Title Insurance: A Totally Legal Scam

fivecentnickel.com responds:
Posted: March 29th, 2007 at 8:46 am

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.

John responds:
Posted: March 29th, 2007 at 10:53 am

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.

KMC responds:
Posted: March 29th, 2007 at 11:00 am

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.

Blaine Moore (First Time Home Owner) responds:
Posted: March 29th, 2007 at 11:11 am

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.

RootAnn responds:
Posted: March 29th, 2007 at 11:25 am

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.

fivecentnickel.com responds:
Posted: March 29th, 2007 at 4:37 pm

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?

Dave Wirsching responds:
Posted: March 29th, 2007 at 5:09 pm

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.

Gaming the Credit System responds:
Posted: March 29th, 2007 at 6:06 pm

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.

broknowrchlatr responds:
Posted: March 29th, 2007 at 11:04 pm

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.

Zook responds:
Posted: March 29th, 2007 at 11:11 pm

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....]

Free Money Finance responds:
Posted: March 30th, 2007 at 6:20 am

Star Money Articles for the Week of March 26

Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: AllFinancialMatters says renting furniture is a bad idea. MightyBargainHunter does his own round-up. Five Cent Nickel compares Blockbuster Total Access vs. NetF…

Wealth Building Lessons responds:
Posted: March 30th, 2007 at 2:59 pm

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.

Dave Wirsching responds:
Posted: March 30th, 2007 at 9:00 pm

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.

DanyO responds:
Posted: April 1st, 2007 at 1:19 pm

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.

No Credit Needed » Blog Archive » Carnival of Personal Finance #94 Hosted By No Credit Needed responds:
Posted: April 2nd, 2007 at 7:25 am

[...] Change Searchlight Crusade Free Money Finance Daddy Financials Make Your Nut Phil For Humanity Blueprint For Financial Prosperity Salt Lake Real Estate [...]

Mapgirl’s Fiscal Challenge / Carnival of Personal Finance #94 is Up! responds:
Posted: April 2nd, 2007 at 8:47 am

[...] Jim at Blueprint for Financial Prosperity on Title Insurance and what a rip off it is. [...]

Cash Money Life - A Personal Finance Blog with a Salute to the Military » Bank of America Offes No-Fee Mortgages, No PMI responds:
Posted: May 8th, 2007 at 7:18 am

[...] and borrowers are still responsible for transfer taxes, recording fees, their own title insurance (which is not always necessary!) and legal fees, among other [...]

» Should You Refinance? on Blueprint for Financial Prosperity responds:
Posted: January 22nd, 2008 at 5:02 pm

[...] for even if the lender paid for the closing costs (at the very least, I’d have to pay the scam that is title insurance). In actuality, on a 30 year mortgage, I would need something that’s slightly less than [...]