• GAZLO
• CLASS
• JOBS
• AUTO
• HOMES

A necessary evil: Confusion clouds title insurance

Photo

Photo by Bill Olmsted

Land Title"s Tippy Phillips painstakingly goes through handwritten records to research a property in the Rock County Register of Deeds office. Each line is a separate transaction that stretches across two pages. The newest records in the office are computerized.

Photo

Photo by Bill Olmsted

Land Title employees Tippy Phillips (l) and Michelle Laube use hand written books while researching property in the Rock County Register of Deeds office.

Photo

Photo by Bill Olmsted

In the Rock County Register of Deeds office, land records are kept in handwritten books, on micro-film, and in computers. The records go back to the 1840s.

Photo

Photo by Bill Olmsted

The oldest records in the Rock County Register of Deeds office go back to the late 1840's. The newest records are computerized.

JANESVILLE — Whether the discussion is mortgage foreclosures, consolidation in the banking industry, declining auto sales or struggling retailers, the nation’s housing market has been a hot topic in the last 18 months.

Often absent from the discussion, however, is title insurance, a $16 billion industry that consumer advocates and government regulators say few people understand yet blindly feed whenever they buy, sell or refinance a home or property.

Consumer groups say buyers aren’t clear on what title insurance is, rarely question how much it costs and routinely follow the recommendation of their real estate agent or banker on whom to buy it from.

In 2006, Forbes magazine wrote a cover story on the topic under the headline “Inside America’s Richest Insurance Racket.”

Title insurance covers claims and legal fees for homebuyers and lenders if problems arise over ownership of the property. It often covers errors in deeds, boundary disputes, fraud and forgery, liens for unpaid taxes or bills and missing heirs who may appear with a claim to the property.

“That lot you’re buying in a subdivision was probably once part of a 40-acre parcel that has changed hands and been divided many times,” said Miles Meidinger of The Title Team in Janesville.

“We find and take care of problems before the closing.”

Each property is covered by two title policies. One protects the buyer, and the other protects the lender’s interest. In Wisconsin, the seller typically pays for the former, which is known as the owner’s policy. The buyer pays for the second policy, which is known as a loan policy.

The policies have a one-time fee and cover events in the past. That makes title insurance different from other insurance policies, which have ongoing premiums and guard against events in the future.

“We don’t base losses on actuary tables like you have for health or car insurance,” Meidinger said. “We provide an assurance that that nothing can happen based on what we find in the public records.”

If something does come up, the title insurer will be the one responsible for paying off claims. Industry figures show that title insurance companies pay out about 5 percent of the premiums they collect compared with the 70 percent or so paid out by auto and homeowner insurers.

Title insurers say that comparison is off base because a portion of the premium is targeted at preventing problems. The fact that the industry’s payout is so low, they say, is due in large part to the upfront work of title agents.

Customer confusion

Meidinger and representatives from the major title insurance companies in Janesville agree that title insurance confuses consumers, who typically take their buying cue from someone with whom the title companies have worked hard to get and keep in their corner.

Title insurers market their products to homebuilders, real estate agents, mortgage brokers and lenders who are able to steer the consumer to a particular title agent, said J. Robert Hunter, director of insurance for the Consumer Federation of America.

“The ultimate consumer has little or no market power in the title insurance transaction because title insurance is required for obtaining the loan or purchasing the property and because the consumer, who infrequently purchases real estate, has relatively little knowledge of title insurance,” Hunter testified before a House Committee on Financial Services in 2006.

The U.S. Government Accountability Office followed up in April with a report that raised questions about the extent of price competition in the title insurance industry and the ability of consumers to affect market prices.

Wisconsin ranks 26th in the nation in terms of closing costs on a real estate transaction, according to a 2006 survey by www.bankrate.com. For a $200,000 loan, www.bankrate.com found that title insurance and associated work cost about $800 in Wisconsin.

With mortgage lenders getting out of the closing business, title insurers are picking up more of that business. In Wisconsin, closing fees add $250 to the title work, which amounts to about a half percent of the loan amount when all is said and done.

Hunter, the consumer advocate, said that while consumers may be frustrated by higher-than-expected closing costs, they typically don’t do anything about it in fear of delaying a transaction where the title fees are such a small percentage of the overall deal.

“In Wisconsin, we’re relatively lucky that we have low rates,” said state Insurance Commissioner Sean Dilweg. “All the companies file their rates with us, and the rates they charge are usually lower than what they’ve filed for.”

Steerage

Dilweg, who has been on the job a little more than a year, said he hasn’t heard an outcry over title insurance pricing.

“My basic question, however, is: ‘Do consumers have a choice that’s presented to them by the real estate agent or lender?’”

That’s where things might get fuzzy. While real estate agents and lenders are supposed to tell buyers, sellers and refinanciers that they can have any company do the title work, it’s uncertain how many do so.

For their part, the title insurance agents only see the work that shows up in their offices.

“There is almost no competition for consumers as there is with the marketing of auto or homeownership policies,” Hunter said. “Instead, title insurers compete to secure referrals from the real estate service providers who steer title insurance buyers to their businesses.”

In some cases, that steerage has resulted in kickbacks and other incentives from the title insurance industry. On a national basis, the 2007 Government Accountability Office report found 58 investigations that resulted in $100 million in fines and penalties in the previous four years.

Dilweg and the title agents in Janesville aren’t aware of that happening locally.

Instead, they say, steerage is the result of outstanding business relationships built on quality work.

“We all have the same product, but the question is who provides the best quality service?” said Deborah Dongarra-Adams of Land Title & Closing Services in Janesville.

“There is steerage, but there are no kickbacks. Most real estate agents base their decision on service, some do so on price and some do so on friendships.”

Jim Mawhinney of Rock Title in Janesville agreed, saying real estate agents work with the companies they know and trust. At the end of the day, it is the real estate agent’s reputation and standing with the buyer or seller that matters most, he said.

“The buyers and sellers can certainly specify their preference, and some do,” Mawhinney said. “But most consumers don’t know one title company from the other unless they know someone who works there.”

The industry seems to be making an effort to better educate consumers.

Dongarra-Adams and Meidinger said they’re marketing their companies to consumers more than ever.

And Dilweg, the state insurance commissioner, has created a title council that will analyze consumer choice and education in the area of title insurance.

The nine-person council has three title company members, one real estate member, four financial members and one public member.

TITLE INSURANCE TIPS

A good place to start is www.knowyourclosing.com, a Web site that provides a quick overview of the real estate transaction process.

Here are some other tips:

-- Shop early: Buyers and sellers have a choice as to who handles their title work. Because they often don’t know that, the first time they think about title insurance is when they signing a contract to buy or sell a home, and then it’s often too late.

-- Know what you are buying: There are two types of title insurance policies: one for the lender and one for the owner. The owner’s policy covers the buyer for the amount of the purchase prices, and in Wisconsin the seller typically pays it for. The buyer pays for the policy that covers the lender.

-- Know the companies: The title insurance industry is built on a complex web of interconnected ownership and underwriting affiliations.

“My advice is to know the title company that’s doing the work,” said Deborah Dongarra-Adams of Land Title & Closing Services in Janesville. “Are they good? Do they have a lot of claims history?”

-- Questions or complaints? Call the Wisconsin Office of the Commissioner of Insurance at 1-800-236-8517.