender pays off the old lender, which means the old loan is paid off, and the title insurance expires… and you get the opportunity to pay for title insurance all over again. Talk about a scam that is totally legal…
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There are two types of title insurance. One protects the lender, and is attached to the loan. Another protects the buyer, and is attached to the property. When you refinance, you have to buy a new lender policy. However, if you opted for an owner’s policy, that doesn’t need to be re-done — it sticks with the property as long as you own it (at least that’s how it works around here). But in general, I agree with you. About the only thing you can hope for is a discount on the new policy if you use the same title company.
I think the bigger scam is that they only “insure” titles with no problems. If there’s any issues at all with the property, you won’t find an insurance company to touch it. Maybe I’m naive, but that seems to defeat the purpose.
At least you don’t have to pay for the title search again. There’s another great product. For the low, low price of $500, you get a clerk to do a 5 second Lexis-Nexis type search. Now that’s a great product.
I’d hate to have hte ownership of my house contested and lose it just because I’d finished paying for it. Aargh, that’d be frustrating.
At least I don’t have much to worry about. We bought our house from the original owners who built it, and by the time we pay off our mortgage they will most likely not be alive anymore to contest it.
And you have to get it again (lender title insurance) even if your “old” and “new” lender are the same. I’ve never gotten a discount on this part, but using the same title company has gotten us 50% off the closing fee. I thought this was pretty slimy when we refinanced the first (and only) time. Quite the way to make money.
Blaine, the original owners might not contest it, but how about the long lost descendant of the people who owned the land before your house was built on it?
A couple of quick thoughts –
1) title insurance isn’t like hazzard insurance – title insurance insures against past issues, not future problems, like hazzard insurance. If there’s an issue on a title, then insuring it would be an instant guaranteed payout. Like insuring a house after it burned down. Wouldn’t make much sense.
2) There is risk in title insurance. The issuing agency relies on the public record (called a search) to determine the status of the property. If an issue that was existant, say a lien, but was either missed on a search or mis-indexed in public record, the insurer assumes the liability.
3) Reputable title agents don’t rely on 3-5 minute “lexis-nexus” type searches. They rely on painstaking searches of public documents, sometimes going back to handwritten documents recorded in the 1800’s. You A couple of quick thoughts –
1) Title insurance isn’t like casualty insurance – title insurance insures against past issues, not future problems, like casualty insurance. If there’s an issue on a title, then insuring it would be an instant guaranteed payout. Like insuring a house after it burned down. Wouldn’t make much sense – that’s why a problem title can’t be insured.
2) There is risk in title insurance, even without know problems. The issuing agency relies on the public record (called a search) to determine the status of the property. If an issue that was existent, say a valid lien, but was either missed on a search or not indexed properly in public record, the insurer assumes the liability.
3) Reputable title agents don’t rely on 3-5 minute “lexis-nexus” type searches. They rely on painstaking searches of public documents, sometimes going back to handwritten documents recorded in the 1800’s. You won’t find those in an on-line database.
4) Depending on where you live, subsequent refinance transactions can be significantly discounted. In PA, that discount can be as much as 37%. Protect yourself by getting quotes from multiple providers. Never sign anything provided by your Real Estate Agent, Lender, or Builder that gives away your right to select a title insurance agency without carefully considering the implications of the loss of comparison shopping.
5) Lenders title insurance policies protect the lender – they are going to insist that a policy is issued in most cases. Hey, it’s their money, and they want to make sure the collateral is protected. If you don’t want to pay for it, don’t borrow other people’s money.
To add to what Dave wrote above, there are things that can “come up” to cloud the title when you still own the property. Just because the title was clean when you bought the house five years ago doesn’t mean that it’s still clean.
For instance, say you renovate the kitchen or have a pool put in the backyard. If you’re not paying for this work up-front, a common thing is for the contractor and/or supplier to put a Materialman’s and Laborer’s Lien (M&L Lien) on your house while the work is done. This lien is then shuffled off to a bank or whatever when the work is done. But sometimes there can be disputes or other issues that lead that M&L lien not to be released. That contractor has a valid claim against your property. They can’t foreclose on the property, but the lien puts a cloud over the title. Nobody’s going to want to buy that property (which is effectively what a bank does when you refinance) while that lien is still unreleased.
Another (much worse) cloud on a title is a Tax Lien. This usually happens when you don’t pay your property taxes, but it can also come into play from non-payment of income taxes or business taxes. Again, nobody will touch your property while there’s a Tax Lien out against it. It will have to be resolved before you can sell the property.
