NATIONAL NEWS

Rumors that the title insurance industry is corrupt and overpriced are the talk of the town. And as more and more title companies go out of business due to the Real Estate downturn, some are concerned that the industry is in trouble. But is this true?

In the wake of the housing bust, the title insurance industry is under scrutiny, as reports of title companies overcharging customers, using illegal business practices, and being forced out of business are making headlines across the nation. So what’s the real deal?

“This has been the worst downturn in 25 years,” says Sam Ingram, president of myClosingSPACE.com. “The Real Estate industry as a whole has been hit really hard. Typically, if the doors are open and lights are on, we’re doing well. But lots of doors have closed in the title insurance business these days.”

According to Charles Clawson of Noble Title Company, as more title companies go out of business, more title agents are left without a clear career path. “Title companies are either closing down or they’re laying people off,” he says. “Because this is a very specialized skill, it is hard for them to find employment. Escrow and title skills don’t transfer easily to other occupations.”

To add salt to the wounds of an already hurting industry, title companies are also facing harsh criticism from both the government and the public, as allegations of inflated prices and illegal activities abound. Recently, a group of title insurance companies—including Fidelity National Financial and LandAmerica Financial Group Inc.—faced antitrust suits alleging they set artificially high rates in New York. The lawsuit states that, while state law allows these companies to set title insurance rates collectively through a rate-setting organization, the defendants included unregulated and unauthorized costs within their set rates.

However, title companies are not taking these charges lightly. The companies involved are fighting hard to prove that they are innocent. And Charles says it is likely that they truly are. “The lawsuit relates to price fixing, which is ironic given that all states require title companies to file their rates,” he says. “It was the state that required companies to get together and coordinate their prices originally. I don’t think it was their intent to fix prices. Even in Nevada, title companies are more likely to charge less than overcharge due to tremendous competition. I don’t think people are getting overcharged at all.”

The way the insurance is sold is another major criticism. Legally, borrowers can purchase title insurance from whatever company they choose. But in reality, the insurer is usually selected by the Real Estate agent or lender, both of whom are heavily marketed to by title insurers. While many of these marketing practices are legal, some are not. Kickbacks, free vacations and special perks are illegal activities that are very common in the title insurance industry.

“The reality is that most title companies give kickbacks to agents—some have found legal ways while others do it illegally,” says Sam. “This has created a bloated fee at the closing table in the form of document preparation fees, delivery fees, etc. As this happens over and over, customers get charged hundreds of extra dollars in fees.”

Law-abiding title companies complain that companies that use these tactics make the industry as a whole look bad. “This is a sensitive subject with me because my competitors pay kickbacks to REALTORS®,” says Charles. “There are not enough government regulators to investigate every infraction. The legislation is in place but there’s not enough manpower to enforce the legislation.”

Fortunately, as the recent housing bust puts the spotlight on abusive practices, customers are becoming better educated on the closing process and what title insurance is all about. And with companies like Noble Title and myClosingSPACE.com, which market directly to consumers, title companies can no longer hide what they are doing from their customers. Neither company relies on referrals from brokers or attorneys, nor do they offer kickbacks to get increased business. Both charge a flat fee for title and settlement services and add no hidden charges during the closing process.

According to Sam, Real Estate agents are increasingly looking for this type of business model. “We started out by marketing directly to consumers,” he says. “But we found that when a consumer came to us, they brought their agent, broker or lender to us, and they loved our model. We now have another side to our business to manage these relationships. Agents get the satisfaction of knowing that they will save the customer money, and they’re more likely close on that deal because of it.”

Charles believes that working with consumers will help debunk any myths about the title insurance process. “The biggest benefit is helping educate people as to why they need to use a title company and what they need to look for in a title company,” he says.

Most customers never consider the importance of title insurance because what they have purchased is a safety net. However, without this safety net, the possibilities are frightening. A person could buy a home and have someone show up years later, legitimately claiming to own that property. Title insurance protects customers against that, as well as liens, claims, easements and flawed deeds.

Charles adds that title insurance also allows mortgage companies to lend money that is secured by a real property. “Many people have multiple mortgages on their properties,” he says. “In the event of foreclosure, the first mortgage gets paid in full before the second. So lenders really care about their position, as that’s how they get paid in case of default. Title insurance lets lenders know they are insured in a position. When you understand how title insurance works, it is easy to see how consumers and banks need title insurance.”

Both Sam and Charles agree that the bad apples in the title business are causing hardship to the rest of the industry, but they are confident that the legitimate operators will come out on top.