Title insurance is essentially a risk elimination business that, given timing, data validity and criminal activity, can never eliminate all of the risks of transferring the diverse and complex bundle of rights concerning real property. The corrective actions that title insurance provides are in addition to other services including but not limited to the facilitation of the real estate closing, distributing all of the funds to the respective parties and recording the documents.
Total title premiums written each year are a function of (1) the number of transactions, (2) the type of transaction (purchase or refinance) and (3) the value of the property being insured — in addition to whether or not there are both an owner and lender policy and other unique endorsements providing special coverages as desired by the owner and lender.
The primary work for the issuance of a title insurance policy is done at the local level either through an independent agency or an underwriter owned office. In many states these local operations maintain a title plant (an index of all filings concerning all of the real estate in a county or multiple counties as appearing in the respective local county recorders offices as well as various courthouse records), complete the search and examination once an order arrives, prepares the title commitment, remedies issues that affect a clear title, completes the closing (though in some locations this may be done by an independent escrow or closing company), disperses all of the funds in accordance with the parties specific instructions and deposits the associated documents for recording with the county recorder’s office and then issues the title policy. This is an oversimplification of a complex process.
Title premium rates are not consistent from state to state for various reasons. A prime example is that the premium either includes or excludes certain escrow and settlement services. In Texas and New Mexico, for example, the title premium is an all-inclusive fee; while in other states it is the insurance premium with additional charges for fees and expenses for services rendered. For all of the work, the local title agency retains on average 80 percent of the title premium with the balance remitted to the underwriter (the remittance rate varies from as low as 7 percent to as great as 40 percent). The only apples-to-apples comparison of total title fees is to add up all of the closing costs in the title section of the HUD 1 statement. Therefore, to compare title costs from state to state requires a statistically valid sample.
In some states title premium rates are promulgated, while in others rates are set by an independent rating bureau. Still, other states simply allow a company to file and use their rates, and other states require rates to be filed and then subsequently approved or rejected by the regulators within a limited time span.
While title premiums benefited from the housing and commercial markets boom and refinance activity from 2003 to 2007, the rapid retreat back to 2001 premium levels has been challenging. As shown in the table and graph below (and these are statutory premiums so they do not include other fees such as escrow, outside legal and so forth), title premiums quadrupled from the early 1990s to the peak in 2005 and since have fallen by 48 percent. Total industry title premiums from 1990 through 2002 were $81.5 billion and from 2003 through 2010 tallied $106.4 billion.
Claims, however, have almost tripled since the early 2000s and although earnings reports for the first quarter of 2011 from the major underwriters showed an improvement, they remained extremely high through 2010. The combination of premiums dropping by almost half and the tripling of claims has significantly impacted the profitability of the title industry and resulted in a decline of $1.2 billion in surplus (think of surplus as a shock absorber—assets over and above required reserves).
The average claims rate from 1990 through 2010 was 5.64 percent. From 1990 through 2004, however, the average was just 4.54 percent while the rate from 2005 through 2010 jumped to 7.29 percent. Total industry claims were $5.1 billion from 1990 through 2004 and ran $5.5 billion for the six year period from 2005 through 2010. In other words, the industry paid more claims in the past six years than were paid in the prior 14 year period.
Not only do claims rates change over time, but they also vary significantly from state to state. The table below shows the states that had a minimum 8 percent claims rate from 2005 through 2010. Recall that the average claims rate from 1990 through 2010 was 5.64 percent. It does bring up the question as to why and how a company would continue issuing title insurance with such high payouts?
Title insurance not only reduces the risks of lenders and homeowners, but also reduces the total cost of homeownership – an often overlooked benefit of title insurance to the U.S. economy. Since a lender is no longer taking the risk of who owns the property, whether their lien has priority, or if other interests will negatively impact the value of the property; all as expressed in the respective title policy. This standardized process provides lenders with the means to securitize a loan at a reduced interest rate—saving the homeowner each time they make mortgage payments.