Would You Like Fries with That?

We’ve all been there: that crucial moment of decision when faced with an option that can add cost (Leather upholstery? Carpeted floor mats? V-8 engine?), and even calories (French fries? An extra scoop of ice cream? Bearnaise sauce?).

Thanks to the US government’s consumer protection regulations, buyers who finance their homes using mortgages are now advised that owners title insurance coverage is “optional.” Buyers who read their closing disclosures closely are keying into this description and beginning to wonder whether they actually need such coverage, especially since it is spelled out as an extra cost item.

The short answer to this query is YES, but know that I am biased; our firm issues the title insurance policy.

The purpose of title insurance is to eliminate risks and prevent losses caused by defects in title arising out of events that have happened in the past. To achieve this, title insurers perform an extensive search of the public records to determine whether there are any adverse claims to the subject real estate. Those claims are either eliminated prior to the issuance of a title policy or their existence is excepted from coverage.

Mortgage companies require a lender’s policy of title insurance for their benefit in connection with closing, therefore the description of the owner’s coverage as “optional.” The lender’s policy doesn’t do a thing for the homeowner. It only insures that the mortgage is a first lien.

The lender, of course, would be concerned IF the buyer lost title to the property, but only WHEN that occurred. The lender would be concerned IF they found out there is a judgment or municipal lien ahead of their mortgage in lien priority, but only WHEN the mortgage is in foreclosure.

Put another way, the lender gets concerned once the tragedy has already happened. An owner is concerned before it gets that far.

Since the title policy is an indemnity contract for losses, the mortgage company must suffer a loss before they actually have a claim under the lender’s title policy. Therefore, they must proceed to foreclosure, sell the property and obtain less than the debt due on the loan. By that time the owner has been ejected from the property. And, without an owner’s policy, a buyer is not covered and must pay someone else’s debt.

Given these risks, why is owner’s title coverage now being considered “optional,” and why do lender’s title insurance policies all of a sudden seem so expensive?

Under Federal rules, the lender is required to lump a majority of the title insurance cost into the lender’s required coverage. This is basically opposite of what Florida law provides, i.e., the bulk of the cost of the title insurance is associated with the owner’s policy, and the cost of the lender’s coverage is an incremental addition.

So, while the substance of what title insurance coverage is hasn’t changed, the disclosure rules relating to its costs have, leading to confusion and concern by consumers feeling like they’re being upsold for something they don’t necessarily need.

In such a case, the old adage of “penny wise and pound foolish” certainly applies, and an informed consumer should not feel guilty about incurring the incremental cost of the so-called “optional” owner’s title insurance, especially if he or she considers the protection of their substantial real estate investment a #1 priority.