We’ve noted that title insurers have been refusing to eat the risk in foreclosure sales when they can’t verify the chain of title from local records. Of course, the idea that title insurance was ever really intended to be insurance in the first place is questionable: the title insurers only step up when they can verify that there appears to be absolutely no risk. A one-time client, a major NYC developer and Forbes 400 member, established a title insurer for his own residential deals because he saw the premium as free money.
Some have taken the route of writing qualified policies, but buyers appear to be waking up to that. So the industry response increasingly appears to be to have the bank selling the real estate indemnify the title insurer. Since the biggest servicers also happen to be the biggest banks in the US, this effectively means that the risk of clouded title in foreclosures is being absorbed by TBTF banks, and hence by taxpayers, a point we’ve raised in earlier posts (see “Title Insurance Woes Illustrate Liabilities of Foreclosure Mess Concentrated in TBTF Banks” and “Latest Real Estate Time Bomb: Title of Foreclosed Properties Clouded; Wells Fargo Dumping Risk on Hapless Buyers“).
Needless to say, it would make more sense for the banks themselves to make proper allowance for this incremental risk, as Grayson suggests. The text of hisletter follows:
Dear Secretary Geithner and members of the Financial Stability Oversight Council,
I’m writing concerning the foreclosure fraud crisis and the resulting potential need for a special capital buffer for large systemically significant institutions. I’m particularly worried about the title insurance market, and attempts to lay off title liability onto large banks without corresponding changes in capital requirements.
Recently, Bank of America struck a deal with Fidelity National Title Insurance to indemnify the title insurer should legal problems with foreclosures create unanticipated title liability. Title insurers are clearly worried that they may face higher legal and policy costs if foreclosures are reversed, or should legal ambiguity cloud titles they already have insured. Bank of America’s deal with Fidelity may be necessary to help keep the housing market functioning. Since title insurers have in some cases just refused to insure this market, someone must pay for the liability these insurers have refused to incur.
The extent of this liability is unclear. On October 8, Bank of America CEO Brian Moynihan told the public and investors that, despite the self-imposed foreclosure moratorium, his bank had not “found any foreclosure problems”. He said, explaining the foreclosure moratorium, that “[w]hat we’re trying to do is clear the air and say we’ll go back and check our work one more time.” The bank’s SEC Form 8-K reinforced these comments. Yet two weeks later, the Wall Street Journal just reported that Bank of America, in reviewing 102,000 cases of problematic foreclosures, found problems “in 10 to 25 out of the first several hundred foreclosures it examined.”
Both banks and regulators are claiming that the problems are simply process-oriented document errors that aren’t really causing harm to the public at large. I suspect that no one really knows the extent of the problem, or the potential liability. What we do know is that title insurers are demanding indemnification.
With that in mind, it would seem prudent to require additional capital buffers for systemically significant institutions until the extent of the foreclosure fraud crisis is understood, or until title insurers decide that they no longer need indemnification for increased risk. It may also be useful to conduct a new round of stress tests to determine the resilience of the financial system with respect to these serious problems.
Regards,
Alan Grayson
Member of Congress
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“Of course, the idea that title insurance was ever really intended to be insurance in the first place is questionable: the title insurers only step up when they can verify that there appears to be absolutely no risk. A one-time client, a major NYC developer and Forbes 400 member, established a title insurer for his own residential deals because he saw the premium as free money.”
I guess I see what you mean, but isn’t the buyer still paying for the title insurer’s guaranteed opinion? That’s not quite the same as “free money”, is it? Maybe we shouldn’t call it “insurance”, but it’s surely something.
Agreed, they are charging a premium by calling it “title insurance” for what from a practical standpoint is a title verification service.
And remember, it was the developer who characterized it as free money.
Consider that, according to ALTA, about 4.3% of premiums collected ($15 billion) get paid out in claims ($660 million), it is pretty much is as close to free money as you can get.
All states should go to a Torrens type system, or Iowa’s title guaranty program, and make the sale of title insurance to homeowners illegal.
