"Cloud on title" is an industry term that describes situations in which the ownership of a home is unclear. One could say there's a cloud on title insurance generally today, given the Biden Administration's proposed title waiver pilot, the questions it raises and the broad spectrum of responses to it. Nothing about title insurance these days is black and white — it's more many shades of cloudy grey. While the pilot only covers one tiny portion of loans, it has reopened a debate that has gone on for years: whether title insurance as currently constructed is useful.While both the Mortgage Bankers Association and the American Land Title Association are vocal opponents of the Biden proposal, Doma, a title underwriter (which is in the process of selling itself to another firm primarily because of financial issues) and the group representing small and mid-sized mortgage bankers, the Community Home Lenders of America, are supportive of the White House program.Opinions are vastly split. Mat Ishbia, the outspoken president and CEO of United Wholesale Mortgage, asked on his 3 Points video of April 2, why a borrower must pay $1,500 to $2,000 for a lenders' title policy."What are they really getting for that $1,500 or $2,000, right? It's going to be disrupted; title will be disrupted," he asked, adding that the credit reporting system is also ripe for change.Fannie Mae and Freddie Mac are looking at ways to save the consumer money, whether it is on title, credit or elsewhere."A lot of things are going to change over the next 12, 18, 24 months around these things," Ishbia said. "If the only way they're in business is because they've always been in business rather than actually providing a value to the consumer, watch out because disruption usually comes in."Lenders paying lender title insuranceThe Consumer Financial Protection Bureau, which posted a blog decrying junk fees in the mortgage process, including title, is reportedly considering making lenders pay for their portion of the title policy.But that could end up helping lenders rather than benefiting consumers, warn a number of observers, including Bose George, an analyst at Keefe, Bruyette & Woods, most recently in an April 14 report.If lenders had to pay, the premium is likely to be rolled into the mortgage. While large lenders could take advantage of their size and negotiate down the costs of lender title insurance, that is only likely to further consolidation in a business where 83% is controlled by four companies, he said.Originators could try to emulate Rocket Mortgage, whose title agent affiliate Amrock has a 70% penetration rate on refinancings the company closes. As an agent, the lender could capture more of the premium revenue."However, this outcome might be another reason why regulators might not want to change the system to one in which lenders are controlling the lender's title insurance process," George said.George noted the political opposition to the Federal Housing Finance Agency title waiver pilot and suspects the same for this idea, especially given CFPB's own statements on the benefits of the TILA-RESPA Integrated Disclosures. "Given the strong political opposition and the uncertain benefits from not allowing borrowers to pay directly for lender's title insurance, it remains unclear if the CFPB will eventually choose to make this change," he said.Potential disruptors past and presentTitle has been a long-time target for those who think they could provide the coverage in ways they claim are better and cheaper.Radian, which today owns a title underwriter, once tried to undercut the industry it is now a part of in 2001 by offering Radian Lien Protection, a mortgage insurance pool policy, as an alternative.But when RLP was banned for sale in California by the state's insurance regulator in June 2002 at ALTA's behest, the product was pulled from the market.Now, the CHLA commended the Federal Housing Finance Agency for reviving the title waiver pilot, which had gone by the wayside in August 2023."CHLA applauds FHFA for this title pilot as it could save homeowners thousands of dollars when refinancing their home," said Scott Olson, its executive director, in a statement. Fannie Mae is putting out a request for proposal for the title waiver pilot, it announced on April 12.Doma said it was working with Fannie Mae on some form of pilot; the sale to Title Resources Group, if completed, is not expected to affect that, George, the Keefe, Bruyette & Woods analyst, said in a note on the sale.The 2008 bankruptcy of LandAmerica, a national underwriter, is a reminder that things can go bad in the title business. Doma's sale after never being profitable as a public company is another example. Among the alternatives already in the market to the lender's policy is the attorney opinion letter. While opponents have made it very clear that their opinion AOLs are not the same level of risk mitigant that title insurance is, the Biden Administration's title waiver pilot lumps the two in the same boat, saying in those limited circumstances that the program applies to, neither one is needed to be obtained by the borrower.Some of those promoting the use of alternatives recognize that it is not an either/or proposition, that circumstances exist where title insurance is the better option.Diane