All Forum Posts by: Shafi Noss

@Jay Hinrichs Maybe so. I'm happy to drop that theory if the numbers aren't behind it.

Still Fannie Mae itself approves "Attorney Opinion Letters" as an alternative to title insurance to pair with their loans. 

"In recent years, widespread digitization of real estate records and technological advances have improved the process of confirming marketable title, but that has not translated to lower costs for borrowers. 

Fannie Mae research shows that low-income and first-time homebuyers pay disproportionally more in closing costs. Since beginning to accept AOLs under the Selling Guide in April 2022, savings to borrowers have been significant. On average, homebuyers have saved more than $1,000 when an AOL was used instead of a traditional lender’s title insurance policy. For purchase transactions, average borrower savings have been >$500, even when the borrower has elected to obtain an owner’s title policy."

...

"Fannie Mae has also purchased more than 10,000 loans with AOLs since 2009 and has not experienced losses from title claims on these loans."

https://singlefamily.fanniemae.com/media/37606/display

So is it always correct for everyone to get title insurance? FNMA doesn't seem to think so. 

@Peter Walther

You said "This is a free market, so if you think it's easy to lower prices and still make money, feel free to start a title insurance agency or underwriter.". 

That only makes sense if I am claiming title insurance agencies or underwriters are overpaid. That isn't what I said. 

Here is what I suspect and I could be wrong about this so let me know. A normal title search catches 80% of title issues and costs a few hundred dollars. Attorney's are also employed to check other sources outside of the normal search catch maybe 20% of the claims, and they are paid a few thousand dollars. This extra search successfully decreases risk but costs a lot more. 

Many insurance policies have basic coverage and premium coverage options. The basic coverage is cost effective and the premium coverage is not cost effective but maximally protective. I suspect the way title is structured is everyone is forced to buy the premium expensive version of protection, you can't opt for basic protection if you wanted to. 

Also title insurance isn't a free market in many states, there are price regulations. I don't know why. But I keep looking back at Iowa which costs $175, guarantees clear title, and does just fine. 

 I could equally claim you have misunderstood what I said. Based on that reasoning you should be advising me to become a title attorney to take advantage of the free market distortion not a title insurance agency. 

You're right of course that some protection extends past the 6 weeks of ownership, and I was clumsy or mistaken describing it otherwise. 

Nevertheless that anecdote shows risk is nonzero, but nothing further. The risks are lower than if I continued to own the property myself. The rational thing to do is to compare the risk and risk premium and make a decision to self-insure or not based on my risk tolerance, it's an obligation of rationality. I do not think you are disagreeing with that. 

Here is what confuses me about the one-time premium. If I have a 30yr mortgage the lender does not require title insurance updated every 5 years. But if I rate/term refi with the same lender after 5 years, title insurance is required to be paid again. Why? I get the old loan is paid off and the insurance goes with it but why can't it just be transferred to the new nearly-identical loan. It doesn't make sense to me. 

You've pointed out a bunch of insurance you haven't needed yet, none of this is evidence you should always buy title insurance. 

If you have such reasonable analysis, I'll wait to see it to be persuaded. 

Self insuring is cheaper in the long run even if you have a claim. Insurance is a negative expected value product, that's normal and expected. See my post about the commission above. 

@Peter Walther Title companies take a 70%+ commission of the title insurance premium leaving the insurer 30% or less, of course their combined ratio will be normal. Premiums could double and if it was all paid as commission, the combined ratio would be the same. But the cost per unit risk to customers would still double.

The question is what's up with that other 70-85% of the premium. A title search costs a few hundred dollars and supplies the bulk of the risk protection. Someone with basic education can perform one, especially as digital records become more available. 

As far as I know, attorney's are paid a large portion of the premium for performing advanced title searches, I don't know how this works super well so if you have counter evidence let me know. I suspect there is a disproportionate cost-to-risk ratio in this activity specifically, not that it's always wrong to do, but there is some lopsidedness in this specific area and everyone is forced to pay it when they could instead pay more for the insurance itself but with a lower overall cost. 

I mean look, well-functioning free markets create fair prices. This only breaks down when consumers lack transparency and mobility which I think happens in a lot of industries including title. But the the end-insurer doesn't have to be making a killing for the consumer to have a poor cost-to-risk ratio. 

@Jay Hinrichs Yes exactly, I think this is a rational way to do it in many cases. 

@Rob K. I'll respond to this since I hear the undertones towards what I have just been posting about. Obviously an anecdote about a single case where someone would have benefitted from purchasing insurance is not evidence supporting that insurance should 'always be purchased'. The fact that the risk is nonzero does not mean the risk is high enough to pay any price for insurance. Title risk is real, it's just unlikely. Calculate the risk and the risk premium and make a rational decision, it's investing 101. 

That's another area where the title insurance payment structure does not make sense, on a refi. On a refinance you have to get the title insurance 're-issued'. Basically you have to pay again just to change the lender. If you change the lender on your hazard insurance you do not have to buy a whole new policy. This does not make sense to me. If you have any light to shed on that Rob I'm open to hearing. 

Most other developed economies like Japan and most of Europe have gov't backed title, a few other countries have a hybrid structure, and it is really only the US and Canada that are all about private title. We are a bit of an outlier as a country. 

I think the private title industry made sense for a US that is more prone to litigation and was forced to keep private records. As we transition to electronic records and the chance of title issues from paper records fades into the decades I hope the heat from reform efforts breaks through to the regulations to create a system that is more optimal. 

 

@Jay Hinrichs 

Well first Jay I know you are extremely experienced and I suspect Carlos is as well so let me start by saying you both have my respect. 

Here is the nuance I am trying to distinguish: yes of course when you refi or sell a lender or buyer will want title insurance (unless Iowa). 

But what about the 6 weeks that I own the property before the sale or refi? Should I buy a full-price policy to protect myself during those 6 weeks? It has the same cost as a policy that would be in place for 6 years. I do not think the answer is 'always yes'. 

That's another weird thing about title insurance. Most insurance is paid monthly, title insurance is the same cost no matter how long you hold, the price is not fully tethered to the amount of risk protection the owner receives. 

 I believe there is a discount if you can produce the old title policy.