Whalen was just on FoxNews and mentioned the government ‘insurance’ that never really pays out, but which bad credit borrowers have to buy to get the loan.. sounds very similar to the title insurance scam.. nobody selling insurance if there’s a chance of default, put-back, or some other cloud which creates multiple claims, and if the unthinkable happens then losses get socialized and paid by our grandkids.
Which insurance is this?
I just watched it again. He’s talking about PMI (private mortgage insurance). It’s about 4:50 into the second segment (after the break).
http://video.foxbusiness.com/v/4397457/expert-bankers-looking-for-exit-strategy
OK. Just watched that. What am I missing here?
If PMI “doesn’t pay out” where did the losses piled upon on the mortgage insurers for the past three years come from?
This isn’t homeowners insurance. Is he trying to make some sort of assertion that the defaulted borrower deserves something back?
I don’t know. I think he’s just saying it’s another way to fleece the low-income borrowers with less than stellar credit, just a statement about the statistics of how PMI never pays any claims.
That’s odd that he would say that. MGIC, the largest provider of PMI in the country has been taking a serious hit these last three years.
See this article: http://www.law.com/jsp/article.jsp?id=1202473567859
“The insurer’s third-quarter net loss of $51.5 million, or 26 cents a share, compares with a loss of $517.8 million, or $4.17 in the year-earlier period, the Milwaukee-based company said today in a statement. The company has been unprofitable for 12 of the last 13 quarters. The operating loss, which excludes some investment results, was 38 cents a share, beating by three cents the average estimate by eight analysts surveyed by Bloomberg.
Mortgage insurers, which pay lenders when homeowners default and foreclosures fail to recoup costs, have lost money over the past three years because of the surge in soured loans. MGIC’s streak of losses was interrupted in this year’s second quarter when it reported a $24.6 million profit.”
It sounds like he was referring to PMI. The borrower is required to purchase PMI (personal mortgage insurance) if they are putting less than 20% down. The borrower makes payments on this policy with the mortgage payment. The policy pays out to the lender if the buyer defaults.
Title insurance is required in all home purchases and paid as a fee at closing. It is, as described above, less a true insurance policy than a verification of clean title. Lenders will not close on a loan for anyone without title insurance.
The value of title insurance is more that they guarantee that the person selling the property really owns it and that the lender is first in line so to speak, right? It’s insurance but if there is a claim, they dis a bad job.
Title insurance is very different from title opinions, where a winning a malpractice claim against the opiner is the remedy. The insurance contract model, conservative as it is for title insurance, is very liberal compared to the professional liability model of opinions where all risks must be disclosed, explained and agree to. There is a reason title insurance became the norm over attorney opinions.
That said, title insurance generally will fudge on known knowns and accept unknown unknowns. Known unknowns, however, are a no no. There will definately be post-forclosure lawsuits – how much loss will there be?
The relevance of this is that Grayson’s piece, like most commentary ignores that idemnity does not prevent lawsuits, although I agree that banks ought to have to book some kind of reserve. Lawsuits are poison for real estate investors (sellers) whether they are covered or not. Lawsuits must be disclosed to licensing authorities. Lawsuits must be settled to wind up corporate entities. Some people get very upset just because they are getting sued. Other people have very good reason to be upset when being named in a lawsuit comes up in a job interview. Title insurers frequently will not pay a claim until they lose in court and exhaust appeals. Indemnity covers this financially (probably), but not emotionally, and does not compensate for disruption in moving quickly before an evicition. Again, people get very upset over this in ways that money doesn’t always soothe, at least if it’s not perceived as sufficiently compensatory. While I may be overly dramatic here, maybe not. It’s still early and the potential for “nuisance” lawsuits to the insurers is in the millions, that is attorney fees alone that would easily exceed their reserves even if they didn’t have to pay for large losses.
As for R Foreman referring to title insurance as a scam, how much do you want to pay for coverage?
Finally, there are a few states, Oklahoma for example, where “insure overs” are illegal. The rationale is that indemnity isn’t full compensation for reasons stated above.
Thanks. I know that some states do it differently than others. Does this impact a state like Iowa, where I know the big underwriters could not operate, differently than NY, FL, etc.?
Maybe a scam is too harsh a term, but certain ‘title insurance’ is a mis-nomer.. as Yves pointed out all they’re doing is researching title, not insuring anything if there is any chance of cloud.
