Title insurance emerged more than a century ago. It had a purpose: to stop swindlers from cheating buyers, by ascertaining that land was, in fact, owned by the person selling it.
Since then, it has grown into a multi-billion-dollar business.
And while today’s title insurance industry ostensibly protects homeowners from defects in their deeds, some believe it has been rendered practically obsolete in the digital age. Today, a record search can be done for less than a tenth of the prevailing rate of title insurance—which can exceed $2000, depending on the home’s price and the state in which the property sale occurs.
Outdated and Overpriced?
Imagine you’re refinancing your home. Check out the price of the title insurance you might expect for your own state and township with this calculator from First American.
You will pay for this insurance in order to comply with the rules of secondary mortgage companies, and a dated set of state laws. Many of these laws first took effect in the name of consumer protection, after a spate of Depression-era insurance company bankruptcies left buyers stranded with their title claims. Even today, most states prohibit general insurance companies from moving in on the title giants, or from providing guarantees tantamount to title insurance.
Thus insulated from normal competition, title insurers slid into a troubling history of inducing mortgage reps, developers, and real estate agents to steer business their way.
California-based First American TitleTM is the industry’s largest company. First American started copying and delivering records back in 1894, and became a title guaranty provider in 1924. Today, First American makes heavy use of automation and offshore data entry personnel. It is highly unlikely to overlook missing heirs, unknown easements, outstanding liens, or any glitches in the public records. Modern technology has made latent defects in deeds—and thus insurance payouts—rare.
Yet the industry continues to profit greatly, for reasons increasingly out of step with the times.
Owner’s Policy Sold Separately—Except in Iowa
If home buyers need any further reason to question the monopoly of a handful of title insurers throughout the country, here it is. These companies are selling the buyer a lender’s title insurance policy. This protects the financial institution, not the buyer, from incurring costs should any unknown title claims arise after the closing. Thus, the homeowners foot the bill to cover their mortgage lender’s peace of mind and not their own.
Buyers can get title insurance to protect themselves as well, but they have to buy that separately. There are, in other words, two types of title insurance products: the lender’s, which must be paid, and owner’s title insurance, which is typically optional.
Many buyers decide to obtain an owner’s insurance policy (indeed, the U.S. government encourages it) to avoid getting stuck with the costs of possible clouds on the title. Common problems that plague titles can involve past incidents of deed fraud or forgery.
Home buyers in Iowa are already covered. The policy from Iowa Title Guaranty covers owners at no extra charge, for houses valued up to $500,000, as long as the buyer intends to live in the home as a primary residence.
Why Iowa’s Model Stands Out
Iowa is unique. The state doesn’t just keep records of property transactions; it guarantees them.
In 1947, Iowa abolished title insurance. By 1987, the state had established Iowa Title Guaranty—the only title insurance purveyor allowed to operate in the state. (There are some exceptions. A buyer who opts to use an out-of-state lender might be paying a title insurance company based outside Iowa.)
Because the state is the insurance purveyor, an Iowa home buyer can have a title insured for around a tenth of what most people throughout the country are forced to agree to at closing. There are no title insurance agents needed, as state-certified abstractors perform a thorough examination of the home’s history. Any title issues must be remedied before closing.
In short, Iowa’s state-managed title insurance offers at least the same level of protection private companies do, for a fraction of the cost. For a residential transaction, $140 covers a title of a home valued at $500,000 or less, with an additional $1 per thousand for more expensive homes. Most endorsements are free.
The system’s profits are then re-invested in Iowa, to fund affordable housing initiatives for Iowans.
Nationwide Transformation to Come
The transformation made possible through digital advancements couldn’t happen to a better industry. Already, real estate title records, traditionally available to the public, are becoming truly accessible online. Today, it takes seconds to look up a home’s price and transaction history, appraised value, applicable taxes, and physical description. As property records become openly accessible, accurate, and comprehensive, title insurance would appear to be less of an imperative.
We can expect the trend to continue. For example, blockchain is poised to create solutions that improve title accuracy, and minimize the risk of defects. Once the blockchain records an accurate title, it will continually record and protect, in real time, every transaction to come. Should the real estate sector follow innovative counties and broadly adopt blockchain technology, homes will take on traits of liquid commodities. Watch for the title insurance industry to reinvent itself yet again, with big companies becoming data gatekeepers to stay relevant.
This transformation will take a few years to happen. Hundreds of counties are just starting to embrace online document recording and digital notarization. Yet the industry’s trajectory is already clear. In the real estate transactions arena, the tech disruption has only just begun.