This article was originally published in Real Estate Agent Magazine Twin Cities, written by Charity Malmberg, Founder and President of Trademark Title
The title insurance industry has been protecting the American dream of homeownership for more than 125 years. Real estate property is the nation’s largest asset, and the 1990s was one of the best decades in American history for housing. The behind-the-scenes work of title companies ensures the quick and secure transfer of land, fostering lender and consumer confidence in their real estate investments.
The objective of title insurance remains the same as it has always been – helping the parties in real estate transactions to determine their rights and interests, and assuring that land transfer is expeditious and secure. Protecting the parties involved in real estate transactions is the reason the title insurance product was developed.
In this country, matters affecting ownership and other real estate interests are entered in public records. Before a transaction is completed, a title search of the records is made in an effort to locate potential problems so that they can be rectified and the transfer can proceed.
While most problems can be located in a title search by skilled professionals, there can be hidden hazards that even the most thorough search will not reveal. Examples include forgeries in the chain of title, a claim by a previously undisclosed relative of a former owner or a mistake in the records. Liens, easements, rights of way, life estates, air and subsurface rights, and future interests are also found in a title search.
Title insurance is substantially different from other types of insurance coverage, which can often lead to a misunderstanding of the product. Title insurance emphasizes risk prevention rather than risk assumption. This emphasis on risk prevention is a labor intensive and costly component of doing business, but the coverage offers the best possible opportunity for avoiding claims and losses in real estate transactions.
During the title search, title companies find and fix problems with the title in 25 percent of transactions – usually unbeknownst to the consumer or lender. In addition, title companies pay millions of dollars each year in claims.
When a property is resold quickly or refinanced within a short period of time from the original purchase or most recent refinance, a new title search and title policy are needed. The owner/ seller may have created or experienced claims, liens or other encumbrances since the original policy was issued, and the lender will require a new title search to ensure that the title is clear. For instance, the owner may have taken out a second mortgage, incurred a mechanic’s lien or a lien from unpaid taxes.
HISTORY OF TITLE INSURANCE
Until the nation was nearly a century old, the conveyance of real property did not include any form of guarantee or insurance. Many of the transactions were handled by conveyancers, who either personally searched titles or obtained some form of abstract (summary of public records) to determine ownership of the land and encumbrances on the title. Before taking title to property, the buyer required that the title be free of any rights, interests, liens or encumbrances of others for which he or she would be responsible. Based on the title search or abstract, the title could be examined and an opinion rendered by the conveyancer that the title was clear, and thus marketable.
There clearly were limits on the protection that the conveyancer could provide to the parties involved.
In 1876, a group of Philadelphia conveyancers founded the first title insurance company. In an initial advertisement, the company said it was beginning operation to insure “the purchasers of real estate and mortgages against losses from defective title, liens and encumbrances,” and added, “Through these facilities, transfer of real estate and real estate securities can be made more speedily and with greater security than heretofore.”
Subsequently, title insurance companies were organized in other cities – among them, New York City, Chicago, Minneapolis, San Francisco and Los Angeles.
As the industry grew, title companies and their agents began providing essential services to real estate buyers, sellers, lenders, brokers, attorneys, developers, builders and others. Following World War II, returning serviceman began to buy homes in large numbers; the title industry began to change from an essentially local enterprise to business on a national level. Yet despite this national lending/investment environment and the advent of a national secondary mortgage market, title work continues to be based on local law and custom.
With new types of mortgages and the rapid growth of the secondary mortgage market, title insurance companies have responded to investor needs by creating new policies. Title companies in some locations have evolved into much more than just title searching. Today, many complete all aspects of the closing process, from preparation of documents and recording instruments, to preparation of closing forms and collecting and disbursing funds.
The title insurance industry continues to provide security to real estate investors, especially as rapid and dramatic developments drive the real estate market.