Last month, the Biden Administration announced the revival of a previously abandoned pilot program that would waive the requirement for lender’s title insurance on certain home refinances – part of a misdirected effort to address housing affordability. Additionally, the CFPB has shortsightedly questioned the benefits and cost of title insurance.
It’s uncertain whether federal regulators are purposefully misleading Americans about the potential savings or just don’t understand how title insurance works. The truth is the cost of title insurance coverage has decreased nearly 8% over the last two decades due to innovation in the industry.
Critics of title insurance highlight a limited understanding of the vital nature of title insurance protection by mistakenly and repeatedly referring to the industry’s lower claims rate relative to other lines of insurance. A 70% claims rate — standard for other insurance lines — on property rights would be catastrophic to our economy. Success in the title insurance industry is measured by preventing claims in the first place. A lower claims rate means that title agents are succeeding in their job by resolving any title issues and reducing risk upfront – protecting the largest asset most households will ever own and source of their greatest wealth over time.
Title insurance is significantly different from other lines of insurance. For a one-time fee paid at closing, title insurance provides homeowners protection for as they or their heirs own the property. Other types of insurance charge monthly or yearly premiums. The facts are clear: title insurance is essential to protecting homeowners and their most important investment both during the initial purchase of a home and refinancing – and it exists for a reason.
Without a title insurance policy, homeowners can find themselves fighting for their property over issues they never knew existed.
Here are some real-world examples of how title insurance protects consumers:
Surviving Spouse Left Without Deed
Under the new pilot program, the requirement for a lender’s title insurance policy on certain refinances would be waived – but this can leave homeowners vulnerable. For example, a property owner passes away and leaves behind his surviving wife. If the widow isn’t listed on the deed, issues regarding ownership could arise when the wife goes to refinance. During the refinance process, title insurance professionals would do their due diligence to disqualify any potential heirs who may attempt to claim the property down the road. This would allow the surviving wife to officially claim ownership of the property. The proposed pilot program would not identify this type of issue with a search engine.
IRS Tells Couple: “You Don’t Own Your Home”
After purchasing their home from an individual who had acquired it from an IRS auction, a couple found out the government agency had rescinded the original sale. The IRS refused to turn over the deed to the new homeowners because of unpaid tax bills by a previous owner. The couple contacted their title company and were told they had coverage for this dilemma. Thanks to their title insurance policy and the great work conducted by their title professionals, the couple was able to keep their home, and they didn’t have to pay a dime out of pocket. Fannie Mae is not capitalized to address these issues, nor is set up to be able to pay these types of claims.
Sold—But Not by Homeowners
After a California vacation home was left unused for several months, the county notified the homeowners that the property had sold – but the owners hadn’t put the house up for sale. This was a case of seller impersonation fraud, where an unsavory actor posed as a homeowner and fraudulently “sold” a property. Thankfully, due to their title insurance policy, the homeowners were protected against post-policy fraud; title professionals were able to expunge the fraudulent deed from the record. The “buyer” also had a title insurance policy for the transaction, and their title company paid them the purchase price of the home – money that they otherwise would have lost without their policy. Fraud and forgery claims account for more than 20% of claims expenses and dollars paid to insureds.
Approximately one-third of all claims are for issues that would not be found in a public records search – demonstrating that title insurance could not be effectively replaced by an automated search engine that will be used under the title waiver program.
Title Insurance Provides Essential Protection
The above examples barely scratch the surface when it comes to the protection provided by title insurance. Time and time again, seasoned title professionals have saved American homeowners from their homes being seized, stolen, or defrauded. The Biden Administration’s pilot program would put Fannie Mae and Freddie Mac in charge of resolving any title-related claims that arise for qualified borrowers refinancing – a seismic shift in the housing finance system.
Title insurance is equally important when homeowners refinance. When a homeowner refinances, they obtain a new loan. Lenders require a new title search for a title insurance policy on that loan to protect their investment in the property. If this is not done correctly, the homeowner could still face collection on a previous mortgage thought to have been paid off. Similarly, a lender could face the risk that they do not have the required lien priority.
Under the Administration’s title waiver plan, title insurance professionals will be eliminated from refinance transactions, removing a key layer of anti-fraud protections for consumers and lenders. Consumers and lenders who are victims of refinance fraud would have to investigate and negotiate a resolution with some unidentified department within the GSEs, and consumers could ultimately be forced into property sale or foreclosure.
By turning Fannie Mae and Freddie Mac into title insurers, the GSEs would also be moving beyond its charter into a primary market activity. The 2008 financial crisis happened the last time these entities took on significant risk for which they were ill-equipped to handle.
The title industry agrees that homeownership should be more attainable and affordable for more Americans. However, the notion that title insurance is in any way a principal driver of affordability challenges is misguided. Title insurance is crucial to protecting American homeowners, lenders, and their most important investments.
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