Title insurance offers inexpensive protection to both owners, lenders

Suppose you learned about title insurance, which pays out only about $7 for every $100 collected in premiums. Would you consider that to be an over-priced rip-off insurance scam?

Since most insurance companies pay out in claims far higher percentages of premiums collected, at first glance it appears title insurers have found the perfect way to earn big profits. But before you rush to go into the title insurance business, you should be aware title insurers spend most of their premium dollars researching titles and preventing losses from occurring.

HOW TITLE INSURANCE WORKS: A forged signature on a deed. A deed delivered after the grantor's death. A missing heir who unexpectedly appears. A deed signed by a minor or person of unsound mind. Mistakes in recording title documents. A defective foreclosure. Errors in indexing and copying. Liens for unpaid property taxes, income taxes and judgments.

These are the leading causes of title insurance claims. To protect real estate buyers and their mortgage lenders, two types of "peace of mind" title insurance are available.

One is the lender's title insurance policy, insisted upon by most mortgage lenders to pay off the loan if an unexpected title loss occurs. However, an owner's title policy pays the property owner if a title risk causes a loss of the owner's equity.

Depending on a local custom, a title attorney, abstracter or title officer will check local real estate title records to discover all documents affecting a property's title status. In many counties, this title search is now computerized for speed and accuracy.

After all documents affecting a property are collected, a photocopy of each is reviewed by the title examiner to determined its effect on a property. Title insurers spend approximately 90 percent of their premium dollars collected for expenses such as title searches. Their goal is to minimize title risks by discovering title defects before the title is insured.

THE NUMBER-ONE CAUSE OF TITLE LOSSES: But even the world's greatest title searcher can't prevent most causes of title losses. The biggest cause of title losses today is forged signatures, and few examiners can detect forged signatures on recorded documents.

Although signatures must be witnessed by a notary public before the document can be recorded, such acknowledgement is not a guarantee the individual signing is the authorized person. For example, divorced husbands have been known to ask their girlfriends to sign their ex-wife's name to a deed when the family home is sold without the ex-wife's approval.

In addition to forged signatures on deeds, it is not uncommon to find forged mortgage satisfactions and deeds of reconveyance which clear a home loan from the title. How is this done? Dishonest property owners have forged and recorded authentic-looking mortgage satisfactions or deeds of reconveyance shortly before selling the home, making it appear the property is owned free and clear.

When the home is sold, the dishonest seller pockets the sales proceeds and leaves town. Months later, the new homeowner receives threatening letters for overdue payments from the seller's lender, whose mortgage was never paid off. Who pays? The title insurer.

LENDER'S TITLE POLICIES DON'T PROTECT PROPERTY OWNERS: Most mortgage lenders insist on receiving a lender's title insurance policy. But it only protects the lender up to the loan limit.

The property owner does not benefit from a lender's title policy if a title loss occurs. However, for a slight additional premium, the property owner can obtain an owner's title policy to protect the owner's equity from an insured title loss.

To illustrate, suppose you bought a $100,000 home with a $20,000 cash down payment and an $80,000 mortgage. A year later, when the loan balance has declined to $79,000 the seller's ex-wife proves her signature on your deed was forged by her ex-husband, who now lives off the sales proceeds in Tahiti with his new wife. The title insurer will pay the lender the $79,000 loan balance. If you have an owner's title policy you will receive your $21,000 equity up to the $100,000 policy limit. However, if you did not obtain an owner's title policy you will receive nothing.

Lender's title policies remain effective as long as the mortgage is secured by the property. But owner's title policies insure the owner's equity, up to the policy limit, as long as the owner or heirs own the property.

IS TITLE INSURANCE A SCAM? Title insurance for a typical home costs about 0.5 percent of the purchase price. Local custom determines whether the buy er of seller pays the premium, but shrewd negotiators try to get the other party to pay.

Since title insurers spend about 90 percent of premium dollars collected on research and operating expenses, and pay only about 7 percent for title claims, they operate on very thin profit margins about 3 percent. Although title insurance may seem expensive, since real estate is the largest investment most people make, title insurance is quite inexpensive per year of ownership. Although title losses are infrequent, when they occur they can be catastrophic unless a deep-pocket title insurer is waiting to pay the unexpected major loss.

Published by ROBERT BRUSS in the Fort Myers News-Press, July 2003