I received the following in an email from a reader:
In August I found a brand new townhouse in a great location that is selling at about 5 or 10% below recent comps (and 15 to 25% off of what it would have gone for at peak). I still think I am going to end up underwater at some point in the next few years, but I can take the equity hit if I have to, and I don’t plan on selling (maybe not ever).
At the end of all of this, the builder can’t get title insurance. We were supposed to close last week, but the builder has been firmly rejected for title insurance twice—apparently this is happening to lots of builders. The rationale for rejecting him has been consistently that “title insurance companies have lost too much insuring builders already.”
In addition to being an example of the current aversion to risk everywhere, it is also another drag on actually getting the transactions closed. We want to buy, they want to sell, we’re one of the few with sufficient income and credit scores for the bank to want to lend to us, and the transaction is in peril because of title insurance.
Has anyone else experienced this problem? I haven’t heard anything in the major news outlets about a wave of title insurance problems killing closings.
If this is a widespread issue, it could certainly be yet another factor dragging the market down.
As much as I try to avoid the PI Real Estate Blog sometimes my morbid curiousity gets the best of me.
Larry Cragun has two or three posts on this topic, the most recent from today:
http://blog.seattlepi.nwsource.com/realestate/archives/154679.asp
HI TIM, IT SEEMS TITLE INSURANCE MAY LIKELY BE A BIG RIPOFF ANYWAY
The RE system has its hands in buyers billfolds a million ways and this attorney says Title Insurance is a ripoff and simply not needed:
See the proof:
http://www.alexanderinjury.com/blog/2008/09/title-insurancethe-great-ameri.html
maybe it’d be useful to describe the function and necessity of title insurance.
http://en.wikipedia.org/wiki/Title_insurance
sounds to me like it is insurance against fraudulent land titles purchased by the buyer of a property.
aside from it being ridiculous that this sort of thing exists at all, how is it the responsibility of the seller, and how can it hold up a purchase?
maybe scrow can enlighten us?
Wow. This is the first I’ve heard of title insurers denying requests for new policies on these grounds. I suppose it’s not all that surprising given the siginficant downturn in profitability the big 5 title insurers have recently experienced which is now leading to consolidation in the industry.
http://www.inman.com/news/2008/11/7/fidelity-landamerica-agree-merger
Anecodtally, I can say that I’ve got a client for whom I recently made a title insurance claim after the local V.P. said ‘oh yeah, this will be covered’ only to have it summarily rejected by corporate. The claim is definitely covered by the policy but they’re telling us to pound sand. One data point doesn’t make a trend so I can’t say whether they’re telling everybody to go fly a kite but I have a sneaking suspicion they’re telling moe and more people where to buy string.
HI TIM, IT SEEMS TITLE INSURANCE MAY LIKELY BE A BIG RIPOFF ANYWAY
Said Software engineer quoting a blog with no factual information.
Until you have been caught in between mechanics liens/encroachement, and a title defect from 15 years ago, I would suggest go to stewart/chicago which are the most reputable here, and get a copy of a title insurance policy and see what it covers.
Granted I know nothing about the case or the industry (which does sound like a complete rip-off with modern information searches), but this sounds suspicious. I can’t think of a reason why you would not be able to find some company who would not take your money for doing next-to nothing, unless there’s some actual problem with the title. Does the builder have a specific title company they work exclusively with or something? Either that, or maybe there’s something about the title for the particular property they’re not disclosing…
Title insurance is both a useful product AND a rip off. It’s there to protect consumers from “mistakes” on a title. This could include fraud and a whole lot of other things. It’s a rip off because the price for a title insurance policy is so disconnected from the claims they actually end up paying. Typically, it’s been about 5% of premiums. The rest goes to expenses, commissions and profits. Your typical auto or home policy pays out 60 – 70% in claims. The system has been set up so consumers don’t really get a chance to shop around, so there has been very little price competition historically.
If title companies are now seeing identifiable segments that lead to paying 20 – 30% of premiums as claims rather than 5%, it isn’t surprising they are refusing coverage to them. It’s a (poorly) regulated industry so they insurance commission could intervene if it becomes a problem.
