Good afternoon —
A few weeks back in this newsletter I posed the question: "Is title insurance a scam?" and I received quite a wide variety of responses.
One respondent stated: "Who believes it is anything but a scam? Ever read a policy and the exceptions? Worthless - only good for starting a fire in the wood stove or fireplace."
While another wrote: "People who ask the question 'Why is another title insurance policy necessary when you refinance' are acknowledging that they do not entirely understand how title insurance works and how it contributes to the stability of the real estate market in the United States. 80% of the title insurance fee goes towards the investigative work a title agent performs to ensure there are no liens on the property that would adversely affect the lenders first priority position on the property."
In addition, some mortgage industry professionals weighed in, one who has been in the home lending business for 40 year and one for 35 years, neither of whom have ever had a title claim on one of their policies.
Given the variety in feedback, I decided to consult some industry professionals on both sides of the debate.
For Howard Turk, the founder and managing director of Turk & Company, one of the biggest benefits to title insurance, as opposed to its most viable counterpart, an attorney opinion letter, is that it is standardized across the country.
"That is a good thing because it ensures predictability of outcome when there is a dispute — everyone knows what the contract says and insurance companies can't throw in language that would allow them to dodge the liability," Turk said.
Turk continued: "By not getting a title policy, it is a bit like me saying, 'I think I am not going to buy life insurance anymore because I want to save money on the premium, so instead I am going to leave an envelope with $100 in cash for my family and instruct them to buy lottery tickets after I die.' There is a chance that the $100 will turn into $100 million, or they might lose it all."
Stacy Mestayer, the chief legal officer of Voxtur Analytics, a company that offers an attorney opinion letter product which it says is a "fully compliant alternative to title insurance," has a different view.
"'Scam' is definitely a bit harsh of a word to describe title insurance," Mestayer said. "We created the attorney opinion letter as an alternative product not with the intention of completely displacing title insurance but creating an alternative that could be used in certain situations, particularly those where the cost of title insurance is not necessarily proportionate to the risk that is being covered. While attorney opinion letters existed long before title insurance, they were never situated to be able to compete with title because they weren't consistent or scalable, but the product we have created is both of those things."
Turk analogized the reason homeowners buy title insurance to the reason they buy a fire insurance policy. "If I look outside right now, I see a lot of homes and not a single one of them is burning down, but every single one of them has fire insurance. The reason for that is because sometimes the loss can be catastrophic and not protecting yourself against that risk is a false economy."
However, unlike title insurance, homebuyers and owners frequently have a better understanding of the need for fire insurance than the need for title insurance. According to Jim Dufficy, the president of American Digital Title Insurance Company, this lack of understanding is where the consumer discontent that breeds beliefs such as "title insurance is a scam" comes from.
"I have been in this industry long enough to see these refinance cycles come and go and the discontent comes because the consumer doesn't understand title insurance. Because the consumer relies for choosing closing services in a refinance on the mortgage professional, the title industry doesn't see the cost benefit in directly marketing to the consumer. The consumer isn't even the ones asking for title insurance in a refi, the lender mandates it. So, I would predict that in another 10 years or whenever the next refinance cycle comes, you'll probably find the same discontent for the same reason." Dufficy said.
Dufficy said that finding ways to market to consumers and educate them about the value of title insurance, and demonstrate the curative work that goes into preparing the title for the refinance or a home purchase closing, will help quell some of the discontent by increasing their understanding of what they are paying for.
Do you agree with Dufficy's assessment? What are you doing to better educate consumers about title insurance? Email me at brooklee@hwmedia.com.
Until next week,
Brooklee Han
Real Estate and Title Industry Reporter
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