Does anyone else find it exasperating that Grayson will go down in flames tomorrow yet he appears to be one of the most intelligent legislators out there? I guess the fact that he tries to understand and seek out answers to foreclosure-gate, among other things, is certain to be held against him by his constituents. And that’s the way it is in November of 2010.
Throw the bums out so that we can get even bigger bums. A damn shame, if you ask me.
Yes, one of the few member of Congress actually working for his constituents by demanding government accountability, and he’s on the ropes. Incredible.
Uh, and how are the banks going to get this capital buffer? The fed is simply going to give it to them? Does it just magically appear? Maybe in Geithner and Bernanke’s world.
How about this – declare a banking holiday and figure out what is going on at these banks, particularly the fraudulent HAMP that Obama instituted. No one on either side of the aisle has fortitude to do this and I suspect we’ll have these “heroic” members of Congress that are so in tune with what is going on to keep pushing the can down the road. Grayson is just trying to save his snake skin.
You clearly know nothing about banks, or about Grayson’s voting record. He’s the most aggressive critic of banks in the House. And the banks are profitable, they can increase their capital levels by paying lower bonuses, for starters.
Grayson is part of the problem.
Here it is from Alan Grayson’s website – He sits on the Financial Servies Committee:
Committee Assignments: The Committee (“Financial Services Committee) also ensures enforcement of housing and consumer protection laws such as the U.S. Housing Act, the Truth In Lending Act, the Housing and Community Development Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the Community Reinvestment Act, and financial privacy laws.
GRAYSON IS WHOLLY OWNED IN THIS FRAUD, and NOW, he wants to protect homeowners. When? During election season! You are being lied to. Keep drinking Grayson’s kool-aid.
See my comment above, you really are over your head on this one.
“Intelligent Legislators” – he helped concoct fraud in the CRA.
“Seeks out answers in foreclosure-gate”. Really? He helped create ‘foreclosure-gate’ with his ‘intelligent-legislation’:
No money down – no problem!
No income – no problem!
You want to modify your loan – no problem! Oh wait, there is a problem – sorry you had to make payments you otherwise you couldn’t further afford and now are deeper in debt. But you are an American homeowner now leaving rent free by a judicial injunction!
Iowa is unusual, in that title insurance may not be sold inside the state. The nationals, however, do sell it for property in Iowa from outside the state. This is largely because the Iowa Title Guaranty Program which is run by the state uses rules more like title opinions: disclosure, explanation, cure or acceptance. That is, all identified problems generally must be cured prior to issuing the guaranty. Lenders and commissioned people hate it.
Oddly, it is because title insurance is illegal there, it ends end being essentially unregulated. I’ve never exactly understood this outcome, but it is true.
Iowa is unusual, in that title insurance may not be sold inside the state. The nationals, however, do sell it for property in Iowa from outside the state. This is largely because the Iowa Title Guaranty Program which is run by the state uses rules more like title opinions: disclosure, explanation, cure or acceptance. That is, all identified problems generally must be cured prior to issuing the guaranty. Lenders and commissioned people hate it.
Oddly, it is because title insurance is illegal there, it ends end being essentially unregulated. I’ve never exactly understood this outcome, but it is true.
I believe in throwing the bums in. The homeless never cost anywhere near as much as these clowns, and they care a lot more about our bridges.
Title insurance is very much state-by-state. Some places it operates in unofficial monopolies. Back in the day, a guy would get elected county recorder and he would have access to the records 24/7, and what do you know, his brother happened to own the local abstract ‘n title agency accross the street and liked to stay up late microfiching the records. Although ostensibly open to the public, the recorder’s office would severely limit access in practice, and helpfully recommend the company across the street. Hard to believe, isn’t it?
Title fees in NY are outrageous, but the CEMA tax kind of dwarfs them. I was told once that a national lender’s manager for the NYC area made $70k per month on title fees alone (his, uh, spiff off of those outrageous fees).
Historically, title was a very local business before computerization and larger foot-print operators, like lenders, hated it. The last 20-25 years has been about being able to operate in as many jurisdictions as possible. There have been notable conflagrations, usually because title is a very local business at the operational level.