Tomb, CEO of the American Land Title Association made the group's position about attorney opinion letters clear: "They just don't give the full coverage that someone would need. They're unregulated. Look, at the end of the day nobody's not getting into a house because of title insurance."At Voxtur Analytics, the company recommends whether the transaction needs a title insurance policy or if an AOL is sufficient based on what is the best execution in terms of protecting both the borrower's as well as the lender's interest.And the second consideration is "what is the best price, because on some of the lower cost loans, [an] AOL is not always the cheapest route," said Jim Adams, the head of title at Voxtur Analytics.. "I don't think focusing on one product is best for the consumer, that's why we focus on what's best, how are they protected the best and then what is the lowest cost."An existential crisis?A recent LinkedIn posting from Jeremy Potter asked some serious questions about title insurance's role and what needs to be examined."Why does the lender need insurance when the buyer already buys title insurance (or visa versa)?" he wrote. "Why does the lender's title insurance costs or the elimination of lender's title insurance put the consumer at risk? Why isn't the seller and seller's real estate agent responsible for clearing title when bringing a new home to market? (Isn't it their asset to make good for the market?)"Potter comes at his questions as a person experienced not just in the mortgage industry — he is a former Quicken Loans and Norcom Mortgage executive — and a technology expert having worked at Stavvy (once a participant in Flagstar's Mortgage Tech Accelerator). He is currently a board member of CATIC, one of the independent title underwriters.Part of the argument against title insurance is that the claims payment rate is only around 5%, according to a 2023 Urban Institute article. But industry supporters argue that the product should not be compared with other types of insurance, which protect against risks going forward.Those products typically pay out 70% or more. Opponents to title insurance argue that difference "suggests that title insurance companies are vastly overcharging consumers to purchase the insurance that protects the lender," said Mitria Spotser, vice president and federal policy director at the Center for Responsible Lending, in an email.Title insurance only covers any claims made that occurred prior to the policy being purchased, the tail as it were, said ALTA's Tomb."Things don't always show up in the public [record] search," Tomb explained. "It could be a divorce, it could be child [support] payments, [or] someone wants to cash out in a marriage and they take [the other] person's name off the deed, those types of things."For the average home purchase price, the typical price of a title insurance premium is less than 0.5% of the total life-of-loan costs, an ALTA study said. That works out to $1.89 per month if the mortgage lasts 15 years, Tomb said.Potter said the cost of title insurance is baked into how much work it took to get as much clean data as possible about the property.What is changing is the use of technology in the process. "That's where the tension seems to exist today," he said. "Certain innovators, technologists, some from within the industry, some from outside the industry, are coming in and saying, 'well, we can get better data faster, we can get cleaner data to you from the source that may bring more efficiencies. Shouldn't that bring a lower risk, thereby a lower price and a lower cost?'"Title insurance costs don't necessarily put the consumer at risk, CRL's Spotser added, but they appear excessive, especially given what was termed "the minimal amount of effort" needed to check for encumbrances on the property in today's environment."In the old days, a person would have to go to the county courthouse to research deeds and property descriptions to ensure the title was proper," Spotser said. "In the modern age, that information is often available online with little effort."Despite the increased use of technology in the search process, title insurance costs have continued to rise, Spotser noted.The differences between borrower and lender title insuranceComplicating matters is how title insurance is sold in 49 states as well as U.S. territories. As currently constructed, title insurance involves two policies, the sale of which are typically bundled. One of the policies, typically the new owners', is sold on a discounted basis. But it is the lenders' policy that is required by lien holders and the secondary market.Under current guidelines, title insurance, including the owners' portion, is subject to shopping by consumers, at least as envisioned by the supporters of the RESPA-TILA Integrated Disclosures. But not much of that goes on."One of the questions is, are we going to see more shopping if we elevate the owners' policy as being the required one?" Potter asked.However, the logic behind separate lender and owner policies is that they cover different risks, Tomb said. The lender policy covers the validity and priority of the lien, "and the coverage related to that lasts as long as the mortgage remains outstanding."The owner policy protects against financial loss due to any title