Title Insurance

When Christy Bieber purchased a home in Florida last year, she went through all the usual steps. She signed a contract, had the place inspected, filled out a bunch of paperwork, and wrote some very large checks. She and her family moved into the house in the fall of 2023. Then, one day, they had a surprise visitor.

BIEBER: After we had moved in and started construction on the house, a lady showed up at the house and she said, “I actually own this house.”

Initially, Bieber thought that maybe this woman had been the home’s prior owner, and that she was just paying a visit.

BIEBER: So we’re like, “Oh, hi, how are you? You know, it’s so nice to meet you. You know, like we’re doing all this construction, we’re getting it underway.” And then she’s like, “No, no, you don’t understand. I own this house. And the HOA took it from me and I’m getting it back.” And we were sort of dumbfounded by that.

Luckily, Bieber had the title to the home. That’s a legal term for “ownership.” A title isn’t a document; it’s a concept. And during the process of buying the house, she had spent a few thousand dollars on a form of protection called title insurance.

BIEBER: When you buy title insurance, the title company — they’ll do a search to make sure there’s no claims that are out there, no tax liens, nothing like that. And then they give you a policy to insure you. So if it turns out that they missed something, then they take care of the consequences of that. I had always thought that title insurance was kind of a waste of money. And in this day and age, property records are kept online. So I thought, why do I have to buy insurance?

In Bieber’s case, her title insurance would end up actively helping her. But most homebuyers can’t say the same.

GOODMAN: For most people their home is their single largest source of wealth. There is no question that they need that protection. The only question is — is title insurance the best way to get that protection or should there be less costly alternatives? 

For the Freakonomics Radio Network, this is The Economics of Everyday Things. I’m Zachary Crockett. Today: title insurance.

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In most parts of the United States, there’s no authoritative record of who owns what building. Instead, there’s a record of transactions: Person A sold the property to Person B, who died and left it to Person C. You might look at that record and assume that Person C now owns it, and in most cases you’d be right. But maybe Person A couldn’t pay his bills, and one of his creditors now has a lien on the property. Or maybe Person B’s will was disputed, and someone else believes she’s the rightful heir. Usually, title insurance companies or real estate lawyers search for those conflicts before a sale — but there’s always a risk that they’ll go undiscovered until after the paperwork is signed and the checks have cleared. And when there’s a small but possibly very expensive risk, well, that’s a job for the insurance industry.

The first title insurance company was founded in 1876 by a group of Philadelphia lawyers. Today, the industry is dominated by a few key players: First American, Old Republic, Fidelity, and Chicago Title. And their products are purchased in almost every property transaction. For one thing, mortgage lenders require them.

GOODMAN: There’s the title insurance that protects the lender. And if you are taking out a mortgage you are absolutely required to get this type of title insurance. 

That’s Laurie Goodman. She’s a housing finance policy expert at the Urban Institute.

GOODMAN: And then there is title insurance that protects the owner of the property. 

The homebuyer pays for the lender’s title insurance, but in many states, the seller pays for the buyer’s title insurance, or they split the cost. Unlike many other kinds of insurance, the premium is a one-time payment that covers any title-related problems. It usually costs between half a percent and one percent of the sale price, and the policy is good for as long as you own the property. The title insurance process usually begins with a title search.

GOODMAN: A title search is a search of property records. In many areas, the property records are automated and the title search is very, very easy. In other areas, you have to actually go to the county clerk’s office and dig through property records that haven’t been computerized, and that can be far more costly. And you can also miss things. If there’s a title search issue that is discovered before the fact, you may want to actually reconsider the sale. 

But if an issue is discovered after the sale has gone through, that’s when title insurance comes in. As long as the issue predates the purchase, the title insurance company will cover the cost of fixing the problem — all the way up to the full price of the house. That was good news for Christy Bieber when a woman showed up claiming to own the home Bieber and her family had just purchased.

BIEBER: That was on a Saturday. And by the Monday, the title insurance company had already sent us the proof of the title, sent us all of the documents showing that she did not own the house. And they had been in contact with her lawyers to tell her to cease and desist with this immediately. So they took care of the whole thing within a day.

Bieber was really glad she’d paid for that policy.

BIEBER: Had we not had the title insurance, I think we would have gotten into a little bit of a litigation mess. She had many, many claims in court and she had been fighting and got this house back one prior time after it was foreclosed on, and she had managed to hold off the foreclosure for 12 years. 

That wasn’t the only time Bieber’s title insurance came in handy. A few months later, she and her husband found out that their homeowner’s association had levied a $15,000 fine on the property before they took possession of it. Once again, she reached out to her title insurance company. They sorted out the issue with the HOA, and Bieber and her husband didn’t have to pay a dime — beyond the few thousand dollars they had already paid for the insurance itself.

BIEBER: All I had to do was make a single phone call, and they resolved both of those issues for me. And had they not done that, we would have had to resolve these issues on our own. And I don’t know if we would have been as successful.

Listening to Bieber’s story, it’s easy to see why title insurance is a routine part of nearly every real estate transaction. On the off chance there’s a problem with the title, you want to be protected. And Bieber’s title insurance company didn’t actually have to pay any claims — they just helped make the problem go away. But, situations that do require a title insurance company to pay out a claim aren’t just unlikely. In the world of insurance, they’re about as rare as it gets. And some people are starting to think there should be an alternative.

That’s coming up.

