Title insurance optional? Not likely
A U.S. senator says he knows how to promote
homeownership: Make title insurance optional.
Sen. Phil Gramm's notion is unlikely to become reality.
No responsible lender would want to lend money to a home buyer without
the services that title companies provide, only one of which is
an insurance policy.
Gramm, R-Texas, spoke up on Dec. 13 during an appearance
by the Secretary of Housing and Urban Development before the Senate
banking committee. HUD Secretary Mel Martinez told the panel about
HUD's efforts to promote homeownership, especially among people
with low to moderate incomes.
Gramm replied that he knew how to lower closing costs:
Do something about title insurance, which he said costs more than
"I want you to look at it and see what
you could do about this requirement of title insurance," Gramm
told Martinez. "If people want to buy it, great, but your programs
are making them buy it. My guess is the social cost of not having
it wouldn't be one-tenth, maybe not one-hundredth, of the cost of
purchasing those policies."
Clearing the clouds
Not true, says Ann vom Eigen, lobbyist for the American
Land Title Association. She gently suggests that critics of the
title insurance industry do not understand what it is and where
the money goes.
"No. 1, there's a title search, which
is a large portion of the cost of the policy," vom Eigen says.
In fact, in strictly regulated Texas, which
analyzes the title industry's finances very closely, less than 20
percent of the fee pays for the insurance policy itself. More than
80 percent of the title insurance fee goes to title agents who search
records and supervise the closing. That 20-80 split generally holds
true nationwide, although in some places it's closer to 50-50 and
in others it's closer to 10-90.
Title agents search records for any problems that
could "cloud" the title, endangering the buyer's ability
to buy, use and sell the property. Mainly they look for problems
in the recording of easements, court judgments, liens and taxes.
They look out for mundane paperwork errors. A title agent might
spot, for example, a missing signature on a document from a previous
closing and take steps to correct the oversight.
How far title agents look back is a matter of law,
local custom and even intuition. They sometimes go back 40 years
or more. Title companies tell ALTA that they find problems in one-quarter
of home sales. Most of those problems are fixed in time for the
closing to take place.
Insuring the past
Another cost is the insurance policy itself. Title insurance
is unusual. It protects against past events, whereas other kinds
of insurance protect against the possibility of future events.
"Title insurance is a risk-avoidance form
of insurance, so the search and the elimination of problems that
are identified in that search are very basic costs," vom Eigen
There are two kinds of policies -- one for lenders
and one for owners. With every conforming mortgage, the lender requires
lender's title insurance, and that's the type of coverage that Gramm
was complaining about.
The insurance pays for any financial loss and attorneys
fees resulting from a challenge to the property's title. For example,
if a missing heir pops up and claims an ownership interest in the
property, the title insurance pays for the legal fight. If the missing
heir wins, the title insurer compensates the policyholder for financial
The mother of invention
It's hard to imagine lenders going along with Gramm's suggestion
and allowing title insurance to become optional. They'll still want
solid evidence that a buyer bought the property in question and
that the lender lent money that was secured by the property. They'll
want someone to perform a title search and make sure all the i's
are dotted and t's are crossed at closing. Those functions most
often are performed by title agents.
"If there wasn't title insurance, we would
have to invent something like it," says Jim Maher, ALTA's executive
If the law allowed buyers to veto the issuance of
lender's title insurance policies, lenders would respond by raising
rates, vom Eigen predicts. That's because conforming mortgages often
are bundled together and sold as investments. If mortgages lacked
title insurance, investors would be taking bigger risks, and they
would seek bigger returns on their investments. And that spells
higher interest rates for home buyers.
How seriously is Gramm's suggestion being taken?
Gramm's office referred a call to the banking committee, which referred
a call to HUD. A spokesman said HUD had nothing to announce.