Unlike auto or home which collects a large premium against future losses, title insurance collects a large premium in order to prevent future losses. The loss ratio is low because they spend 80 cents on the dollar to clean up liens, property line disputes, disputed titles through divorces etc. Lenders require it because otherwise losses would be much higher and they would have to charge much higher interest rates to cover them.
I suspect there is a defect on this title, or a history with this builder that is the real issue. But you have the right to pick your own title agency. Shop around, but ask the first agency what the real problem was.
The title insurer may actually be doing you a favor by declining to issue title insurance.
First off, nobody is REQUIRED to get title insurance. To get a loan the lender will likely require you to pay for their title insurance policy however.
Now, how is the title company doing you a favor? Keep in mind that title insurers are not casualty insurers. Casualty insurers insure against some future event wheras title insurers primarily provide coverage against matters that have already occurred. This could include forgery, fraud, vesting/ownership concerns, and this list goes on.
The matter that I will make the subject of this thread though is mechanic’s liens. This is very likely what is going on behind the scenes that you may not even be aware of. What most folks do not realize is that any time there is new construction there exists a higher probability of liens being recorded against the project.
Normally, you can determine the priority of encumbrances by when they are recorded. For instance, a Deed of Trust that recorded January of 2007 would have priority over a Deed of Trust (or any encumbrance that recorded today), assuming the priority was not affected by a subordination agreement.
However, the mechanic’s lien law is unique. Special circumstances allow for vendors and people that offered goods, services and labor on a given project to be paid for their efforts.
Although the specific details will differ from state to state, the general idea is that these folkshave lien rights that date back to either when the work commenced on the project or when they physically commenced work on the project.
The result is that these lien rights are not often recorded. The only evidence of new construction work in progress on a project is to physically observe the work. This requires someone to actually go out to the site and ofcourse will require an inspection fee.
The standard owner’s title insurance policy will only offer protection against mechanic’s liens when in fact the liens have been recorded.
So, an unknowing homeowner purchases a property that at some future date may have a bunch of mechanics liens recorded against it. Their title policy offers them know protection against these “hidden” and previously unrecorded liens.
The title insurer will only take on the risk of these future liens if it can be determined that the builder/developer is in fact solvent and has the liquidity and ability to pay any outstanding liabilities.
The fact that the title insurer is unwilling to take on this risk speaks volumes. If they are unwilling to take on the risk their is likely a very good reason you should not want the risk as well.
And for anybody (attorney or otherwise) making the statement that “title insurance is just a big rip-off” has not bothered to educate themselves on the subject. Did anyone catch that these comments were coming from a personal injury attorney. Now, if you want to insure the future existance of title insurance, you will allow a personal injury attorney to try to handle your title and escrow needs. Can anyone say “malpractice”. Why would anyone listen to a personal injury attorney on real estate transactions? would you go to brain surgeon if your heart was experiencing difficulties? Come on man!!
I have been in the title industry since 1985. I can state categorically that if you want title problems take it to an attorney that does not specialize in real estate and sit back and “enjoy your ride”.
I would also state that even the really good (and smart) real estate attorneys will call their local title officer and run the matter by them first.
ONCE AGAIN, THE LAW (nor title companies) REQUIRE ANYONE TO GET TITLE INSURANCE. IF YOU DON’T WANT IT, DON’T GET IT! But guess who will whine the loudest when it comes time to rely on the coverage that title insurance would have provided!
I’m calling shenanigans on this message. Who would voluntarily live in a townhome?
I find it very difficult to believe that the insurance company has no more specific reason than just “we lose money on builders”. Either there’s something wrong with this builder or this property, or at the very least this type of property in this neighborhood from this kind/size/flavor of builder. Have you tried calling some title companies on your to talk to them about this? If this is really happening then it seems the amount of leverage cash buyers (who can waive title insurance) have over builders is almost limitless.
It’s not just Title insurance, Mortgage Insurance Companies are making huge restrictions, and refusing to insure many mortgages. For the first time in several years, we’re seeing MI companies with their own sets of credit guidelines.
