As someone who spent a career in the title insurance industry – both as a builder of a title business and leader of the industry’s trade group, — I am proud of the role we play in helping to protect what most Americans consider the biggest purchase of their lives.
Title insurance is imperative for lenders to ensure the borrower has ownership rights to a property, but it doesn’t just protect against problems affecting title. It plays an essential role in the economics of homeownership, ensuring that credit reaches those who need it and providing safeguards to those who lend it. The capital markets depend on the due diligence, transparency, and protection our industry provides to do its job.
In fact, our industry is so important that throughout the COVID-19 pandemic, title insurance professionals were deemed essential by the federal government. Their hard work kept a major part of the economy running during a challenging time when purchasing a home meant more than ever.
During this same time, our industry helped consumers take advantage of low interest rates to refinance mortgages. In a refinancing, homeowners obtain a new loan and lenders require a new title search and a title insurance policy on that loan to protect their investment. Professionals conduct the search and examine documents, with title companies regularly providing a discount, or “reissue rate” on a refinance.
Discounts also may be available if using the same lender that issued the original loan. And because the home’s ownership remains unchanged, a homeowners’ title insurance “Owner’s Policy” is valid through refinance.
Why is a title search necessary for refinancing? In short, even if someone recently refinanced, problems could have arisen that the lender must know about before approving a new loan. For instance, a homeowner may have incurred a lien from a contractor who claims they weren’t paid. Or a homeowner might have a judgment on their house due to unpaid taxes, homeowner association dues, or child support. The borrower also may have encumbered the property with loans that were not disclosed when applying for refinancing.
There are other issues that can arise between origination and refinancing:
- Easements that were created by contract or through use or adverse prescription (e.g., rights of way for utilities, rights acquired by neighbors because of a fence encroachment);
- Building or use restrictions contained in a recorded plat, agreements, or deeds;
- Rights or claims arising out of bankruptcy;
- In certain states, unpaid parking tickets;
- Deeds recorded between parties that now do not reflect the ownership; or
- Fraudulent documents recorded against the property.
Real estate is a $3 trillion industry in the United States. There has been a great deal of innovation around purchasing homes, making credit available, and closing real estate transactions. This innovation is positive for consumers. However, sometimes innovators can misrepresent products or sow confusion. They point to low claims ratios as evidence that title insurance is unnecessary. Not only is this not true, but it is a fundamental misunderstanding of what title professionals do and how our underwriting protects this work.
Low claims ratios are a testament to the work our agents do to eliminate items prior to closing. It is this work that keeps the cost of our insurance low and protects the homeowner and lender from problems that would arise if not for the work we do in advance of closing — problems that could be detrimental to the homeowner’s credit and the lender’s investment.
While this is clear to active industry participants, it may not seem intuitive to homeowners who are purchasing or refinancing for the first time. That is why we take pains to explain the process. Through the American Land Title Association and state associations, the industry continues to develop new tools to help consumers understand the role title insurance plays in the closing, the benefits of title insurance and how to shop for title insurance. The best resource for consumers is ALTA’s comprehensive home closing website, homeclosing101.org.
The work title professionals do every day is critical to protecting the American dream. And the work our industry does to make the closing process faster and easier is a critical part of the overall economy. All participants in this economy should engage in good faith conversations — with facts and data — to improve our industry’s offerings.
As the economy and housing market begins to slow, we must avoid the temptation to move away from well-regulated products that are a key part of protecting lenders and homeowners. The last housing crisis proved that strong underwriting standards are critical, especially during market downturns. But it is never the right time to take new and unknown risks that ultimately will increase the cost and be a detriment to consumers and lenders.
Mary O’Donnell is CEO of Westcor Land Title Insurance Co. and a past president of the American Land Title Association.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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