Why is title insurance such a scam?

Factual Questions
1

I finance a house. I buy, for my lender, title insurance that covers them against – well, who really knows what the hell it protects them from, but apparently it’s important – something for the term of the mortgage.

A few years later, interest rates drop, and I refinance with a different lender. For some reason, they want me to pay for a title insurance policy again…WTF? Ok, so it’s a different entity that needs to be insured. Great. At least I should be able to get some of the money back from the old policy, since I’ve only used 2 years of it. No? Why? If I cancel my car insurance in the middle of the year, I get some of my premiums back. Likewise my homeowner’s insurance. Why not my title insurance policy?

Can someone explain this scam to me?

2

I may be thinking of something else, but I believe title insurance insurances against title defects, etc which might mean that your, or the banks, ownership of the property was not 100% clear. If that was the case you might not technically own the property, and the bank wouldn’t really have a house as collateral for its loan.

It doesn’t seem to me that it would be as crystal clear that the liability ends once you sell the house. After all, if you technically didn’t own it, how could you have sold it? It makes sense that it is sold without time restrictions, and consequently no concept of cancellation. You buy title insurance to prevent any future issues regarding your claim over the property, and it is a once off cost that covers you forever.

3

They (the lenders) are loaning you money with your house as collateral, in essence. That means they need to be guaranteed that you own the house, free and clear except for their mortgage or whatever other lien on it. Yeah, you bought it from the guy who sold it to you – but did he have clear title? Was the guy he bought it from involved in a divorce, the ex-wife dying tragically a few years later, and some lawyer two states over attempting to claim that the kid she had custody of and he forgot to mention to the guy you bought from, has an interest in the property? Did the farmer who sold the land to the developer 30 years ago have some kind of agricultural loan on his lands that a government agency you’ve never heard of will come back on you and your neighbors in the subdivision to try to collect on? Or maybe the farmer died and his son as executor sold off the lands and cheated his sister out of part of her share of the inheritance, and she’s now coming back on the sale as fraudulent. The point to title insurance is to be sure that none of these sorts of things will affect your ownership or the lender’s interest – the insurer will come to an agreement with anyone of the above who might have a valid claim against the land. That’s why it’s important.

As for why it’s a scam – well, I’ll let someone who knows how insurance works the way it does discuss that. Personally, I tend to agree – the insurance should be transferable with the loan. But that’s not a GQ-style fact, rather an opinion.

4

Actually, I misread your second paragraph. I am not sure why a second lender needs a new policy, which casts into doubt my whole understanding of the issue. Damn! I really thought I understood something :slight_smile:

Wikipedia has a pretty good looking break down about what it is and why it exists in the United States.

5

Title insurance is not a scam.

Say you buy a piece of land from two sisters, who inherited the property from their mother. Uh-oh, up pops brother, who was on the deed but did not get any proceeds from the sale. You ring up Friendly Title Insurance Company, say “Bubba wants some money” and fret no more.

6

Well, it isn’t a scam the FIRST time I buy it. But that covers me for an entire 30 year period, right? Why do I have to buy it AGAIN if I refinance the house? and AGAIN if I refi a third time? That’s where the scam comes in.

Thansk to everyone for explaining what it protects you against. Now I want to know why it is allowed for them to keep 100% of my money while only providing 5% of the service?

7

because title insurance is “at this point in time” - namely, at the point of the sale or financing - the insurer assumes the risk of a defect in title at that particular time.

When you first buy the house, it protects both you and the bank from any defects in title that the vendor may have had. However, on a re-fi, it’s primarily to protect the mortgage company from you.

You’ve now had the property for a few years. Have you done anything in the interim that may cloud the title? did you have a wild weekend in Vegas and sign a mortgage agreement with First Vegas Bank to fund your gambling? did you get a quickie marriage with Ms Vegas third-runner up? Have you built anything on the property that doesn’t comply with local zoning codes?

Any of those things could cloud the title, especially since they may not show up on your title documents from when you bought the property. The mortgage company wants title insurance to protect its claim to the property from problems like that.

