Title insurance protects consumers despite doubts

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It's fashionable these days to be critical of real estate title insurance. |ret||ret||tab|

The criticism originates mainly from the mortgage lending community, but consumer groups and real estate brokers are also critical. Legislators don't have much sympathy for it either. |ret||ret||tab|

These critics say it's slow, expensive, and old fashioned. They say it shouldn't be necessary any more in the age of the Internet and electronic commerce and an economy where mortgage foreclosures are low. They say mortgage lenders are learning to live without it, and it's working. Title insurance will be replaced, soon, they believe, or perhaps simply go away. |ret||ret||tab|

Don't believe it. Title insurance is one of the great unsung heroes of our age, a swift and efficient free-market solution to a bureaucratic nightmare, a sound and effective marketplace miracle that has added untold billions to the value of real estate in this country.|ret||ret||tab|

If there weren't such a thing as title insurance available today, we'd have to develop it, or something like it. It's had a profound effect both on the speed and efficiency of the real estate market and on the value of the real estate in that market. Those who believe it can safely be ignored are only kidding themselves. |ret||ret||tab|

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A little history|ret||ret||tab|

Title insurance came into use in the latter part of the 19th century when it began to dawn on a fast-developing real estate market in a fast-developing nation that there was too much uncertainty, too much harum-scarum, too much fraud and deception, and far too many mistakes made in moving real estate from person to person. |ret||ret||tab|

When problems occurred, there was no one to turn to, no one to stand behind the exchange of papers and say it was right. What was needed was real solid assurance that real estate was being correctly transferred and secured. So a new kind of insurance was invented to answer this need. |ret||ret||tab|

Title insurance protects buyers and mortgage lenders against defects in their legal ownership. With the birth of standardized forms during World War II, it was used in the majority of transactions and its use became virtually universal in the 1980s when the secondary market came into being. |ret||ret||tab|

Well-advised purchasers insist on it. Mortgage lenders like it because it is comprehensive and uniform. The secondary market, in spite of its recent attempts to denigrate it, is hooked on it. It makes mortgages marketable and their security swiftly possible. |ret||ret||tab|

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What's so wonderful about it? |ret||ret||tab|

Although the basic concept behind title insurance has not changed, those who produce it have come a long way since its introduction in 1871. Today's title company takes advantage of the legal rationale underlying title insurance. It doesn't guarantee that title is perfect, or what the courts call good title or legal title. |ret||ret||tab|

No, title insurance defines insurable title as being marketable title, another legal standard based on a title having no significant defect, a title good enough that a reasonable buyer would accept it. Rather than good title this might be called good enough title. |ret||ret||tab|

A good title standard says a deed recorded in 1903 without a notary seal is flawed and void and passes no title, because that is what the law strictly says. A marketable title standard permits a considered weighing of the likelihood there will be a challenge to that deed and decides whether to accept or reject that risk. It thereby moves real estate, flawed by traditional standards, back into the marketplace, quickly and efficiently. |ret||ret||tab|

There is more. As was said, title insurance is a free-market solution and title companies are competitive. Different firms view title defects in different ways, and what one will not insure another will. This means that in this country, unlike any other, the marketability of real estate is negotiated. Difficult cases are bargained from title company to title company. Risks are effectively bid upon by firms whose experience gives them a feel for what is risky and what is not. Title companies dislike this process but they all use it. The result is an even speedier and more efficient marketplace. |ret||ret||tab|

Difficulties of some kind crop up in a small but significant number of transactions. Some problems are mended, some are looked at and accepted as non-risks, and others will have eluded discovery entirely. All are insured against and title insurers pay out more than $300 million annually to settle claims against the policies they issue. |ret||ret||tab|

Even here, quick settlement has become the style, another example of swiftly returning unsalable properties to the marketplace, a major plus. |ret||ret||tab|

Speed of service is an extremely important competitive advantage. The title firm that can make, and keep, service guarantees will get the work. |ret||ret||tab|

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Adding value to real estate|ret||ret||tab|

So, the entire system encourages speed and efficiency, and, like all commodities, as real estate becomes more marketable, it becomes more valuable. Without question, real property in the United States is more valuable that is, it sells for higher prices because of the efficiency of its marketplace. As a big contributor to this marketplace, title insurance adds value to real estate in an amount no one can estimate, but what must be many billions of dollars. |ret||ret||tab|

Third World nations find that merely installing a basic government land records system often doubles or triples the value of its real estate. We can only guess at the value our unique system adds to real estate in the United States, the only nation in the world that uses title insurance. |ret||ret||tab|

