The American Title Insurance Industry: How a Cartel Fleeces the American Consumer

2. Alternative Title Guarantee Models

2 Alternative Title Guarantee Models Four alternative models for title insurance coexist in North America: for-profit corporations, the Torrens system, governmental title guarantee programs, and mortgage-bundled self-insurance. This chapter describes how each of these organizational arrangements insures title and affects consumers. Title insurance, like homeowners’ insurance, is nonelective whenever a real estate purchase involves a mortgage. It is optional for the buyer when the transaction can be completed without financing from a bank or another lender. No statistical data are available on how often this occurs or the title defect experience of noninsured land and buildings. Model 1: For-Profit Corporations Commercial title insurance is an American invention. This service was created to handle the risks of any overlooked prior and valid claim, extending to the country’s settlement by European immigrants in the seventeenth century. As previously noted, when a real estate property is purchased in the United States, the new owner assumes legal responsibility for satisfying most preexisting valid claims by tax authorities , or liens by previous co-owners whose rights were ignored in the chain of prior owners due to oversight, negligence, or fraud. For-profit organizations dominate the U.S. title market. Policies written in 2005 by the direct title insurance carriers were valued at $16.8 billion. No data are available for the additional income of local and regional title abstract and settlement offices. Since they retain most of the statemandated premium, the title industry’s annual income is likely to be around eighty to one hundred billion dollars.1 In the American legal system, claims against land and buildings are dealt with differently from most other individual or corporate liabilities . Statutes of limitation, bankruptcy, or death can wipe out debts. 37 Most claims against a real estate property, however, retain their validity in perpetuity. All pertinent public records should be examined before a sale is consummated. Insurance cannot provide certainty of ownership; it only offers a commitment by the insurer to handle legal issues involving the title and to compensate the insured for any loss up to the amount of the policy. Insurance operates differently from a lottery. Lottery winners are chosen by random chance. A lucky ticket provides eligibility with a winning number. In the insurance business, it is the unlucky real estate investor who has to file a claim. If the title insurance company agrees that the loss is covered by the investor’s title policy, he will get paid. Five nationwide direct title insurance carriers and their fully owned subsidiaries write more than 92 percent of the policies. In order of the volume of business, they are: Fidelity National Title Insurance Corporation, First American Title Insurance Company, Land Title Insurance Company, Stewart Title Insurance Company, and Old Republic General Title Insurance Corporation. Local or regional title agencies are increasingly being purchased or merged with one of these nationwide corporations. The five nationally active companies maintain title agency offices in many locations, often under the name of the original founders to preserve valuable “name recognition.” The title search, policy preparation, and escrow functions, however , continue to be primarily local. As previously noted, in the U.S. Census of business records, NAICS Code 54191 (Title Abstract and Settlement Offices) is the category for these predominantly modestsized businesses. The abstractors deal with the local lender and buyer, search the title record, issue the insurance policy, and register the new title after it is transferred to the new owner. They perform escrow services and have to be bonded but do not need a heavy capital investment . The risk portion of title insurance is funneled to one of the NAICS Code 524127 (Direct Title Insurance Carriers) large direct title insurance carriers. Each direct title insurance carrier maintains investment units, fully owned subsidiaries that generate income from the company’s reserve funds. The companies also are expanding horizontally to provide other real estate–related services, such as selling credit reports and software and providing escrow services. No information is available about the extent to which actual title 38 Alternative Title Guarantee Models searches throughout the United States fulfill the industry’s claim that it is engaged in a thorough and labor-intensive search process over multiple transactions. As title records have become more and more trustworthy, title search shortcuts appear to have become the rule rather than the exception. Few real estate investors realize that their insurance policy is often based on...