RateWatch #231 - Title Insurance
December 30, 2000
by Dick Lepre

What's Happening?

Listen up! Mortgage rates are not going to drop just because the Fed eases in January. The yields on the 10-year and 30-year Treasury's have been moving down and already factored in at least 50 basis points (0.5%) of easing. The bond and mortgage-backed securities markets do NOT react to the Fed - they "pre-act" and have already done so. We are getting into one of those periods where TV and the radio serves to misinform. If you want to refinance get started now.

Title Insurance

When you buy a house you will get title to it but you will also get whatever goes with that title. The former owner conveys the property to you by an instrument such as a grant deed. The deed is recorded and you "officially" own the property. Actually, you get more than the property. You get all that goes with it. That includes and unpaid liens and any inherent defects in the title.

Whether you are purchasing or refinancing you will need (or someone will need) to pay for title insurance. There are two title insurance policies.  When you purchase a home you receive an "owner's" title insurance policy.  Also, the lender receives a "lender's policy".  The owner's policy will last for as long as you own the home. The lender's policy terminates when the lender is paid off. This necessitates a new lender's policy whenever you refinance.

What Is Insurance Anyway?

Insurance, in economic terms, is the exchange of the loss of a defined, relatively small amount of money - the premium - in lieu of the risk of a large loss later.  That is true of the insurance that you have on your car, the fire insurance on your house, liability insurance and homeowners insurance.

Insurance companies function much like banks.  The pay out as much or more than the premiums they take in but the fact that they take the money in before they pay it out is what makes it work.  Like a bank, they invest that money with the intent of producing a profit. 

Why Title Insurance?

When you buy a home you expect certain things from the transaction.  Like, maybe, you want to live in it.  Maybe you want it free from debt obligations not created by you. Maybe some day you want to be able to sell it or put it up as security for a loan.  Title insurance gives you the assurance that you will be able to do all of these things.

Title insurance will reimburse you for loss due to defects existing PRIOR to the issue date of your policy, up to the policy amount. The policy also provides for the cost of
legal defense of your title.

When you buy a home you will get a detailed title policy.  This will express all of the known restrictions on the property.  These are things such as: property taxes,
easements, covenants conditions and restrictions (usually relevant for condos and planned unit developments), and anything that restricts your ownership interest. Anything not mentioned is, thus, covered by the title policy.

What's Really Behind This?

The answer is - a lot of little things.  For example:
- Forged deeds, mortgages, satisfactions or releases
- Undisclosed but recorded federal or state tax lien
- Undisclosed but recorded prior mortgage
- Adverse claim or vendor's lien
- Deed from partnership, unauthorized under partnership agreement
- Deed from purported trustee, unauthorized under trust agreement
- Misinterpretation of wills, deeds and other instruments 
- Deed from a legal non-entity (styled, for example, as a church, charity or club)
- Deed by person in a foreign country, vulnerable to challenge as incompetent, unauthorized or defective under foreign laws
- Deed to land without a right of access to a public street or road

This is a sampling from a list of 73 "things that can go wrong" from the First American Title Insurance Company's
WWW site at http://www.firstam.com/fatic/html/cust/1150.html

If you are the sort who enjoys reading a list of things that can go wrong or just a plain old schizophrenic paranoid  - read that list.  It should give you enough to worry about for weeks.

What Losses Really Occur?

The things that title insurance companies take losses on fall into than category of things that I will politely refer to as "Bleep Happens".

These are: scams, changes in judicial minds, inaccessibility to the property due to lack of easements across surrounding lots, inattention to details in recorded instruments, and just taking people's word.

There is an archive of misdeeds on the First American site at:
http://www.firstam.com/faf/html/news/chronicles/1000.html

So Why Do I Have to Pay for Escrow Also?

Whether you are purchasing or refinancing there will be an escrow fee as well as a title insurance fee.  The relationship between the title insurance and the escrow varies geographically. In some states an attorney does the escrow and a title insurance
company provides the title insurance.  In some places, one title insurance/escrow company provides the title insurance and another provides the escrow.  In my office in San Francisco we generally use the same company to provide both.  Exceptions are made when their title plant cannot produce the preliminary title report quickly enough. In this case, we generally open an escrow with them and have them order the title insurance from a company that can produce the preliminary title report quickly.

Who's Choice Is This?

Practically speaking, in the case of a purchase transaction, the listing Realtor opens the escrow.  In the case of a refinance, the loan officer does it.  You, as the customer, can direct otherwise but understand that Realtors and loan officers choose escrow companies and specific escrow officers because we have better control over the transaction.  It makes sense that our loan officers get better results from an office where we do 50 escrows a month.  We ain't looking for a kickback we are looking for service.

Can You Get a Deal?

Title Insurance companies generally give a discount on any property where title insurance has been given in the previous 5 years. Title insurance companies publish their rates with the state insurance commissions and are not allowed to give anyone a special deal.  In recent years, title insurance companies have gotten into legal difficultly for such practices as locating escrow branches in the offices of Realtors with whom they do a lot of business.  The reasoning is that, even if there is no financial consideration, the convenience of the office was something of value to that Realtor and not others and, thus, amounted to something such as a discount or preference.

But There's More

In recent years title insurance companies have extended the concept into at least two new areas - title insurance for aircraft and title insurance for vessels (those things that float and are expensive). 

The problems with titles to aircraft and motor vessels are similar to those of real property but can be expanded by the mobility of these objects.  Registration of an aircraft can be invalid if it was registered in a foreign country and not property deregistered.  Also, aircraft are more likely than houses to be stolen.

Aircraft and motor vessels also tend to have expensive engines which may also have identification numbers associated therewith. Aircraft may have rented instruments.  Title insurance here can guarantee that you own not just the aircraft but the engine
and whatever else the seller purports to own.

Vessels also can be "documented" which enables them to engage in commercial activities and may give them protections afforded by flying the American flag.  These become relevant in international waters.

What It Is Really All About

Think of it this way:  when all is said and done, title insurance is all about peace of mind.

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