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Courthouse remains unchanged |ret||ret||tab|

As with everything else in a free market environment, entrepreneurs work with what they're given. The title industry accepts what it did not create and cannot change: 50 states with 50 sets of real estate laws, and more than 3,000 counties, each with its own notion of how to store and index property records. The industry takes those records as it finds them and creates a marketplace solution to fit the needs of commerce. |ret||ret||tab|

Few laypeople realize how difficult it is to search a title or make sense of what a title search finds, whether computerized or not. Yes, courthouse records are becoming computerized, and some are posted on the Internet. But although the technology is new, the role and responsibility of the courthouse is no different than it was in 1871. The environment that made title insurance necessary still exists today. |ret||ret||tab|

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What instead? |ret||ret||tab|

Some critics say the United States should do what other countries do: "Let the government handle real estate titles. It's just an administrative thing. We need to register land titles like we register car titles." |ret||ret||tab|

Others say that instead of title insurance lenders should use credit scoring. "If the borrower has a good job and has paid his bills in the past, he will in the future. That's all you need to know," say credit scoring proponents. Many lenders are looking at the business in just this way. |ret||ret||tab|

Others argue for the casualty approach. They say title problems are infrequent and unimportant and can be ignored. Just write the policy and if claims increase, raise the rates. That's what other lines of insurance do. This will simplify and speed everything.|ret||ret||tab|

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The government alternative |ret||ret||tab|

What about making real estate title registration a government thing? Consider that in the rest of the world, the job of moving a piece of real estate from seller to buyer is a lengthy dogged bureaucratic process presided over by civil servants. There are government offices to visit, forms, rules, regulations, hoops to jump through, fees to pay, waits to endure. In some nations there are bribes to pay. |ret||ret||tab|

When irregularities occur, there will be no negotiation. Problems will be fixed by consumers or their attorneys following the orders of bureaucrats.|ret||ret||tab|

The United States had its fling with government registration of land. It was called the Torrens system, and it failed. Another example, also a disaster, is the federal government's registration of Indian tribal lands. Critics say it will never be fixed. |ret||ret||tab|

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Credit scoring |ret||ret||tab|

What about forgetting the real estate, forgetting title insurance and looking exclusively to the borrower, making mortgages solely on the basis of creditworthiness? |ret||ret||tab|

These should be called personal loans instead of mortgages, and their rates need to be significantly higher. No, lenders must understand that a mortgage isn't a mortgage unless and until its title policy says it is. It's a chance, a gamble, a hope. It's a stab at a mortgage. Lenders who believe otherwise will, as sure as the sun rises in the morning, find themselves explaining to their superiors, to judges and juries, to regulators and legislators, what in the world they could have had in mind. It will not be pleasant. |ret||ret||tab|

Furthermore, credit scoring may be some kind of option for lenders, but what about buyers? No mortgage lender, no attorney, no escrow closer should let buyers invest in real estate without title protection. That is just plain foolishness. |ret||ret||tab|

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The casualty approach|ret||ret||tab|

Finally, what about the much talked about casualty approach? Why don't title companies stop doing all that analyzing and automatically insure everything? Problems can be fixed if they pop up later. |ret||ret||tab|

The answer is that title companies have been using an intelligent casualty approach for many years. Policy protections against forgeries, fraud, unknown heirs, and, more recently, survey problems, are all casualty in nature. Many of the industry's newest automated systems are programmed to take calculated, casualty-type risks. Additional risks are being accepted every day. |ret||ret||tab|

The one thing title firms are not likely to do is write policies without inquiry of any kind. They know that titles erode in quality quickly enough and with every transaction unless watched carefully. They would not relish fixing all those erosions later. |ret||ret||tab|

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Improvements are needed|ret||ret||tab|

It is true, and title people must admit, that title insurance has remained stubbornly expensive. They also must admit that its processes, although much faster today than ever before and faster than any alternative are still too slow. And they must admit that its delivery systems are out of date and need modernization. |ret||ret||tab|

Progress is being made on all of these fronts, and radical improvement is just around the corner probably within the next year or two. The answer for today isn't to do away with title insurance. It's to help open the way for those improvements in every possible way. |ret||ret||tab|

(The preceding article was provided by Stephen C. Babbit of the Missouri Land Title Association and is reprinted with permission from the Condell Private Letter, May 15, 2000.)|ret||ret||tab|

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