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On rare occasions, title insurance can end up being a good deal for the homebuyer. But it’s almost always a good deal for the insurance companies. In the world of insurance, there’s something called a loss ratio. It refers to how much an insurer pays in claims and adjustments as a percentage of the premiums it takes in. For other kinds of insurance, loss ratios might be around 75 or 80 percent — meaning the insurance company keeps 20 or 25 percent of its revenue to cover its administrative costs and turn a profit. In title insurance, the numbers are a little different.

GOODMAN: In 2023, the loss ratio was about 4.2 percent. In 2022 it was even lower. It was on the order of 3 percent. 

Again, that’s Laurie Goodman from the Urban Institute.

GOODMAN: These are extraordinarily low loss ratios. 

So, why does title insurance pay out so infrequently?

GOODMAN: What the title insurers would say is, “Well, we have to do a lot of work beforehand and you are essentially compensating us for that work.” 

It’s true that title insurers and title agencies do a lot of work to clean up a title before closing. Kathy Kwak is chief operating officer of Proper Title in the Chicago area. She says it’s rare to see a title with no defects on it.

KWAK: I don’t like to say 100 percent, because there might be that small exception that something won’t pop up, but most properties are not clear unless they never sold. 

And those things that pop up can be a pain in the neck to fix.

KWAK: Let’s say I owe something to the I.R.S. — there’s a lien that will show up saying that I owe this amount of money. We’ll reach out to the I.R.S. and ask the I.R.S. for a letter saying what’s owed, in order to clear that from title.  

As a result of all that work, it’s rare for any title claims to come up after the purchase.

KWAK: Our claims have gone down to single digits. We have not spent any money, except I have an in-house underwriter that actually reviews the claim that comes in — but that’s part of her job. 

Proper Title is an agency, which means it acts as an intermediary between big title insurance companies that actually underwrite the policy, and the attorneys representing the seller or the buyer. Different real estate markets have different customs. But in many of them, including Chicago, the attorney or the realtor arranges for title insurance — and gets a commission from the title insurance company.

KWAK: In most instances, unless you’re in the title industry, you really rely on your team of experts. The consumer doesn’t really get involved. 

These arrangements have come under scrutiny in recent years.

GOODMAN: Everyone’s hand is in the pot in some way. 

The lawyer or realtor who chooses a title insurance policy has no incentive to get a good price, and in fact does better when the homebuyer or seller pays more. In New York, for instance, lawyers receive between 60 and 90 percent of the premium from the title company. And people purchasing title insurance are typically in the middle of a complicated transaction that represents the single biggest purchase of their lives. So, they rarely decide to stop the process to look for a better price on a minor line item.

GOODMAN: People don’t shop around for title insurance. Usually their lender, their realtor, says, “Hey, here’s your title insurance agent.” It’s like getting your driver’s license: “Stand in this line, stand in this line, stand in this line, take care of it and then come back when you’re done.” 

Some politicians have recognized that this situation is costly for homebuyers. In his State of the Union address earlier this year, President Joe Biden pointed to title insurance reform as a way to lower housing costs. The government-sponsored mortgage finance firm Fannie Mae has begun accepting something called an attorney opinion letter instead of title insurance.

GOODMAN: The attorney opinion letter basically says, “A search has been done and this home is clean, in our opinion.” But they’re only doing this for certain types of low risk refinancing transactions. Because when you do the original purchase, you actually did the title search, got title insurance, and then are doing another search or cruise of the public records for this. 

Laurie Goodman thinks this is a small step toward lowering costs for homebuyers.

GOODMAN: I think, over time, you could gradually see attorney opinion letters progressing from certain types of low-risk refinance transactions to all refinance transactions, to purchase transactions where the last purchase was five years or less ago, to ten years or less ago. And as more county records are computerized, you could see attorney opinion letters becoming more common. 

Kathy Kwak of Proper Title believes that could cause some problems.

KWAK: Where would the money come from then if there is a claim? And does that mean that the attorney would have to have different malpractice insurance? And, with refinances, what is the protection that the bank’s going to get? Is an attorney opinion letter going to be able to provide that? I don’t know.

But even if attorney opinion letters become more widely used, Goodman concedes that title insurance isn’t going anywhere.

GOODMAN: There’s a whole institution that has grown up around title, including the title insurers, the title agents, all the government-sponsored and government-backed mortgages require title insurance. 

She thinks another way to reduce the cost of title insurance could be to tailor its price based on a title’s risk.

GOODMAN: Things like: how long it was since the last sales transaction, whether it’s a refi transaction or a sales transaction; the geographic area. There are certain areas that are more prone to fraud than others. Has the home had a lot of renovation? Because mechanic’s liens are certainly one type of lien that you will pick up in a title search. So, there are a lot of things that would allow you to better price the risk. 

And even though she knows her experience with title insurance was extremely rare, personal finance writer Christy Bieber thinks it’s possible it happened for a reason.

BIEBER: I’ve never heard of anybody else except for us ever needing title insurance.   I guess maybe it happened so that I can write about it and tell people, “Hey, maybe title insurance isn’t always a waste of money!”

Bieber doesn’t know if or when she’ll buy another home, but there’s one thing she does know:

BIEBER: I will not complain about writing my check for title insurance. 

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For The Economics of Everyday Things, I’m Zachary Crockett. This episode was produced by Julie Kanfer and Sarah Lilley, and mixed by Jeremy Johnston. We had help from Daniel Moritz-Rabson.

GOODMAN: No lender is going to raise their hand, say, “Hey, why don’t I save my borrower some money and I’ll take the risk!”