It is an amazing turn around that just a week ago many naysayers trumpeted that the U.S. does not need title insurance and that it is merely an unnecessary expense in the closing process. And now when there may not be title insurance available, people are expressing concerns of a deepening real estate recession.
Not only does title insurance reduce risks and clean up title issues, performs the closings, processes and distributes all of the funds and the records all of the documents (though in some states escrow companies or attorneys provide these functions), but also significantly reduces interest rates for buyers.
You may ask how title insurance reduces interest rates—correct? Just take a look at the current foreclosure issue. If a lender can get title insurance to lend on a previously-foreclosed property, then the interest rate was simply a function of the borrower’s credit rating (the borrower’s risk of their ability and propensity to repay the loan, basically), the loan to value ratio (a function of the appraised value and the down payment), and that rate was essentially the market rate of interest.
Now, however, without the availability of title insurance, the interest rate now includes the risk that the new owner does not have the same bundle of rights on ownership in the property. So to get a loan today without title insurance requires a significantly greater risk premium which is reflected in a greater interest rate.
There is probably some interest rate that a lender would be willing to finance any structure—even a foreclosure not having title insurance. While a lender may not be willing to finance for 30-years at the current 4.3 percent rate, would they at 25 percent interest per year? How about 50 percent interest—i.e. where a lender effectively receives all of their money back in two years. So as you can see, title insurance, along with other risk eliminating and mitigating services, makes housing more affordable, liquid and results in greater homeownership rates at minimal costs to buyers and sellers.
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