defects. So any challenges to the ownership of the property is covered. "In a market like right now, we have a lot of seller impersonation and a lot of fraud and it's a one-time fee," Tomb said. "The coverage lasts as long as the homeowner or the heirs have an interest in the home."The value of coverage for the lender also decreases as the balance is paid down, said Adams. If the borrower refinances and the value of the property goes up and gets a larger loan, that older coverage would no longer be sufficient for the lender's interest. That explains why a new lender's policy could be needed in a refi situation.It also supports Tomb's point that the interests of the beneficiary of those policies are different, and so two separate policies are needed, Adams said.But Theodore Sprink, the managing director and founder of iTitleTransfer had a far different opinion.Having two policies is not necessary given that the bulk of the work, between 90% and 95% is for creating the lenders' coverage. The owners' policy is really an upsell for the title insurers, he said."I do think they should be consolidated," said Sprink. "That's what iTitleTransfer did. We have the same loan closing platform that includes the coverages that are equal," not just for the lender and the borrower. It also follows the mortgage as it goes through the secondary market.Seller obligations (or lack thereof)In his post, Potter also asked, why does the buyer have to clear title in the first place and shouldn't it be the sellers' responsibility?Potter did note, and Tomb confirmed, that in 26 states, it is the sellers' duty to make sure the title is marketable.Furthermore, when it comes to clearing the title, the real estate agent doesn't really have that expertise, Tomb said, because it's not something that they do normally and a lot of follow up work needs to happen.She pointed out again that the sellers' owners' policy does not cover any issues that arise after they first purchased the house."Life happens once they move into this house," Tomb said. Most mortgages are between seven and 15 years old."There's a lot of things that happen; people remodel and they may not have paid off the builder and they have a lien against the house," said Tomb. The property ownership could be up in the air because of a messy divorce, or one of the people on the deed owes child support.But the bundling is part of the issue regarding the cost, Potter said."One future version is you actually pay for the work to clear it rather than an insurance policy to cover it," Potter said. "Or the calibration of those two is more calibrated around level of effort rather than just insurance premiums."The unique case of IowaTitle insurance cannot legally be sold in Iowa, a result of state laws passed after underwriter failures in 1947. The current system where a state agency serves that purpose evolved in 1985 as Fannie Mae and Freddie Mac started playing a larger role in the housing market.The level of comfort the government-sponsored enterprises have with this is due to Iowa Title Guaranty using ALTA forms for the protection it provides, said Dillon Malone, the agency's director.In Iowa, the system works because of the way records have been kept, especially since 1947, with a strong history of abstracting and attorney title opinions."We have a really clean property title system," Malone said. "Being able to create a system that sits on top of that existing tradition, and provides those additional coverages for a smaller fee, I think that's what really makes it work. It makes it work well."ITG's revenue that is in excess of its operating expenses and claims reserves goes to support low-income and first-time home buyers in the state, Malone said.Iowa's title guaranty business is not being done to make a profit, "but we're doing it to ensure the real estate stays stable and steady and then also helping those folks," Malone said.Could Iowa's systems be replicated elsewhere? James Carney, a lobbyist and attorney with the Iowa State Bar Association, noted that other states, like New York, and even other countries, came to look at how Iowa's title system works.But the level of record-keeping just isn't present elsewhere, and documents that might be at county recorders in Iowa are instead kept by the title underwriters.Because it uses ALTA forms, Iowa also has both lender and owner policies, but the latter is typically provided for free, Carney noted.Tangled titlesIf all records were kept perfectly, the issue of tangled titles would not exist. A tangled title describes when a property owner dies without a will and the home passes through several generations, but the current occupants do not appear on the deed.As a result, the property is considered owned by all the heirs, whether or not they have lived or paid taxes on the home.A Pew Charitable Trust study found that more than 10,400 homes have unclear legal ownership in Philadelphia alone, with a collective value of more $1.1 billion.An April 2 blog post by the FHFA's Sophie Cooksey, Sidney Carter and Sally Tran of the Division of Housing Mission and Goals call the problem "heirs' property" referring to land or real estate that is inherited without clear title or documentation of ownership."This form of property ownership can cause families to be ineligible