No regulation. Few claims. Huge profits.
JACK LALOND AND his wife Kathy have refinanced or taken out equity loans on their Plymouth home six times since they purchased it. They used the loan funds and the savings from the refinancings to make repairs to their three-bedroom Cape a stone’s throw from Plymouth Rock, buy a small vacation home, pay for a daughter’s education, renovate their home in preparation for retirement, or just take advantage of lower rates. Each time they were required to buy title insurance, not to protect themselves but to protect their lender.
LaLond didn’t even know he paid for title insurance on his most recent refinancing, but there it was, tucked inside a stack of closing documents. The cost was a meager $300, pretty insignificant compared to the loan amount. But that’s the point. Title insurance is one of those hidden-in-plain-sight financial transactions that offer little or no benefit to homeowners yet provide a lucrative gravy train for attorneys and insurance companies.
|Jack LaLond of Plymouth thought title insurance was just part of the cost of the loan.|
“I just thought it was a part of the cost of the loan. I didn’t think about it,” LaLond says. “I just assumed it’s legal and that’s all that I was concerned about.”
While most insurance policies cover against losses that will occur in the future, title insurance is a way to guard against problems from the past, problems such as boundary disputes, missing heirs, liens, judgments, and other obstacles that would prevent clear title from passing from one owner to the next. Title flaws used to be a big problem, but today they are relatively rare or difficult to overcome. Yet the title insurance business rolls along as if nothing has changed.
Last year, Massachusetts residents spent more than $252 million on title insurance, according to the American Land Title Association. Of that total, an estimated $85 million went to the insurance companies providing the actual coverage. The remaining $167 million was spread among the lawyers who handle real estate closings in Massachusetts and do double-duty as the agents for the title insurance companies. The business is extremely lucrative for the insurance companies, who pay out almost no money in claims, and for their lawyers/agents, who with online access to records can now do the work that used to take days in a matter of hours.
Nearly three-quarters of the title insurance policies purchased in Massachusetts last year were for refinancings, meaning the title work was essentially a redo of work for an earlier loan or refinancing. Like Lalond, most consumers roll the cost of title insurance into their loan amount, which means their bank is lending them money and charging them interest on funds used to purchase a policy that benefits only the bank.
Most states regulate title insurance in some way, whether it’s the commissions agents can collect, the premiums insurers can charge, or the licenses participants are required to obtain. But Massachusetts takes a completely hands-off approach. The state doesn’t even gather data on the title insurance industry, making it nearly impossible to track who is being paid for what. The only rule that’s been enforced is that lawyers are the only ones who can act as agents for title insurers.
Beacon Hill lawmakers have filed bills the last several years that would regulate title insurance rate-setting and commissions and give the state Division of Insurance oversight of the industry. But those bills have not gone anywhere in a Legislature where nearly 20 percent of the members have outside legal practices, many focused on real estate. Rep. Antonio Cabral of New Bedford is pushing legislation this year that would explore whether it makes sense to thrust the state into the title insurance business.
The executive director for the Real Estate Bar Association of Massachusetts says the organization is opposed to Cabral’s proposal, especially the idea of creating a state-run title insurance company. “The notion of a state-owned title insurance company is certainly one that makes us recoil in horror,” says Peter Wittenborg. “The bill would so completely overturn the economic model that the industry is based on that it’s hard to imagine how the industry would continue in Massachusetts.”
Cabral says the bill is about transparency and consumer interest. “We’re looking to create some competition,” Cabral says. “It seems there’s no checks and balances on how much people can charge you.”
THE MAYFLOWER COMPACT
Title insurance played an important role for centuries in this country by attempting to bring order to the haphazard system of land transfers and property ownership. That system has gone the way of the horse and buggy in this era of technology and decades of settled law, yet lawyers and title insurance companies continue to cling to those historic problems as a reason to force homeowners to buy a product very few will ever benefit from.
