Title Insurance Realities

Title insurance protects an owner or lender of property against title defects contained in the chain of title to the property. Generally, as a notary, if you handle any loan closings, this issue may be asked. The basics you need to know are the following:

1. Title insurance protects against any defects in the chain of title for the property. Any title search can miss a potential defect. Common missed defects include heirs not signing deeds, missed spouses, improper notarization and missed judgments. Even the best attorney or abstracter can miss this information. Why? Because our system of recording was not "designed," it just evolved over time without any real forethought. This resulted in the creation of a system that really does a poor job (in my humble opinion) of tracking transfers of property. With the advent of computers, it is somewhat easier now, but still not what it should be.

2. Title insurance may have "exceptions" that limit the coverage. For example, if there is a known defect, the title company may not insure the defect. If it does insure the known defect, it is said to "insure over" the defect. Why the title companymay do this or not is complicated. But it may do so if it has issued a prior policy on the property that already insures the defect. This is a business decision for the title company as it is already on the hook for the defect. So re-insuring does not create any additional liability. Better to take the premium (ie. money).

3. Insurance premiums are rather cheap. According to the American Land Title Association (ALTA) industry wide percentage of payouts to premiums is about 4%. The buyer, borrower or lender pays a one time premium based on the amount of the purchase or loan. These premiums can be from 50 cents per thousand and up to $5.00 per thousand (some cases more).

4. Under the Real Estate Settlement Procedures Act (RESPA) the buyer or borrower cannot be forced to purchase insurance from a particular company. This promotes competition. Because of the recent market downturn, foreclosures and bank failures, payouts from title companies have been higher than usual. This has caused several title companies to be sold or go bankrupt. Therefore, competition is limited in today's market to 5 national players.

5. Land records from state to state, and even from county to county in each state, vary greatly. Markets like uniformity. Uniformity allows the market to treat loan products more like commodities (like wood or oil or gold) that can easily be sold to investors. In other words, the loan package is "marketable." The good news is that title insurance is somewhat uniform in its protection. This allows the loans to be bundle into security investment packages that are sold to investors. The investor then have some assurance that he or she is getting a loan that is properly secured, adding value to the investment.

OK, this is a little more than you probably want to know, but I thought interesting. So the bottom line is that even though the risk is small, title insurance is a necessary part of the loan transaction. It protects the buyer or borrower, protects the lender and makes the loan "marketable" so it can be sold to investors. Not a bad deal for the small price that is paid.

Also, as a practical matter, it is required on almost every loan. You will see it often if you notarize loan packages.


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