8

Ok, but why? If, as you say, I am apparently able to cloud the title at the moment I walk out of the door by going on a wild gambling trip to vegas or putting up a tool shed, what’s the point in insuring it at that particular point? Either the insurance lasts for the life of the loan, in which case it should be somewhat refundable, or it’s completely useless, in whch case I shouldnt have to buy it.

9

Whereupon Friendly Title Insurance Company thinks of some reason why they don’t have to pay. Back when my Bro was working for the IRS, a Title Insurance company missed an IRS lien. The homeowner got the IRS to back him up. The Title insurance company said it didnt even know how to pay out a claim as it had never done so before.

Now, instead of Title Insurance you can often get a Title Search, which is cheaper and does the exact same thing- assuming there are no “claims” anyway.

10

Because that is the point at which the bank is lending you the money. I think you may be confused as to what “protection” title insurance provides. Title insurance only protects you against situations that arose prior to the date the insurance was written.

The insurance written 2 years ago says NOTHING about whatever you or anyone else might have done since the prior policy was written. (Moreover, the insurance policy written today covers the possibility that the policy written 2 years ago missed something.)

I have not purchased title insurance in some time, but my understanding was that at least in certain limited circumstances - such as when you were refinancing a short-time after a prior mortgage - you could obtain “updated” title insurance for a reduced rate. I may well be mistaken on that, tho.

11

I am very confused as to what protection the insurance provides. Seems to me that if they provide insurance which looks back in time, I should only be on the hook for the difference between the last time title insurance was purchased and now. But I typically have to pay the whole shebang every time.

That’s the scam. It’s easy to overlook because a typical house purchase involves a hundred thousand dollars or more, and at that point slapping another 500 - 800 bucks on top is just one more thing a omeowner shakes his head at, resignedly. But it’s bullshit, and I think everyone knows it.

Either the insurance should be transferable for a much reduced rate, or thoe whole thing should be just done away with.

12

The first mortgage holder doesn’t care about any liens that go on the property AFTER the date the first mortgage holder’s lien is established. They don’t care because the liens that come on the property after that point in time are subservient to their lien. (Except tax liens, but they take precedence over everybody’s lien so there’s nothing the bank can do about those). The first title insurance only insures up to the date the first mortgage attaches to the property. Things that happen after that don’t affect the first mortgage holder’s debt priority, so it doesn’t give a damn about them. The second mortgage holder needs the title insurance in place on date 2, the date its second mortgage attaches.

13

I get this part, but what I don’t get is why the price is static. I bought a policy last year and it cost me 900 bucks to insure the title from that point back to 2001 years ago. A year later, I buy another policy…at that point, since I have already bought insurance for the prior 2000 years, I shoudl only have to pay for the one single stupid year that has elapsed. But I don’t, because the scam says that they can charge me 900 bucks AGAIN for the same 2000 years I already insured, plus the one that wasn’t.

14

I think your misunderstanding is assuming that title insurance is priced similarly to other types of insurance - through some sort of actuarial procedure. It’s not - it’s just a flat fee based on the historical rate at which policies are paid out. There is no attempt to determine the likelihood of any particular policy paying out like there is in auto or home insurance.

If it was calculated actuarially then you expect a policy on a 200-year-old home to be much more expensive than a 10-year-old one.

15

The key to understanding title insurance is understanding the title recording system in the US.

Oversimplifying, and recognizing that there are innumerable local variations, documents reflecting the ownership of real property and liens and other interests in real property (like mortgages) are recorded in the office of the county clerk (or similar official). The county clerk keeps a copy of the document on public record, and maintiains an index of all recorded documents by the property they relate to (usually by tax map number or similar code).

When a document is recorded, the whole world is considered to be on public notice of what it contains, and anyone who subsequently acquires an interest in the property takes their interest subject to previously recorded documents. That means, for instance, that if there is a lien recorded on your property and you try to sell it, the lienholder will be able to go after the subsequent owner who purchased it from you. Similarly, if there is a judgment recorded against you and you take out a mortgage on the property, the judgment creditor will be able to get paid before the mortgage-holder.