There have been a few attempts at replacing tradtional title insurance. One of the big 2 had the automated policy which merged credit reporting data with taxpayer information for the 2nd lien loans. I have been told this was a distater of serious magnitude. Certain sticky real estate issues, like spousal interests and rights, often are not disclosed by this data. In my state, an omitted spousal signature on a mortgage of martital homestead property is a total failure of the lien. Oops. Ya know how they tried to protect against this? Our friend the affidavit. Lenders depended on Joe Heloc to swear that he wasn’t married to get the loan he didn’t wanna tell the Missus about. They did this a lot. It’s what was known as “stated marital status.” Lenders fared very poorly in court in these cases. Lenders said “but we relied on that affidavit.” Courts said “what you call a guy whose married who says he’s not married? A: Not divorced yet. No lien for you.”
Seriously, title insurance. As if nobody knows who has owned what block and lot in a clear unbroken chain of assignment of title in the USA. It’s not like we go back to the Norman Conquest or the fall of Rome. Or the reign of Pericles. And Iowa, I mean, how old is that stuff 150 years with less than a handful of registered title since the land was taken under our system of law. At Mortgage Banker and or Brokers associations, the biggest laugh is how the title companies have set practically nothing aside for claims since there are almost never any claims. But, I guess we live in a new era where people are asking questions and finding that the answers are a pretext for skimming cash out of deals in the transfer of real estate.
Lawmaker Questions Power to Foreclose .
A Virginia lawmaker asked the state’s attorney general to launch an investigation of Mortgage Electronic Registration Systems, the middleman firm in millions of court filings that helps keep the mortgage-securitization machine moving.
Robert G. Marshall, a Republican member of the Virginia House of Delegates, requested that Virginia Attorney General Ken Cuccinelli determine whether the Reston, Va., company violates state law because it doesn’t pay a fee every time a loan changes hands. Opinions differ as to whether MERS must pay local fees every time it sells an interest in a loan.
“There are too many people getting foreclosed on not properly,” said Mr. Marshall, who represents two counties near Washington, adding that he is drafting a Virginia law that would require lenders to pay county fees before being allowed to proceed with foreclosures. “The disdain with which the conditions of law have been treated by those who want to make money too fast is very troubling to me.”
Christopher L. Peterson, a law professor at the University of Utah who has criticized the record-keeping company’s business model in scholarly articles, says the foreclosure furor is a serious challenge to MERS because the documentation problems show the company is doing an end run around hundreds of years of American property law.
“By having all the mortgage loans recorded in the name of one entity, the records don’t mean anything anymore,” Mr. Peterson said. “We used to have the records that showed the true economic interest of who owns the land in the public system. Now we just have one proxy, and we can’t tell which lender or which trust owns the right to foreclose, because virtually every securitized loan is recorded in the name of MERS.”
http://online.wsj.com/article/SB10001424052748704865104575588791583567372.html?mod=WSJ_hp_LEFTWhatsNewsCollection
Hell yes the premiums are free money….. look at the string of winery / wine marketing companies that have been purchased by a title company owner with a base in Jacksonville, Florida…. It only takes a couple of dots to draw a line…..
Are the title insurers capitalized enough to handle past foreclosure defects? Although the big banks may indemnify the insurer, they aren’t indemnifying the property buyer, are they?
If your title insurer goes belly-up, and 10 years later you lose your property, what recourse do you have? This situation does not inspire confidence. You want solvent insurers but they do not appear to be well capitalized and appear to be very late to realize that they have substantial risk already. If it materializes in volumes to bankrupt the companies, then large swathes of the property simply doesn’t have title insurance.
LFG went belly up. I believe FNF bought their underwriters an took on that risk. They had an issue with a 1031 exchange company putting escrow money in ARS. Poof. One company disappears and another has 50% of market share.
Now you also have situations where individual agents go belly up and maybe are missing some money from the escrow account. In these situations, if the seller’s proceeds bounce, you stand in line hoping to get something back from the mom and pop shop. The underwriter doesn’t insure over that. I want to say that this happened around Katrina…float dried up and a few seller’s that sold pre-katrina ended up getting screwed.
do you know anything about FNF and LPS sharing directors?
looks like one hand washing the other, BIG time.