There are also judgments that can be obtained in court that will cloud the title. Whether due to a divorce, a dispute with your neighbors, somebody slips and falls on your sidewalk and decides to sue you, whatever. A judge can order a “Lis Pendens” which effectively means that you can’t sell the property until you have taken care of the matter at hand and the Lis Pendens is released.
All of these things will show up in a search of the real property records at the county courthouse. As Dave wrote, sometimes this will be computerized, but sometimes it will involve a search of many old, hand-written documents. It depends on the county and how up-to-date it is, and also on how old the records are. Also it depends if there is a good Title Abstract Plant in the area. If you retain a copy of your original title search when you first buy the property, you may be able to save some of the work involved, but they still might not lower the fees.
What a surprise, a title company person defending title insurance. So tell me Dave, what is the percentage payout of received premiums in this industry? It’s among the lowest in the insurance industry.
It’s a scam that’s rife with overcharging and kickbacks.
http://www.consumerfed.org/pdfs/Title_Insurance_Testimony042606.pdf
The purchase of a home is basically a scam for scavenger lawyers and other unscrupulous persons.(This may sound like a very vicious and angry statement, but it is true!) The consumer is burdened with unnecessary fees and charges that they don’t understand and no one explains to them. I guess “buyer beware” is a term coined and practiced often by lawyers. Title insurance certainly falls within this category. The number of claims ever made against a title are extremely small and the amount of commission paid by these companies to lawyers is unconscionable. You pay an attorney to do a “title search” and of course the lenders don’t have much confidence in the average attorney’s ability, so they require lenders title insurance. But lenders then require title insurance just in case lawyers didn’t do their search thoroughly. Well, I guess that’s OK, but the lender requires the borrower to pay for their insurance!!! That is not OK. Plain and simple there needs to be an overhaul to the entire practice of buying, selling,and refinancing real estate, to determine what are legitimate charges and what are not. Title insurance is probably the biggest fraud being committed against borrowers that there is, but it will not go quietly into the cold dark night….unless we all help it.
Excellent documentation, KR B. We just closed on our house today, and we refused the owner’s insurance b/c it just didn’t sit right with us. No one at the Title company could (or would) tell us the rate of claim incidence. It has to be the lowest risk in any of the insurance industries. Sure, car insurance is mandatory, but everyone has an accident at some point during their lifetime. Based on median home prices in 2005 and the amount that was paid in insurance claims that year (about 1/4 billion), the rate of incidence is about a thousandth of a percent. That’s a pretty acceptable risk level for me.
Paying for insurance stinks until you need it. What’s even more surprising is that $800 [or whatever price you pay determined by the price of your house] policy that you spot on your HUD settlement statement, probably $200 goes to the insurance company and the rest goes to the law firm that did the closing as a commission. That’s right. The majority of that insurance payment is paid to the law firm!
Don’t get it confused, law firms that do closings for a flat fee of say $700 for a purchase, make a money on the P&S work at $200/hr, typically add $50-$125 on TOP of the title search and then add in their commission for selling you the title insurance.
So when you look at the HUD and see $800 for title insurance and $275 for a title, understand that the examiner performed the search for $200 and the title company is getting $200. [The numbers are just examples....]
I couple points to extend on John’s points above
You go to the title company. They check the history. Then they sell you insurance, just in case they screwed up.
You refinance. You very well may go with the same title company. They check again (to see if they screwed up the first time). Then, they re-sell you insurance against the possibility that they missed something both times. The kicker is that this insurance covers you for a time period that would be covered for by the first policy.
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if you know you’re going to refinance within 2 yrs, ask the title insurance company for a binder. it costs 10% extra but the next title insurance is supposed to be free.
it also works if you’re going to be selling within 2 yrs.
Also, the title insurance company should be giving you a discount if you refinance within a 2-3 year period but don’t have a binder. I always ask for one and get it.
Every state’s rates and rules are different. In PA the binder doesn’t exist, but the discount for refinances within 2, 4 and 10 years does. In NJ the discount is even more complex.
Best advice – get multiple quotes. Use a service like TitleInsurance.com or GetTitleInsurance.com if you are looking for a quick way to get multiple quotes. They’re free.
I guess the lenders are covering their butts, on your dime. They get you to pay the research, so “THEY” can make sure the title is clean and they won’t endup in troubles.
Those on here defending the price of title insurance definitely work for or own a title insurance business. When you refinance you pay for a title search then pay for a whole new title policy. If there is a lien that doesn’t come up in the overpriced title search then the title insurance would pay. At the rate they charge every buyer/refinancer they pay out less than 8% of the total premiums they charge. In Florida there is no comparison shopping either. This is the biggest racket and should be illegal. Someone needs to sue and bring this to light. I am refinancing now and I may just have to be that one.
