Most homebuyers, nervous about making one of the largest financial transactions of their lives, accept the explanation given by agents and brokers at closing: Title insurance guarantees the validity of a deed, the document that establishes ownership of real estate. Without the protection it offers, a buyer could lose their house and land because of an obscure legal defect buried in the county’s index of public records: the boundary lines might have been surveyed wrong; there could be some unrecorded easement, or restriction on the use of the land; one of the deeds in the chain of title might even be a forgery.
But Collins, who was an accountant in addition to being a lawyer, figured that the chances of a title dispute were next to nil. Since it was a master-planned community, all the titles had been minted at the same time in a single subdivision plat — an orderly division of a large tract of land, proposed by private developers, and approved by the city. If there was any issue, he insisted, it would mean that there was an issue for every home in the neighborhood. And surely the developer had done their due diligence when acquiring the land in the first place. Why should he have to pay thousands of dollars to insure against what would seem to be a nonexistent risk?
Title insurance costs more in Texas than in any other state. Aside from the brokers’ fee, it is generally the single largest closing cost on the purchase of a home. It is customarily paid by the seller, but often buyers bear the cost, as was the case with Collins; either way, it increases the price of the transaction. For the average house in Texas, worth approximately $268,000, the most basic title insurance premium will come out to $1,808. Compare that to New York, where it would be about $1,125; Oklahoma, where it might be $850, or Iowa, where the state would insure the title for $110.
The Texas title insurance system, the nation’s most expensive, is set by the state government, but the revenue raised — nearly $2 billion a year—goes directly to private companies. Industry lobbyists work hard every legislative session to suppress any effort at reform, while agents and brokers do their best to convince consumers that title insurance is indispensable and reasonably priced, when in reality it is neither.
“After much discussion and significant pushback including verbal warnings of impending doom for us as homebuyers,” Collins said, the title company handling the closing allowed him to reject the policy — but only in part. As Collins found out, mortgage lenders won’t fund the purchase of a home unless their interest in the property is covered by title insurance. He had no choice but to shell out an extra thousand dollars, on top of all the other costs of buying the house, to protect the bank from the virtually nonexistent risk of a defective title.
Title insurance “has an origin in usefulness,” says Jessie Lunsford, a longtime Austin real estate developer. Real estate law is complex, and a property’s chain of title can have defects that are difficult, if not impossible, to discover. In addition to muddled boundaries, unrecorded easements and liens, and other problems with decades-old paperwork, little of which is digitized, it’s possible for the long-lost heirs or ex-spouses of past owners to reappear and assert an ownership interest in a piece property. In theory, title insurance protects against these risks.
In practice, such claims are vanishingly rare. The exact number per year is not available, but the title insurance industry’s loss ratio of 1.2% is far lower than other insurers usually incur. It’s tough to find a developer, attorney, agent, or broker who has been involved in a title dispute, or even heard of one. “Lord knows I’ve never filed a claim,” said Lunsford, who has purchased some 30 properties in his career. Given the high price, he says, “It’s a total scam.”
In 2017, the latest year for which data is available, title companies sold $1.8 billion worth of policies, according to the Texas Department of Insurance (TDI). Of that, title companies retained $1.5 billion and paid $335 million over to their underwriters, the companies that actually compensate policyholders in the event of a claim. But according to TDI data, only about $24 million was needed to settle claims from title defects that year. In other words, for every dollar that the industry took in as revenue, they paid out little more than a penny to policyholders.
That isn’t how insurance is supposed to work. Its economic purpose is to spread risk, distribute losses more evenly, and protect individuals from sudden shocks. Insurers rake in a big pile of money, but end up paying most of it out in the form of claims, only setting aside a percentage to cover the costs of doing business, and as profit.
Take property insurance, for instance. It is also relatively expensive in Texas, compared to other states, mostly on account of our violent weather. The loss ratio of companies like State Farm or Liberty Mutual ranges from 50-90% of their gross revenues. Of a $100 monthly premium, for example, $65 might get paid out to homeowners after fires or floods, in a typical year. The loss ratio on property insurance was 58% in 2018, according to TDI; for auto collision insurance, it was 57%.