The rate of losses for
title insurance pales
when compared to
losses on other
The first title in the New World was the Mayflower Compact, followed by the Massachusetts Bay Colony Charter, fairly sweeping grants of property from the British crown for land the king didn’t even own. After that, land holdings were pretty much determined by where neighbors agreed their boundaries lay: Natural artifacts such as trees, rocks, and rivers were first used as boundaries and later gave way to markers such as fences, surveying stones, medallions, and monuments. The majority of property filings – deeds, transfers, mortgages, liens, and the like – are filed in each county’s registry of deeds. The bound indexes for those transactions date back to 1629 in some courthouses.
Title insurance was first developed and is used predominantly in the United States because of the possibility for ownership disputes. The insurance protects a lender or a land owner if the title to property is cast in doubt. Edmund Williams, the state’s chief title examiner, who typically works on land with the most cloudy titles, says most title problems have been cleared up through changes in state laws over the years. “Things that may be perceived to have been bad title 80 years ago have been cured by statutory fixes,” he says.
Still, lenders require borrowers to purchase title insurance because investors who purchase the loans want assurance the title is clean. Norwell attorney Joel Stein, co-chair of the title insurance and national affairs committee of the Real Estate Bar Association, says without a certification of clean title, lenders would not be able to write mortgages.
“The title insurance policy is essential to selling loans to investors nationally,” says Stein, who has been doing real estate law for more than 40 years. “Investors require a package of documentation and the title policy is the proof of good title. If Massachusetts were to elect to go its own way, national lenders would certainly object.”
The cost of title insurance is nominal, based for the most part on the size of the property owner’s loan. The cost of a lender’s policy now is about $2.50 per $1,000 financed. On top of that are other fees that go into the agent’s commission, such as title searches and abstracts, which can bring the price tag to $1,500 or more for an average home purchase with 20 percent down. A buyer can also purchase a policy, though it is infrequently done. A buyer’s policy is roughly $3.75 per $1,000 of property value.
Nationally, title insurers collected more than $11 billion in premiums last year, an increase of nearly 21 percent over the previous year. They paid out just 9 percent of the money in losses. The 14 title insurance companies operating in Massachusetts pulled in $252 million in premiums last year and paid out just 5 percent, or $12.7 million, in losses and expenses from claims. The rate of losses for title insurance pales when compared to other lines of insurance. According to Division of Insurance records, health insurers paid out 88 percent of premiums in losses in 2011 while home insurers paid out 92 percent.
The rate of losses may be less in Massachusetts because three-quarters of the 334,000 policies issued in the state were for refinancings. Even though title insurance for a refinancing is typically priced at a lower rate because there is less work to do, it remains a lucrative business and a sore spot with consumers.
“There has been a lot of controversy over the years since we started placing title insurance on refinances,” says Steven Edelstein, president of Reliant Mortgage in Beverly. “You hear borrowers over and over say, ‘Why am I paying title insurance again? I thought I already paid for that.’ This one issue has always been a controversial issue.”
Since opening its doors in 2001, Reliant Mortgage has written about 1,000 home loans a year and has $1.1 billion in mortgages currently outstanding. Edelstein, an associate board member of the New England Land Title Association, says every dollar that the company has loaned has been guaranteed by a title insurance policy. But the insurance has never been used. “As a company, we’ve probably put zero claims in,” says Edelstein.
Lenders even require title insurance on registered land, which is land the state has already certified as having clear title. Massachusetts is one of just a handful of states that uses a dual system of land recording. In the late 19th century, Massachusetts created a separate registry system for properties with particularly clouded titles. Overseen by the state Land Court, the state’s own examiners, title searchers, and surveyors search the history of a property’s title, certify it as clean, and guarantee it against any claims of defect. Roughly 20 percent of the state’s land is registered land.
Williams, the state’s chief title examiner, says he owns registered land and was required to buy title insurance for his lender at the time of purchase. Since the state had already verified and guaranteed the property’s title, the policy guarded against nothing and benefited only the title insurance company and the attorney who acted as the company’s agent.
“I viewed it as part of the price of getting a loan,” Williams says. “It’s no different than any other charge [in getting a loan.]”