I agree. Why should I pay for it when I’m refinancing? That makes ZERO sense. Shouldn’t the insurance the first time cover me? Of course not! Because that would earn them less money!
Philip – I agree with you. Any chance you can point me to where you got the 8% figure? I want to raise visibility to this evil tax on home onwership….
Unbelievable! First you pay a seller who supposed to have CLEAR title. Then you pay closing attorney to do title search to make sure title is CLEAR. And even this is not enough: you pay to ensure yourself from screw ups of the first two. Seems like paying three times for the same thing: CLEAR title.
I was in the process of refinancing my house in Staten Island when my Mortgage Broker presented to me a bill from a Title Company he was using on my file. Let’s say I was very surprised to see such high numbers, I was not expecting my closing cost to be so high. At that point I was very upset and my friend, who used to work in that industry, advised me to shop around. He told me that Title Insurance premiums are regulated everywhere in US but title fees are not. My friend advised me to get quotes directly from few different Title Insurance Companies in NY because their fees are not regulated and could be very different.
I followed his advice and called several Title Companies to get quotes for my refinance. After advising my mortgage broker that I was shopping for Title Insurance he was surprised and told me that other Title Companies won’t do a good job and most likely they’ll charge me even more at the closing. After comparing quotes from 5 different Title Companies I noticed that their fees were indeed very different. In fact, my mortgage broker’s Title Company gave me the highest bill. It was about $600 higher than others. Prudential Abstract 646-434-0888 was one of the Title Companies which I called. They provided me with good customer service and waived almost all of their fees. To make the story short I saved almost $900.00 by ordering Title Insurance directly through the Title Company. I was very satisfied and my advice to anyone would be to shop around when buying or refinancing a Real Estate.
You don’t need to get title insurance ever. It is that simple. You also don’t need to buy a home with financing or refinance a mortgage that you have. Title insurance is required by your lender. You, without financing, don’t HAVE to get it, but you SHOULD. With financing, you must get it as lenders require it. I agree that the chance of a claim being made and a company paying out is small, but…….
I’ll admit up front that I’m an Escrow Assistant (processor) for a title insurance company. Being completely honest, title insurance companies don’t get very much of the title insurance premium (regardless of how much work they put into a file). Unless a search is completed in the same county as the title insurance company, the company has to pay a large amount of that premium to the local plant doing the actual search (from 40% all the way up to 90%). So, for instance, if your title insurance premium is $1,000, the title insurance company may be getting a meager $100.
Something else you need to keep in mind is that the borrowers who have tried to scam or fraud mortgage and title insurance companies have hurt everybody. As a result of those who try to do this, both mortgage companies and title insurance companies have to protect themselves from fraud…just as government regulations help protect borrowers from overpaying for title insurance and related services. One example from an actual refinance was a borrower who tried to refinance the house right out from under their sick mother. Both the borrower and their mother bought the house together but, when the borrower tried to refinance, they tried to do it without the company knowing the mother was still around. Can you imagine what would’ve happened if the company had used the search completed when the house was bought instead of doing a completely new search? The mother would never have shown up and the borrower would’ve gotten away with it…and the company could’ve been sued by the mother when she found out.
Another examples of why a new policy is needed is shown above…Mechanics Liens, Tax Liens, and other types of judgments. From the time you buy a house until you’re ready to refinance it, a myriad of liens and judgments could’ve been filed which affect your property. One of the problems I came across recently was a judgment creditor who was paid off when the house was refinanced. Several months later, the borrower came to us wondering why the release of judgment hadn’t been filed…and when the judgment creditor was contacted on this, they tried saying that they weren’t paid on time and wanted more money before releasing the judgment. If the borrower hadn’t purchased a new policy, it wouldn’t have covered this problem. As stated above, title insurance policies don’t cover future problems…so since the judgment was filed after the first policy was purchased, it wouldn’t have covered this judgment. However, since a new policy was purchased and there was proof of how much the creditor was paid and when, and even though it was several months after closing, the company took care of the problems and got the release for the borrower.
Before you go around bashing all title insurance companies, you should do proper research. In every single industry, there are companies that will try to scam their customers. It is your responsibility as a borrower to do your research and make sure you are using a reputable company. Get recommendations from friends of companies they’ve used and have been happy with. Do some research and see what (if any) complaints or scam claims there are against the company you’re thinking of using. Get quotes from multiple companies but also keep in mind that the cheapest doesn’t always mean the best and don’t forget that, many times, you get what you pay for.