Urban Wire Rethinking Title Insurance Could Dramatically Lower Costs for Homebuyers
Laurie Goodman, Ted Tozer, Alexei Alexandrov
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For new homeowners, title insurance adds another up-front cost at closing, generally 0.5 percent of the home price, or about $2,000 for the median sale in the US. Total costs of buying a home and securing a mortgage are high, and any additional costs like title insurance, realtors’ commissions, or taking out a mortgage from a lender pricing higher than others can be a deterrent to homeownership.

Reducing these extra costs and allowing more transparency of final costs could save the median borrower $5,000 to $10,000 up front and reduce monthly payments by as much as $100. Such reduced costs could cover a sizeable portion of a borrower’s down payment; could be put into savings, which recent research shows can help prevent defaults; or could reduce monthly mortgage payments.

How does title insurance affect home costs?

Title insurance includes a title search (that, anecdotally, costs under $200 by itself) and protects against various title defects that were not uncovered during title search, including unnoticed liens on the house (e.g., a contractor’s lien after a previous renovation). Lender title insurance is typically required, while owner title insurance is only recommended.

Although title insurance does cover catastrophic events such as loss of the entire house attributable to a dirty title, these incidents are rare. Most claims are mechanics’ liens equal to tens of thousands of dollars at most. It also costs a much lower share of the sales price (PDF) to insure a more expensive house, suggesting that a large portion of the title insurance price stems from fixed and administrative costs instead of scaling with the home’s price.

Title insurance differs from other forms of insurance in that only 5 percent of the premium is paid out in claims (risks covered by the insurance) compared with 70 percent or more (PDF) for other types of insurance. If title insurance were similar to other types of insurance, the premium the homeowner pays could be dramatically lower, 0.05 percent of the home’s price or even less (which would be less than one-tenth of the average national rates).

Although the industry has only a few large title insurers, lack of competition does not fully explain the magnitude of the gap between the cost of the premium and the losses paid out, as the profitability of this industry would encourage new entrants. More likely, the gap arises from how title insurance is sold—through agents who receive commissions, establish relationships with lenders and realtors, and receive premiums while consumers often do not know what options are available.

When considering the cost of title insurance, there is also a question of whether it is even necessary. The general business liability insurance of title search providers could cover defects in the title search process. Moreover, portfolio lenders, even relatively small ones, and certainly the secondary market entities (Fannie Mae, Freddie Mac, the Federal Housing Administration, and the US Department of Veterans Affairs) have the resources to self-insure against an unexpected title defect.

How can housing finance entities bring down title insurance costs?

Even if title insurance is necessary, there are ways to bring costs down. Portfolio lenders or secondary market entities could self-insure, potentially combined with or augmented by cheaper alternatives like title opinion letters by attorneys (Fannie Mae recently decided against a proposed pilot).

Secondary market entities could also bid out title insurance to the lowest bidder—the title insurance would be placed after the loan has been purchased by the secondary market entity, removing the cost from the closing process. If the government-sponsored enterprises, Federal Housing Administration, and Department of Veterans Affairs were to assume this responsibility, they would need to relieve servicers of any representations and warranties obligation attributable to title defects. If certain title insurance companies were more cost efficient in some states, the bidding could be on a state-by-state basis. If a portfolio lender wanted to get title insurance for a loan, they could do so by contracting with a title insurance firm (or several). 

State actions could also bring down costs. Several states experimented with enhanced title insurance regulation, with Iowa, for example, running a title guarantee program (PDF) and forbidding commercial title insurance. Notably, the rate on a $750,000 home in Iowa is only $175 (less than one-tenth of national average rates, consistent with our calculation above).

In any case, lowering title insurance costs would benefit all borrowers, including those whom the Federal Housing Finance Agency wants to help through the Equitable Housing Finance Plans—borrowers with low incomes, Black and Hispanic borrowers, and first-time homebuyers. We propose that policymakers consider requiring the secondary market entities to secure the best deal for their borrowers by negotiating with their distributors, suppliers, and ancillary service and goods providers or self-insuring.

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Research Areas Housing finance
Tags Housing affordability Housing finance reform Homeownership
Policy Centers Housing Finance Policy Center
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