LPS was spun-out of FIS, which was also spun-out of FNF, I believe. The sharing of directors is somewhat common in these cases (not making a judgment on whether or not I think that’s good corp gov here). FNF/FIS Chairman Bill Foley actually stepped down as LPS Chairman last year, so I guess you could day the situation is improving! :)
I’ve been watching this scandal unfold but have never understood why the concerns about clear title are voiced only with regard to properties in foreclosure. As I understand it, the gist of the problem is that mortgages have been sliced and diced, folded, spindled, and mutilated, to the point that no clear chain of custody to title of real estate can be established.
Whereas “owners” of properties presently in the process of foreclosure have an understandable urgency about seeing that ambiguity resolved ASAP, I– as a home “owner” who re-fi’d the mortgage 3 times over the past decade would seem to be in the same boat. Thus, how was it that CountryWide was able to retire the existing note back in ’04, or my Credit Union to do the same for the CountryWide note in 2008… and yet the chain of custody seems to be an issue (at least in the financial press) for properties in or nearing foreclosure.
What am I missing?
It is just that a lot of people started noticing with all the foreclosures.
The credit reporting system is effective in showing paid off loans with breaks in the title records – what I would call a “bullet resistant” method – but only so long as you can get a credit report for the borrower/mortgagor of record. Once borrowers/mortgagors sell the property, this is much more difficult.
Regardless of claim payout history, which is misleading in this industry because of the cost of preventing claims is not reported as claims paid, the title insurers have some serious headwinds. There is a saying that “bad titles follow bad credit.” Right now, title insurers are digging out from new construction claims for the last decade. Although, insuring property with new construction seems like it should be easy, thinnly-capped builders are notorious claim generators. By mid-decade, builders were the rock stars of real estate and often got (that is, their lenders got) what is called “early-start” covergage, which the title insurer was often underwriting on the builders’ financial condition rather than on title principles. What seemed like an OK idea in 2005, wasn’t so much by 2006 when builders [accelerated] their non-payment of subcontractors.
Bankruptcy court can hand out some very rough justice to title insurers. Transaction volume is way down. Premium volume is way down for that reason, and because falling values affect premium prices. Falling property values also make claim severity much worse – title insurance claims can be a way for a lender to make up for an over-leveraged loan. And finally, like a lot of other businesses, there is much less experienced senior staff than five years ago.
Finally, I haven’t seen much data on this, but I suspect there is another major area of new claims working their way through the system, which I described briefly above. Multi-state title agencies became common in the last decade, and I don’t mean “Tri-state” title type places. It was relatively easy to become a 38 state agency (the other 12 had prohibitive costs of entry in one way or another). It is very difficult to underwrite policies 38 states well*. Laws are too different and deceptively similar laws can have wildly different effects and requirements. Many of these national agencies, while writing for the nationals and seemingly accountable, were in fact dictating to them. (*Important note: title is the only insurance I am aware of where the agent rather than the insurer writes the contract binding the insurer*).
Like originate-to-distibute “lenders,” large agents had the insurers competing against each other for lower overall premiums, better premium splits, looser underwriting rules and agent services more oriented toward footprint growth than toward technical underwriting issues. Like everybody else, it was “close now, worry about problems later.”
Is it later yet? See this link for Bridgespan Title, an early blow-up in the subprime vendor universe. http://www.alta.org/indynews/news.cfm?newsID=198
If banks are allowed to indemify the title insurance company then the homeowner is up against three entities on his own if there is a problem in the future. The bank and title insurance company with the support of the federal government will be opposing a homeowners claim. Good luck homeowner.
I am always disheartened to see articles or blogs about title insurance in which the bloggers or commenters obviously know so little about what they speak of. Title insurance is one of the best deals going for consumers for many reasons.
