FEATURE ARTICLE, JANUARY 2007

THE AMERICAN DREAM AND THE IMPORTANCE OF TITLE INSURANCE
Janet Minke

On February 4, 1789, George Washington was unanimously declared President of the United States by Congress. In his inaugural address — because of what he called “the experiment entrusted to the hands of the American people” — Washington predicted that the young nation would face many challenges. He believed that these could be overcome — not through executive power or individual success — but only by the collective hands of the American people. In other words, partnership would be the key to our nation’s success. Nowhere is this more evident that in the American dream of homeownership. By partnering with mortgage lenders, real estate agents and others, title insurance enables families to purchase homes, develop wealth, create communities and build futures.

A Strong Foundation

Purchasing a home is one of the most significant financial decisions a consumer will ever make. Naturally, the homeowners—to—be want the assurance that they will be acquiring the safe and secure use of the property, free of unknown title defects. This is the value proposition of title insurance. In the words of Ted Chandler, president and CEO of LandAmerica Financial Corporation, parent company of some of the most prominent title insurers in the country, “Title insurance insures a homeowner’s real estate investment, unlocking its potential as a financial asset for the owner. As such, title insurance plays a major role in the confidence that lies at the heart of our nation’s real estate market and economy.”

Indeed, title insurance plays an essential role in facilitating ownership and investment in real estate in the United States. Beyond residential, this confidence extends to the commercial real estate market and to lenders.

From a prepared statement presented by Rande K. Yeager, president of the American Land Title Association, April 26, 2006, to a House subcommittee  on housing:

“Every week there are thousands of transactions, some of which involve hundreds of millions or even billions of dollars, relating to the acquisition, development and sale of commercial real estate, almost all of which are financed with borrowed funds. The willingness of individuals and businesses to invest in real estate anywhere in the United States, or to loan money to those who own or are acquiring real estate, and the ready marketability of those interests and loans, is truly remarkable in light of the inherent complexities that exist with regard to the rights that may be claimed in or against real estate.

The title insurance industry, through the policies it issues and the significant work it must perform to be in a position to issue those policies, has rendered such investments safer, more secure and more marketable than in any time in world history.”

This is the value proposition of title insurance. It helps turn the American dream into reality.

A value proposition is the unique value a product or service provides to a customer. It describes the benefits the product delivers. It answers the question: ‘Why is this worth the money?’

Worth the Money

The complexity of the real estate transaction works against the title insurance industry. Customers who don’t understand title insurance and its purpose, or who have not experienced a title problem, sometimes question the need for it and its pricing. This leads to misconceptions. When members of the title insurance industry don’t speak to their customers about the value of title insurance, the critics of the industry do the speaking instead.

COMMON MISCONCEPTION:
Because the title industry pays out a relative small portion of its total revenues in claims, this must mean that title insurance is of little value.

Title agents access, assemble, analyze and distribute title information. This is vital because title problems are discovered in more than one—third of residential real estate transactions (according to ALTA statistics). Title agents perform intensive – and expensive – work up—front to minimize claims. The better they do this, the lower the rate of title claims. A relatively small portion of the revenue from title insurance is paid in claims. This is a result of the substantial time and expense invested in collecting and evaluating title records to ensure a title is clear prior to issuing a policy. Title insurance is a labor intensive industry, particularly since only 15 percent of public records nationwide are computerized.

COMMON MISCONCEPTION:
Since title companies pay out far fewer claims than other kinds of insurance companies, they are making disproportionate profits.

During the past 20 years, title insurance claims have been about 6.4 percent of revenue. In the property and casualty (P&C) industry, that figure is nearly 80 percent. Yet operating expenses in title insurance average about 92 percent of revenue, compared to only about 25 percent for P&C. This produces a profit margin of only about 1.6 percent in the title industry on average.

COMMON MISCONCEPTION:
There is a lack of competition in the title insurance industry and this drives up prices.

Most customers don’t realize that in many states – such as Texas – prices for title insurance are regulated. Some states – such as Texas – promulgate the rates that can be charged as well as the premium split between insurer and agent. In others, title insurance rates must be filed and approved by regulators before being used. New rates are filed in response to price competition in the marketplace.

Ambassadors of the Value Proposition

To quote again from the ALTA report:

“We can be proud of the essential role that our industry has played, and continues to play, in making the United States real estate market the envy of the world. Nowhere else in the world is the creation and transfer of interests in real property accomplished more efficiently and securely than in the United States. Title insurance products and services have facilitated a level of security, stability and efficiency in real estate transactions that is unparalleled in history.”

Thanks to the partnering role of the title agent in real estate transactions, we have changed from a nation of renters to a nation of homeowners. In 1940, only 44 percent of the population owned their own homes. Today, nearly 70 percent of Americans do – a record high. And title agents are part of the reason.

Janet Minke is vice president, training and development, with LandAmerica Financial Group’s Southwest Region in Dallas.

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