Blown Mortgage

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Has there been a bigger scam out there than title insurance over the last few years?  Title insurance, for those that don’t know, is insurance that you pay for to ensure that the title to your home is free and clear of encumbrances that could affect the "position" of your mortgage holder’s lien against your house.  Lenders want to be certain that the loan that they provide you that is secured by your property is in the "position" it is supposed to be in.

Position refers to the priority of the loans and liens against your house.  Your mortgage is in first position.  A HELOC or 2nd mortgage is just that - a mortgage in second position behind the first - and so on.  Insurance protects lenders so that in the event that a refinance wasn’t recorded properly or a transfer of the property was done incorrectly their security interest in your home is still protected.  There are numerous other reasons/examples - those are just a couple as an illustration.

Each time you refinance your home you need a new title insurance policy.  This title insurance policy can cost thousands of dollars.  The price depends on the size of the loan in most instances. 

The reason that I say title insurance is a scam is for the same reasons that the new insurance commissioner for California says it "is broken":

Poizner proposed reforms Thursday, saying there’s no meaningful
competition and that consumers are paying "unnecessarily high rates." …

A December 2005 report by Poizner’s predecessor, John Garamendi … disputed by the industry — reported that homebuyers in Southern
California pay escrow and title insurance fees that are almost double
those in Northern California because of a lack of competition and extra
layers of service.

This is not the first critical look that title insurance companies have received. This report commissioned by former insurance commissioner Garamendi  found the following (among others):

• Three companies now control more than 75 percent of California’s
  market, and in most counties, three or fewer companies control more
  than 90 percent of the market.
• Prices have skyrocketed while the cost of producing
  title insurance policies has fallen. The only base-rate changes title
  insurers have instituted in nearly a decade have been rate increases.
  In a competitive market, prices typically adjust for falling production
  costs and rising average transaction size (more expensive houses). That
  hasn’t happened in the title insurance market.
• Escrow fees are not set in a competitive market. Fees
  in Southern California, where escrow is handled by independent escrow
  companies, are substantially higher than escrow fees in Northern
  California, where escrow is included in the services of the
  underwritten title company.

Numerous lawsuits brought against title companies have been settled in the past few years including:

• After a nationwide investigation spawned by Colorado investigators
  in early 2005, First American in February agreed to give back $24
  million to consumers nationwide while denying any wrongdoing after it
  was charged with kickbacks to real estate agents, lenders and
  developers. Kickbacks are a violation of California and other state
  laws as well as federal law known as RESPA (Real Estate Settlement
  Procedures Act).
• A month later, Old Republic Title Company agreed to
  finish paying $50 million to the City and County of San Francisco –
  including $14.8 million in restitutions and interest to consumers — in
  a settlement agreement stemming from a 1998 civil suit charging the
  company with withholding escrow funds unclaimed by consumers and
  charging fees for services not performed.
• Two months later, after a 30-month investigation,
  Stewart Title of California, Inc. paid nearly $1 million in fines and
  related costs for kickbacks it denied.
• In 1999, in the nation’s largest ever action against
  the title and escrow industry, a class-action suit by California’s
  Controller at the time, Kathleen Connell, sought a half billion dollars
  in escrow funds which the suit said some 200 title and escrow companies
  had wrongfully withheld from the state’s consumers since 1970. The
  state collected at least $20 million.

The reason title insurance in non-competitive is that as a customer you are usually guided to the title insurance company of choice by the mortgage or real estate company.  While you can choose it is usually much easier to simply "go along" with the service providers proposed by the mortgage or real estate company.

This referral nature of the business is naturally anti-competitive.  Because of this you spend thousands of dollars in insurance policies each time you refinance.  The point of this rant is to say that title insurance has made a lot of money off of the refinance boom and has positioned itself to maximize revenues off of you, the borrower, by cozying up to brokers, builders and lenders.  This is why the lawsuits were settled that alleged illegal kickbacks from title companies to lenders/brokers/builders.  Title companies provided kickbacks for these lenders/brokers/builders send all of their business to them.

When the lender (or whomever) refers you to a service provider you rarely shop that service provider.  You may complain about and negotiate the points or other lender/broker-related fees, but rarely do you hear about your ability to negotiate title and other third-party fees. 

Remember this: when you are shopping for a mortgage you have the right to question the fees charged by title and escrow companies.  You also have the right to choose your own title and escrow company.  While you do need to weigh the benefits of the time required to shop and find a title/escrow company that you are comfortable with it does help knowing that you do have a choice when it comes to the third-party service providers that assist in closing your loan.

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