So obtaining a loan has become a 2 part underwriting process, one with a lender, and another with the MI company.
Also, I agree with Title Insurance not being necessary on refinance transactions. When a homeowner is not changing or transfering title in any way, there really is no basis for forcing them to have the insurance. Of course insurance companies will always have more money to lobby than the consumer ever will.
Hi Guys,
I can offer a very lengthy dialogue about title insurance, (I’m actually teaching the Land Titles class at Bellevue CC this quarter) but I’m short on time this week. Instead I’d like to quickly respond to the main topic.
The reason why that builder was likely denied title insurance is because he has not paid his subcontractors.
When a builer does not pay his subs, the title insurance company has to open up its checkbook and write a check to the subs in order to clear the mechanics liens off title, so that the lenders policy can be shipped to the lender.
Then, the title company asks the builder to reimburse the title company.
All builders sign an agreement with their title companies promising to pay their subs, and then further promising to reimburse the title company for losses suffered on behalf of the builder.
If the builder refuses to pay back the title company, the title company refuses to insure anymore of that builder’s product.
I’d say this story is a very good indication that the builder is nearing the end.
Buying into a plat or a condo project where the builder is about to have the entire project foreclosed presents a huge set of problems.
If the entire project forecloses, the legal description reverts back to the OLD legal, before the property was platted….long, messy title problems.
I would avoid purchasing in that project until the builder is able to secure title insurance from another company.
Unfortunately for the builder…..it sounds like that’s not possible.
Now you know why.
Jill, Which Builder Services title do you work with? IMHO A little of balance.
If a project is recorded at final plat, which is past that point when breaking ground of the actual houses occurs there is no possibility of it reverting to old legal.
The reason builders are not getting title insurance and or losing it, is when title sees liens show up on other properties that the builder has or on the underlying property, they stop insuring them, which is what two of the largest builders (not named) have right now on their hands.
Hi mukoh, I no longer work for a title insurance company. “If a project is recorded at final plat, which is past that point when breaking ground of the actual houses occurs there is no possibility of it reverting to old legal.”
What if the entire plat goes into foreclosure, or the entire condo project, and the legal on the builder’s construction loan describes the entire piece of property, before it was platted out?
In the scenario described in comment 15, I am hearing that there ARE title insurance companies that will issue the policy without paying off the lien. They just type the policy without showing the lien. This is risky but sometimes they will do it for builders who tell them that the lien is a frivolous lien filed by a disgruntled subcontractor.
By Definition: Plat is a subdivision, separate lots or attached. Once it is recorded lots have legal descriptions separately in county records. There is no reversal, this process is administrative. So Platted does not relate to condo buildings.
Platting in 85% of the cases is not done by the builder. It is done by developer, who in turn sells it to builder, after recording of course.
The legal on the loan makes no difference, as the property when it was platted or approved for construction, had a legal description recorded before construction.
Foreclosure has no effect on the legal description itself. Or else I would be buying them and people I know would be too.
The scenario in comment 15. Is that there are two giant builders 900+ units which have had two title companies pull their business, since liens showed up on their other projects post re-cordation of existing inventory sales, which bites title companies.
Disgruntled or contested liens can always be handled easily by just bonding around them, which I have done a plenty of.
Where you might be concerned about the possibility of prior lien rights eliminating a platted map of any kind would usually be when the developer has contracted for off-site improvements (roads, curbs, gutters, storm drains, grading, etc.), and it is true that a foreclosure of their prior lien rights would in fact eliminate the recorded plat.
This is actually happenning on a project I am involved with at this time.
Think of it like this- If you agreed to do work and a particular project, you only agreed with the understanding that the parcel was “X”, if at some future date the parcel has become “Y”, you never agreed to this (and your lien rights are superior to whatever came afterward, regardless of whether that is a platted subdivision, easement, or…
Liens do not change a legal description. A road building contractor can lien the whole of the project with the legal description of the development prior to the property being subdivided, but it doesn’t change the fact the property is subdivided. It simply makes it difficult/impossible to sell any of the recorded lots without most likely eliminating or bonding around the lien (assuming the title company will allow for a bond).