for financing or government programs, or lead to challenges retaining the inherited property."The authors cited one estimate published in the Journal of Rural Social Sciences using 2021 data that identified 444,172 heirs' parcels in the U.S., totaling approximately 9 million acres of land worth over $41 billion. Rebuilding Together, which has gotten funding from the Wells Fargo Foundation, has worked in that city, as well as Baton Rouge, Louisiana and Kent County, Maryland, helping residents looking to fix their title situation.It is a very time consuming process to resolve these issues, said Stefanie Seldin, CEO of Rebuilding Together Philadelphia and an attorney, noting that even situations have arisen where a will exists but transferring title is impossible.One of the reasons why consumers come to Rebuilding Together is because they are looking to make home repairs, but without a clear title it is a difficult task."Home repair providers want to make sure that, especially if they're providing the home repair for free, that the homeowners have true title in the property, so there's no risk of it being stolen or not being able to pay their real estate taxes," said Seldin.Rebuilding Together has attorneys that are doing the curative work for free. ALTA has also been working with families that have been impacted by tangled title issues, Tomb said. ALTA is also one of the named supporters of a pair of bills recently introduced in the House of Representatives addressing the complications around heirs' property.In the FHFA blog, the authors said the Federal Home Loan Banks of Atlanta and Dallas each have allocated $1 million of funding to help resolve these title issues; in 2024, the FHLBank-Dallas doubled that to $2 million.Fannie Mae's 2023 Equitable Housing Finance Plan also includes actions to address heirs' property, the blog said.If all the records were cut and dry, the need for this type of work would not exist. Yet at the end of the day, these owners, while getting a cleaner title, title insurance is usually not part of the package.The cost and profits in title insuranceThe title business isn't necessarily always a big money maker, as profitability reports from the publicly traded firms showsBesides his work at Voxtur, Adams also owns a title company in Nevada and in the past two years he has had to make capital calls on himself. Legal issues also abound, as the company is the target of lawsuits.Even in the best of markets, the title company's profit margins were just 15%. "Because I have the cost of sales, I have the cost of an escrow officer, I have the cost of assistants, I have to have brick and mortar, I have to have title searchers, I have to buy into a title plant, I have to have [errors and omissions] insurance because I get sued all the time," Adams said. "So our profit margin is so thin at the rates that we charge."He finds it odd that people are looking to reduce the cost of providing a marketable title when the entities doing the work and being guarantor are not making a lot of money on the deal."There are a lot of junk fees that are charged by lenders," Adams said. "There's a lot of the loan fees in general are high," such as fees charged to draw transaction documents for example."I think there's a lot of ways we can look at driving down the cost of whether it's homeownership or refinance. Or just title insurance," Adams said.The basis for the formation of Sprink's iTitleTransfer, was an ALTA paper noting that in 75% of the searches, the property had a clean title.Using his experience in the title business at both First American and Fidelity National, Sprink said he assembled "five different insurance policies to provide full coverage, essentially the same as title insurance, but did it through outsourcing no brick and mortar, very limited staff, where we could do essentially the same thing for about a third of the price."His company created a 12-component closing platform, and it does include an AOL as a part of the umbrella coverage."I spend a lot of my time trying to promote the facts, [to] inform [and] educate lenders, loan brokers and Realtors that we do all those things, all of our insurance coverages are essentially equal to that of title insurance," said Sprink. "One of the things I built into our platform, and particularly the attorney opinion letter that is one of 12 pieces, is that we insure the lender, borrower and successor of interest, the investor."Sprink compared the proposed title waiver pilot to that of the waiving of appraisals for certain GSE transactions."That is not the FHFA, or Fannie or Freddie attempting to become a de facto title insurance company," Sprink said. "That is the most puffed up, overblown argument ever."The government is trying to save time and costs in originating and closing loans, much in the same way appraisals are being waived through the use of technology, he said.Its product is different from title insurance but the net effect in terms of coverage is the same, he said. If in doing its work, iTitleTransfer finds through its risk scoring system any issues exist, it hands the transaction off to an affiliated title agency."You talk to 100 Realtors, you won't find one that's ever had to deal with a claim [or] a problem that prevented origination or closing," Sprink said.