The biggest title companies in Austin, including Heritage Title, Independence Title, Trinity Title, Austin Title, and Stewart Title, declined to comment for this story. The Texas Land Title Association, the industry’s main lobbying group, wrote in a statement that title insurance is “paid only once at closing,” and “shouldn’t be confused with homeowners and auto insurance that protect against future hazards and must be purchased every year.”
Ben Gonzalez, a spokesman for the industry-friendly TDI, wrote in an email that “the losses are a small part of the cost of title insurance” because most of the cost comes from “the examination and searches, which are designed to reduce losses.” Before issuing a policy, a title company will search a county’s deed index, notify the buyer and seller of any issue, and attempt to resolve it. If, say, a fence is encroaching on the land, a seller can simply remove the fence. If the problem can’t be fixed, the title company won’t issue the policy. As the industry likes to say, they eliminate risk rather than bear it. They also provide a service: they prepare the sale documents and host closings at their offices.
But the industry’s underwriters receive 15% off the top of every title policy issued. They don’t do any title searches, or provide closing services; their only job is to bear risk. Yet in 2017, their loss ratio was just 6%.***
In 2018, a study from the libertarian Texas Public Policy Foundation set out to determine how much title insurance is really worth. The authors estimated that it costs about $290 to examine the county’s deed index and check the chain of title on a given real estate transaction. It costs another $38, on average, to bear the risk of a future claim, they found. If the free market set title insurance rates in Texas, the authors would have expected the average premium to cost little more than the sum of those two numbers: $328.
But Texas doesn’t have a system that allows price competition, like Oregon, where title insurance usually costs between $300 and $600. Nor does it have a socialized system, like in Iowa, where it’s even cheaper. Texas has the worst of both worlds: a state-mandated system that forbids competition and sets rates higher than anywhere else in the country, with all the profit flowing into private pockets.
By increasing the price of nearly every residential real estate transaction by about 1% across the board, our state-mandated system increases the cost of housing for everyone, including renters. Xu Gao and David Eaton, a pair of University of Texas academics, analyzed national title insurance data in 2016 and found that Texas had significantly higher prices than states that allowed competition. By setting artificially high rates by law and regulation, “Texas transfers wealth from property owners directly to title agents and title underwriters, with no additional value to the property owners,” they wrote. “The system functions as a ‘reverse Robin Hood transfer.’”
The Iowa Supreme Court described title insurance as “an invidious form of business,” and the Iowa General Assembly banned the industry from operating in the state. In its place, a quasi-governmental entity known as the Iowa Title Guaranty Program issues certificates to homebuyers that provides the same coverage but for a fraction of the cost, in most cases $110. The profits generated by the program are funneled into a public interest fund that provides down payment assistance grants to low-income, first-time homebuyers.
To prevent being supplanted by such a system in Texas, the title insurance industry has employed an outsized team of people to curry favor with the state government. During the 2019 legislative session, the TLTA employed 23 full-time lobbyists, 181 volunteer legislative liaisons, and 124 committee members to draft proposed legislation. After the conclusion of the session, the TLTA crowed in its annual report about “the passage of 100% of our association’s legislative priorities,” which boiled down to maintaining the status quo. This was thanks to state Sen. Kelly Hancock, R-North Richland Hills, and state Reps. Sergio Muñoz, D-Palmview, without whom “we wouldn’t have the opportunity to celebrate,” as well as state Sen. Brandon Creighton, R-Conroe, and state Rep. Eddie Lucio III, D-Brownsville, who the TLTA named “legislators of the year.” In the 2021 legislative session, state Rep. Tom Oliverson, R-Houston, whom the TLTA considers a “staunch advocate of our industry,” chaired the House insurance committee; no bills were introduced that would have altered the “reverse Robin Hood” system.
It’s been 17 years since Jason Collins, the Austin attorney, closed on his home in Steiner Ranch. “Obviously,” he said, “we never had any issue with respect to the title for that home.” To his knowledge, over two decades, neither has anyone else in the Hill Country subdivision, where all the homes are laid out on spacious lots more or less the same size, with orderly fences between them, and evenly spaced mailboxes. Yet every time a house there is sold, which happens every year, he said, the buyer or seller gets popped for something like $4,000 for title insurance. “It seems like a waste of money.”
Editor’s note: The original story stated that Jason Collins purchased a home in Sunset Valley. In fact, it was Steiner Ranch. The Observer regrets the error.
This article was originally published by the Texas Observer, a nonprofit investigative news outlet.