What this means is that before title insurance is issued, the title company sends someone down to the county clerk’s office and prepares a report on who is on record as owning the property and whether there are liens, judgments, mortgages or other encumbrances against the property. If you are listed as the owner and there are no encumbrances, you’re home free and title will be insured. If there are encumbrances, they will have to be dealt with. For instance, if there is a mortgage on the property, a new lender will usually want it to be paid off, usually from the proceeds of the sale or refinance. Other problems can be much more complex. However, once the problems are resolved to the satisfaction of the title company, if they ever come up again, the title company will defend against them.

Perhaps the most common title problem which title companies resolve without problem is the absence of a recorded mortgage satisfaction. Let’s say Owner 1 ownes a house with a mortgage from Lender 1, and sells it to Owner 2 and pays off the mortgage from the sale proceeds. In this case, the Lender is supposed to provide a formal satisfaction of mortgage document to be recorded after the payoff check is received and clears. However, it is quite common that these do not get recorded. If the satisfaction of Owner 1’s mortgage was never recored, when Owner 2 tries to sell to Owner 3 the record will show Owner 1’s mortgage as still active and encumbering the property. If Owner 2 did not get title insurance, there is a major headache in trying to track down Lender 1 (or the bank Lender 1 merged into from three mergers ago), determine that the loan was in fact paid off, and get a duplicate satisfaction to record. However, if Owner 2 had title insurance, Owner 3’s title insurer can just contact Owner 2’s title company, which was the one that handled the mortgage payoff of Lender 1 when Owner 2 bought the property, and get a coverage letter saying that Lender 1 was paid off.

There are, of course, many more types of title problems, some of them innocent and some involving fraud, that title insurance protects against. Some title insurance claim stories will make your hair stand on end (though most are rather mundane). In court yesterday, my opposing counsel was discussing a case he was involved with where a guy forged bunches of deeds and took out millions of dollars worth of fraudulent mortgages.

So, the reason that you need new title insurance each time you take out a new mortgage (which is what refinancing really is), is that there needs to be a new search at the clerk’s office of anything that was recoreded after your prior mortgage and to insure that your mortgage has priority over everything else there.

I do believe that in some states (including New York, I think), you may be able to get a discount from your title insurer if you refinance and use the same company within five years. That’s something you could inquire about.

16

Something else to remember, is that even though you are paying for the insurance, the entity insured is the bank.

Generally, when people refinance, it’s with a different institution. That’s why you need to buy another policy, to cover the new lender. (most Title Companies will allow a transfer of title policy from one loan to a new one if it’s the same bank. It’s up to the bank whether or not they pursue that route.)

As to property taxes… most lenders will utilize a tax serice provider which tracks the taxes, and whether or not it’s been paid (it’s public information). If it’s not paid, they notify the lender. If after two years it hasn’t been paid, the lender will generally pay it and add it to the loan. After year three, the county (or state, whoever) can take possesion of the property.

No doubt… I once read a report that Title insurance companies keep 99% of the premiums they receive. I wonder how that compares to auto/heath/etc.

While I don’t think Title Insurance is a scam, I think that it’s drastically overpriced for the protection it provides the lenders. I work with this crap all the time and have never seen title company pay out.

17

So Daddy has a $250,000 car. He dies, leaves it to wife 5 who sells it to you for $200,000 of which $100,000 is a car loan from your credit union. Now wives 1,2,3,4 and their kids contest the will and wife 5’s ownership of the car, blah, blah, blah plus all the possibilities mentioned above as justifications for title insurance.

Shouldn’t your bank have made you buy title insurance on your car?

Is there a reason, other than job security for the legal profession, that property ownership can’t be recorded through a system a simple as that used for cars or, for that matter, boats and airplanes which can easily cost more than cars?

18

No, it’s just a matter of tradition. Other countries use the torrens system, which is similar to what you’ve described.

Hey, I used something I learned in Property!