When people say title insurance is a scam or pays out so little or that title insurers take on no risk, it is clear they do not understand the product or what it does. It is not good to fail to understand something and then spread the misunderstanding publicly, as has been done here. For your information, some title insurers are now reserving up to 10% of premium for losses, due to the economic times. Latest figures for property casualty are in the 60’s. Why the difference? A little bit of research will show that title insurance is a claims AVOIDANCE line of insurance. Like boiler insurance, where boilers are inspected to make sure they will not blow up and claims are very low (thank goodness!), title insurance operates in much the same way. Do you know people who want a title claim on their house? Their most important possession? Of course not! So title insurers search the title to property, as well as numerous court and other records to discover AND FIX problems with the title BEFORE closing. In fact, in about 40% of all transactions, a problem is found and identified prior to closing. That means the claim is resolved beforehand and the consumer never even knows it happened! What a great service!
Please reread what I just said so that it’s clear. The majority of claims happen before the closing because problems are identified and fixed so that consumers will not have to suffer through most claims later on as homeowners. Many of these claims involve recent problems with title, such as lenders who failed to release mortgages of record. Others pertain to foreclosure issues, tax problems or other types of liens. Most are found, fixed and resolved before closing.
What title insurers do is the equivalent of the homeowner’s insurer cutting a tree branch before it destroys the roof of the house or the auto insurer fixing a car’s brakes before they go out and cause an accident. They save heartache, trouble and avoid most claims. I would argue that is more valuable to consumers than other types of insurance that allow the claim to happen. Most of the premium goes into this claim avoidance and curative work which is performed, usually, by the title insurance agent, who gets most of this premium as compensation for the important work performed. That is why there is less paid out with title insurance than other lines. Which way would you prefer? Put less into claims avoidance and let the claim happen to most American families or spend most of the premium dollar to fix the problem up front and help people avoid a title claim? It’s a no-brainer.
Moreover, I’m sure you discovered that title insurance is not paid annually like other lines of insurance. It’s paid only when you purchase or refinance a home. Let’s say you pay $1,000 for title insurance and $1,000 a year for homeowners and auto. You own a home for 15 years. Over that time, you pay only $1,000 for title and maybe up to $100 gets paid out in claims for matters not identified and fixed prior to closing. So you spent $900 to resolve most of the title problems beforehand, which was good for 15 years or $60 per year. Does that sound overpriced to you for insuring your most important asset? Now look at what you would pay for auto and homeowners. For 15 years, you would pay $15,000 to each company and they would pay out (at 60%) $9,000. (This is generous since many people (like me) never had a claim at all on homeowners and only minor auto claims). In any event, the homeowner wound up “losing” $6,000 over 15 years which comes out to $400 per year. Now which type of insurance is cheaper? It’s obvious to see title insurance is the better bargain.
Furthermore, and this is the clincher, you may not know that the existence of title insurance saves homeowners approximately $16 billion per year in the United States in lower lending costs (per information put together by the American Land Title Association). Because of title insurance, US lenders have less risk and are willing to give mortgages at lower costs than in other developed nations where title insurance doesn’t exist. This is an added monetary benefit of title insurance. I could go on and tell you how title insurers collect hundreds of millions of dollars in child support and delinquent tax and other payments, but I think you get the idea.
As far as title being overpriced, I haven’t heard consumer advocates saying that as much the last couple of years with thousands of supposedly overpaid title insurance agents going out of business due to the economy. We have lost some title insurers, as well, and most lost money two years in a row. Title insurance is a cyclical business and if it was so easy to make money, there would be many more than four national families of title insurers.
Apparently, some people would prefer that title insurance doesn’t exist and that nearly 50% (remember problems are found in title in 40%of all transactions before closing plus another 5-10% later) of homeowners have a title problem that could take thousands or tens of thousands of dollars to fix (plus attorney fees and litigation costs!) and put ownership of consumers’ homes at risk. They also want lenders to assume the risk of a title defect, thus forcing lenders to raise interest rates on every loan. The result would be that consumers would pay far more for mortgages than they would ever save by not paying for title insurance. Throw in the risk to 50% of consumers’ homes and you have an expensive, gut-wrenching and potentially devastating hardship created for American families. You still think title insurance is not valuable?
Interesting topic… I wonder if things will turn out that way or not.
Sad note – Grayson lost the election tonight. Sad to see indeed, since Grayson was someone who truly represented his constituents and fought for the little guy in this foreclosure mess.