February 10, 2005 09:51 AM
Title Insurance Protects Lenders. So Why Shouldn't They Pay for It?
Excerpt: Hey lawmakers? If you're really serious about lowering costs for homeowners on closing day, here's a suggestion: Make lenders pay for title insurance.
Hey lawmakers? If you're really serious about lowering costs for homeowners on closing day, here's a suggestion: Make lenders pay for title insurance.
Though many consumers don't quite understand what title insurance covers, lenders require them to buy it, whatever the cost. The insurance typically is one of the biggest costs at closing, ranging anywhere from a few hundred dollars to $1,200 on a $150,000 mortgage, depending on the state you live in.
But while consumers have to get the insurance, they have virtually no bargaining power over its price. Meanwhile, it's the lenders who benefit. These days, lenders sell loans to mortgage investors in a secondary market, and the lenders need the insurance to make those sales.
"Insurers are not competing for the borrower, they're competing for the lender, homebuilder or realtor who is overseeing the sale, so there's no pressure on prices," says Jack Guttentag, professor of finance emeritus at the University of Pennsylvania's Wharton School. "A situation like that is ripe for abuse and almost never to the benefit of the consumer."
What got me thinking about title insurance was news last month that the state of Colorado is poised to impose sanctions against nine title insurance companies. The firms were accused of giving "kickbacks" to large homebuilders in the state in return for the homebuilders' steering business their way, according to Erin Toll, deputy commissioner of compliance with the Colorado Division of Insurance in Denver. Lorri Lee Ragan, spokeswoman for the American Land Title Association, an industry trade group in Washington, D.C., declined to comment.
It wasn't the charge of backdoor dealing that surprised me, it was the size of the alleged kickbacks: 50% of the premium in return for a guarantee that homebuilders would refer a certain amount of business their way. The investigation is one of nearly a dozen state inquiries into questionable practices by title insurers launched over the last five years.
If some title insurers are able to give up half of their premiums in return for future business, how overpriced are these policies?
The housing boom and subsequent wave of refinancing has sent title insurance soaring to a record rate of $15.6 billion for premiums and related services in 2004, up from $11 billion a year earlier, according to the credit-rating firm Fitch Inc. The bulk of those premiums come from residential transactions.
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