The business of title insurance is so lucrative that the state’s Real Estate Bar Association has furiously – and successfully – fought for decades to retain the right for lawyers to be the sole agents for insurers.
“The organization has a long history of attempting, through both legislation and litigation, to confine conveyancing activities in the Commonwealth to Massachusetts attorneys,” Supreme Judicial Court Justice Margot Botsford wrote in a 2011 ruling on a case that solidified the crucial position of attorneys in the title insurance process and gave them enormous leverage on fees.
The bar association had sued National Real Estate Information Services, a Pennsylvania company that was offering real estate closing services using employees who were not lawyers. The association argued the company, which operates in many states, was illegally engaging in the practice of law in Massachusetts, particularly as it related to the issuance of title insurance policies. The SJC held that nonlawyers could handle some aspects of real estate closings, but they couldn’t do title searches or certify titles as “marketable.” The decision gave attorneys enormous leverage with title insurers, who depend on the lawyers to steer business their way.
“It’s all kind of integrated,” says Stein, the Norwell attorney. “If you’re issuing the policy, you should do the title. From a practical standpoint I wouldn’t be comfortable with someone issuing the title policy for a deal I’m closing. Plus, not to mention, there’s the financial matters.”
Even as lawyers have solidified their hold on the title insurance business, the amount of work they have to do has declined. It was not long ago that title searches were extraordinarily labor intensive, taking hours just to go through the musty books in registries, following the margin references, and confirming all notices, levies, liens, claims, mortgages, and discharges on a property. The standard is to search back 50 years or longer until a clean title is found.
But that mind-numbing work has given way to the speed of a computer processor. Richard Howe, the Register of Deeds for Northern Middlesex in Lowell, says computers have reengineered the business of title searchers since he took office in 1995. No longer are there scores of searchers with piles of books at a desk painstakingly recording every defect of title on a centuries-old property. In his registry, like most others around the state, the entire database is online and searchable from a home or office.
While many closings used to occur at the registry to make sure all filings were up-to-date before the check changed hands, Howe says now they are often done in the comfort of an attorney’s office. “The revolutionary development is this electronic recording,” says Howe. “They’re [buyers and sellers] still discussing what day the garbage gets picked up and the lawyer has already registered the deed.”
Although title searches are generally taking less time, the fees lawyers collect for title insurance work are going up, not down. The fees are based on the value of the loan, which has been rising along with the price of homes. In 1991, the average price of a home in Massachusetts was about $151,000; today, even after the downswing of recent years, it is more than double that at $319,000. Title insurance premiums, and the agent commissions that accompany them, have risen by more than 40 percent over those years.
Stein says his office, which includes himself, another lawyer, and five title examiners doing the work, performs about 200 title searches a month. While he says there is some work that can be done remotely, some registries in the state do not have online indices going back 50 years and others are rife with problems in data entry that make it difficult to have confidence in the records.
| Title searches generallytake less time but the
fees lawyers are paid
for the work are
going up, not down
Title insurance commissions for lawyers, which average about 65 percent of the total premium and can reach as much as 85 percent, have remained high even as the fees attorneys receive for real estate closings have fallen. Some industry officials say lenders have cut their legal fees for real estate closings, which many homebuyers scrutinize closely, knowing full well the attorney is held harmless by the fees he receives working as a title insurance agent.
Attorney Douglas Johnson, who has closed about 30 percent of Reliant’s loans, says, in the 23 years he has been a real estate lawyer, settlement fees paid by lenders have dropped from more than $1,000 for a closing in 1991 to between $650 to $800 now. He says the commission he receives as a title insurance agent is what firms such as his count on the most. “The legal fees don’t really cover the work involved,” says Johnson. “We’re making less today [from closing fees] than we did in 1991 when I first started. The only thing that helps is the value of the policies is bigger now.”
The federal Office of Housing and Urban Development does have some requirements regarding title insurance, chief among them that a buyer has the right to secure his or her own title insurance policy for the lender and not just accept the coverage recommended by the bank’s attorney. But experts say lawyers do not often provide that disclaimer to buyers because, if they did, they’d lose a large chunk of pay from the transaction.
