Like Him or Hate Him, Biden Is Right About Title Insurance

With some minor legal reforms, title insurance could be made entirely obsolete. After all, most industries do just fine without it. Few people buy title insurance for any other expensive commodity. Title insurance does not exist for boats, and it is not the norm for cars—even used ones. Of course, many will disagree with it: It is only natural to be suspicious of radical change.

The Benefits of Doing Away with Title Insurance Requirements:

Cost Reduction

Title insurance can be expensive, adding to the overall closing costs for borrowers. Removing this requirement would reduce the financial burden on homebuyers, particularly for those already struggling to afford a down payment and other associated fees.

Limited Value

Critics argue that title insurance offers limited value to borrowers. In many cases, the risk of encountering title defects or disputes is low, especially if thorough title searches and due diligence are conducted. Therefore, they question the necessity of mandatory title insurance. While most forms of insurance pay out 70% of premiums into claims, title insurance companies pay out only 5%. The GSEs, Fannie Mae and Freddie Mac, could easily absorb this cost with a tiny adjustment to their guarantee fee—even if they can only protect the banks because of charter restrictions surrounding their participation in the primary mortgage market.

Market Competition

Removing title insurance requirements could promote competition among title insurance providers. Without a mandatory requirement, companies would need to offer more competitive rates and services to attract customers, potentially benefiting consumers through lower premiums and better coverage options.

Consumer Choice

Some argue that borrowers should have the freedom to decide whether they want to purchase title insurance or not. Mandatory requirements limit consumer choice and may force individuals to buy a product they deem unnecessary or overly expensive.

Risk Assessment

Lenders typically conduct thorough assessments of the borrower’s creditworthiness and collateral before approving a loan. Proponents of removing title insurance requirements argue that this risk assessment process should be sufficient to protect lenders from any potential losses due to title issues, eliminating the need for additional insurance.

Alternative Protections

In some cases, alternative methods can protect against title defects or disputes. For example, escrow services can hold funds until all title issues are resolved, providing a layer of security for both buyers and lenders without the need for title insurance.

Regulatory Compliance

Mandatory title insurance requirements can add complexity to the lending process and increase regulatory compliance burdens for lenders. Removing these requirements could streamline the lending process and reduce administrative overhead, benefiting both lenders and borrowers. 

However, I am sure many readers object: Something as long-standing as title insurance must serve a purpose. As G.K. Chesterton once said:

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.

About the above statement

In the spirit of the above quote, let’s explain why the fence was erected as well as why and how we should discard it regardless. From before our nation’s founding until the early 1870s, people transacting real estate relied on conveyancers to research titles and provide the purchaser with ease of mind. The disconnected state of property records required a human being to research the property. Then, with the advent of several court decisions that essentially legalized borrow and ditch schemes, people decided that they needed additional protections. The most famous of these cases is Watson v. Muirhead. Here’s what happened: The Case: Mr. Watson purchased a parcel of land from Mr. Muirhead. However, Muirhead failed to disclose that there were outstanding liens against the property. Unfortunately, this omission led to legal complications for Watson. The Legal Outcome: The Pennsylvania Supreme Court ruled in favor of Muirhead, stating that Watson’s lack of knowledge about the judgments against the property was not sufficient grounds for him to prevail. Watson had to deal with the financial burden of the liens on his own. If sellers were responsible for disclosing all issues associated with title, title insurance would not be as necessary.

In conclusion

Centralizing and standardizing property records could largely eliminate the need for title insurance—this becomes esp. true if laws insisting that are passed making liens enforceable only if they are recorded in the system of record. While there have been interesting recommendations that titles be recorded on the blockchain, a Federally administered database (or series of state-administered ones) could serve the purpose equally well. Furthermore, laws requiring that anyone other than the current deed holder loses any claim to a given property after two years of not having paid taxes on it could simplify any concerns regarding forged or illegitimate titles. 

Of course, an exception may have to be made in Baltimore and Hawaii where leasehold arrangements are common. Furthermore, states that do not have property taxes might require that titles be challenged within a given two-year window and that after that the “deed and title database” becomes the document of record. However, with modern technology, all these problems are surmountable as long as the right legal norms are in place—esp. if you are dealing with standard houses and normally sized lots where easements and other such issues are not a concern. 

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published March 26, 2024