After years of historic growth, the housing market is beginning to normalize. Home prices nationwide fell between August and September, marking the first time prices have declined for three consecutive months in nearly four years, according to the Case-Shiller National Home Price Index.
As both the real estate industry and consumers prepare for what’s to come, it is critical that we do not take for granted the products and systems that have carried us through other cycles of economic downturn. While some are using the current market uncertainty as an opportunity to promote products that offer less protection under the illusion of saving consumers money, now is not the time to start embracing shortcuts to well-established processes and products.
Title insurance is one such proven product with a long history of protecting homeowners’ right to property. Before title insurance, property rights were not guaranteed. Until 1868, transactions were supposed to be covered by a conveyancer, but oversight was limited and not enforced. A homebuyer could lose their property due to unresolved issues not caught by an attorney, including liens and encumbrances.
But in 1868, a Pennsylvania Supreme Court decision led to the codification of the incorporation and regulation of title insurance companies into law. Today, title insurance protects millions of property buyers from threats to their property rights, including recording errors, unpaid liens, forged signatures on deeds, and fraudulent activity.
For over a century, the title industry has played a critical role in keeping homeowners safe and the real estate market healthy. Even though the industry has evolved greatly with title professionals now embracing artificial intelligence and automation when conducting title searches — our mission has never wavered: making the American dream of homeownership possible and protected for all.
According to economist Hernando de Soto, the author of The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, title insurance is the key to unlocking wealth in America. In many third-world countries, only a small percentage of people enjoy clear property rights. As a result, they have no ability to leverage their home as an asset to create wealth and more business opportunities.
The United States has harnessed the power of property rights because of the capacity and security the title insurance industry provides to transactions. De Soto believes the ability to own an asset and easily transfer it is what makes our country great, and why those from developing nations want to immigrate to the United States.
While we welcome and embrace innovation, recently, some title insurance alternatives have been promoted in lieu of title insurance policies — including certain attorney opinion letters (AOLs). These products, under the guise of reducing costs, shift risk to lenders and consumers, who will ultimately have less recourse, and greater costs, should their property rights be challenged.
These title insurance alternatives only cover title defects that can be found by a public records search, while title insurance protects against known risks and unknown risks not found in a search, such as federal tax liens, HOA liens, and fraud or forgery of title documents. Title insurance provides lenders and consumers with a defense — including all attorneys’ fees — of litigation in which a third party asserts a claim potentially covered by the policy, which alternative products do not.
Importantly, there are also real questions about how these alternative products will be regulated and who will provide oversight. Title insurance is rigorously regulated at the state and federal level, with statutory reserving and rate transparency requirements intended to ensure robust consumer protections, but emerging products lack a similarly comprehensive regulatory regime.
Title insurance is — and will always be — essential. For a one-time fee paid at closing, an owner’s policy protects a consumer’s property rights for as long as they own the property. While title insurance rates vary from state to state, at five years, the daily cost of coverage for a $400,000 home is about 77 cents per day. At 10 years, the price drops to 38 cents a day. By the time a 30-year mortgage is paid off, just 13 cents a day ensures a family will never have to worry about significant financial loss due to a covered title defect. The benefits and cost of title insurance compared to other products is unrivaled.
As we brace for the uncertainty that 2023 has in store, one thing is for certain: the title industry will not stop advocating for the protection of American consumers and the safety and soundness of the real estate ecosystem. Our industry will continue to educate, advocate, and innovate to minimize risks to both consumers and lenders.
Diane Tomb is the CEO of American Land Title Association (ALTA).