Stein says lawyers have to get paid for their work somehow. “One of the main reasons for doing the work is because you’re getting the title insurance premium,” he says. “If the agent’s portion was decreased and you still had the same responsibilities, you have to get paid from somewhere or you’re not going to get somebody to do it. If it’s some way or another reduced [by regulation], the money would have to come from somewhere else.”
Massachusetts may have been one of the first states to issue and record land titles, but it is among the last to institute any kind of statutory oversight over the little-understood policies. The Bay State is one of only three states in the nation that don’t license title insurers. Massachusetts is also one of just eight states that don’t regulate title insurance rates in any way and one of a handful that don’t regulate the agents who represent the insurers.
There is no cookie-cutter regulatory policy across the nation. Many states allow or require attorneys to serve as title insurance agents, while 24 ban lawyers from the business. Most states regulate title insurance agents in some fashion, either with licensing regulations or disclosure requirements. At least 10 states, including Connecticut and New Hampshire, regulate the percentage of the premium that agents can retain.
At least 42 states have laws regarding rate-setting, including 14 states that require prior approval before rates can take effect. Virginia allows buyers to negotiate rates with agents. Many states have caps on rates as well as the amount of commission an agent can receive. Some states, such as Florida, let title companies perform the title searches themselves, shaving hundreds of dollars off premium costs. Iowa is the lone state that dispenses with title insurance entirely and puts the state in charge of guaranteeing all titles.
The National Association of Insurance Commissioners does a survey of states from time to time and its working group on title insurance recently polled its members on problems regarding malfeasance by insurers and agents. The numbers on embezzled funds in Massachusetts do not approach those from other states, prompting Cabral to say that a lack of regulation may be allowing problems to go undetected.
Michigan, for instance, reports more than $36.6 million set aside for title insurance was stolen by agents between 2005 and 2009, while Maryland reports that more than 100 attorneys have been suspended or had their licenses revoked in the same four years for theft of title insurance money from escrow accounts.
In Massachusetts, by contrast, no one tracks wrongdoing in connection with title insurance. The state Division of Insurance said it wasn’t aware of any problems in response to the questionnaire put out by the commissioners’ association. Yet a review of disciplinary actions by the state Board of Bar Overseers finds at least 70 attorneys have been cited since 1999 for violating their obligations regarding funds they received for title insurance, including several who have been disbarred for embezzling tens of thousands of dollars in premiums paid by clients for policies that were never issued.
Cabral has been the driving – and virtually only – force behind title insurance reform. In the 2011-2012 session, Cabral filed a bill that would have tasked the state Division of insurance with setting rates, capping commissions, and collecting data quarterly. In addition, his bill would have mandated lower or even no rates for refinancings that met certain requirements. The bill languished for a year and half until it was sent to study last summer, the legislative way of killing a bill without debate.
| The bill calls for a studyon the feasibility of
starting a state-owned
title insurer to competeagainst private firms.
This term, Cabral has filed a new measure that would grant regulatory and rate-setting powers to the Division of Insurance but leaves refinancing requirements untouched. Cabral’s bill also calls for a study to determine the feasibility of a state-owned title insurer that would compete with the private companies.
State Rep. Sean Curran, a member of the Judiciary Committee and an attorney who works as a real estate broker but has never served as a title insurance agent, says changes may be warranted in the way title insurance for refinancing is treated. “We should mandate that the banks pay for the title insurance on the refinance side,” he says. “If the banks are the ones buying it, they’ll negotiate with the title companies and the fees will have to come down.”
Cabral’s bill has been referred to the Legislature’s Joint Committee on the Judiciary, which killed last year’s bill. Thirteen of the 17 committee members from both chambers, including both chairmen, are lawyers. Cabral says he doesn’t believe his colleagues in the Legislature who are attorneys are trying to block his bill, but he made a pitch in June that the bill be referred to Committee on Financial Services, which typically deals with insurance issues.
“The bill is about insurance,” says Cabral. “I’m not quite sure how it ended in the Judiciary [Committee.] I just don’t think that‘s the appropriate committee.”