All right. No dancing hamsters today. Title insurance.
Jonah Ottensoser: “If I buy a house without bank financing and have the title searched and found to be clear, is there still a need for title insurance? It would seem to me that this insurance is somewhat of a scare tactic on the part of lawyers/insurance agents to cover events that are possible but very remote. Thank you.”
Title insurance protects against screw ups by the title examiner — you had the title searched, but what if something was missed? — and against things that even a diligent examiner could not pick up. “Yes, such things are remote,” says my lawyer, Alan Marcus, “but still possible. Like fraudulent documents, unsatisfied liens, fraud on the conveyance, liens or other title matters that arise from the time that title is certified to until the actual deed/mortgage is recorded.” Alan is paid to be cautious, but that is not such a bad thing. Further, he says, when you go to sell, the title policy can serve as a base for updating the title, saving $100 or $200 in abstracting costs.
Alan says he considers himself a thorough examiner, but that he will not represent a buyer without title insurance “except in very rare cases” and then only after being indemnified by the buyer.
So the short answer is . . . this is probably not a place to skimp. (Depending on the state, it may be a place to negotiate. In states where title insurance rates are fixed by law, you may be able to get your lawyer at least to throw in the rest of his services for “free,” because of the cut he takes on the title insurance.)
One of the criticisms of title insurance is that the “pay-out” is very low. But unlike most policies, where you hope the insurers might pay out, on average, close to a full dollar for every dollar they pay in (supplementing their profits with the investment income they can earn on your money between the time you pay the premium and the time, months later, you have an accident or a fire, and weeks or months or years after that when they actually pay you) . . . title insurance is different. There, in an ideal world, the pay-out would be close to zero. What you’re really paying for is legal research, to be sure the title is clear, plus something for a guarantee of that research.
The real criticism I have is of the archaic title system in the first place. Hello. We have computers now. We have networks and the Internet. Why can’t all these title records and “liens” and so forth be digitized and organized and coordinated in such a way that each successive title search, unless something unusual crops up, costs $25 or something?
And speaking of unusual, I offer one cautionary tale. Some years ago, I lent some money at a very attractive interest rate secured by a first mortgage on a condominium in Connecticut. Why would the borrower pay me 13% (or whatever it was) when a bank might have then charged 9%? Well, banks don’t like to make loans they might have to foreclose on, I guess. I didn’t want to have to foreclose, either, but was assured by the mortgage broker — a very decent sort, and partner of a friend of mine — that there was more than enough value in the condo to secure the loan, even after all the awful costs of foreclosure, should that ever be necessary. (Foreclosure is not a simple or inexpensive process. You have to assume the property will come back to you needing major repairs, missing major appliances, sit empty for months while you try to figure out what to do with it — and so on.)
Month after month I’d get these great checks, and then after a couple of years the mortgage came due but they hadn’t quite done their refinancing, so after a few months I said I was sorry, but the interest rate had to go “to the maximum rate allowable by law” — that’s how these things work, which meant now I was getting even bigger checks every month, even as the general level of interest rates had fallen. And then one day the fellow I was dealing with — the mortgage broker — was dead and it turned out that he had done a very bad thing. He had arranged to have the mortgage paid off. But then instead of sending ME the money, he had kept it in his mortgage company, paying those monthly amounts out of the company’s own pocket. Well, paying me with my own money.
But how could the mortgage be satisfied if I never signed a satisfaction? The borrowers maintain that the mortgage guy, now deceased, had been acting on my behalf and that his fraud in not passing the cash on to me was not their problem. My feeling is that, hey, if a mortgage remains on the county records — as mine did — then it’s not my problem, it’s theirs. Well, not theirs, really — I feel for them and obviously don’t expect them to pay the mortgage twice — but perhaps their lawyer’s or their title insurer’s problem? Might this be the kind of unusual circumstance title insurance is for?
I honestly don’t know the answer, but will, I suppose, eventually find out.