New form of title protection may be offered buyers


August 14, 1994|By Kenneth R. Harney

Washington -- Homebuyers and refinancers in dozens of cities around the country are about to be offered one of the most controversial new financial products in years: an alternative form of title protection that purports to save consumers 10 percent to 30 percent or more on their title charges at settlement.

Currently being introduced in 15 states -- primarily on the Eastern Seaboard and the Midwest -- the program will be available in California and other states in the next 30 to 60 days, according to Norwest Mortgage Inc., its corporate sponsor. The program's name is Title Option Plus (TOP).

The controversy boils down to this: Is this new title alternative truly a money-saving substitute for traditional title insurance -- often a $500 to $600 item on consumers' settlement sheets -- or is it a potential consumer nightmare, as some title insurance executives charge?

Here's some background that could prove helpful if you're plunging into the mortgage market this year. Traditional title insurance comes in two forms: lender's insurance and owner's insurance. To obtain a mortgage from most lenders, applicants are required to purchase lender's title insurance. As the name implies, the coverage of the policy extends solely to the mortgage company or bank making the loan. For a one-time premium, the lender's security interest in the house up to the amount of the loan is protected against undetected problems in the legal chain of title on the property.

For example, say you're buying a house from what you believe to be a married couple -- call them Fred and Andrea Harrington -- and you apply for a loan. A courthouse search of the legal title to the house turns up no recorded problems to the Harringtons' claim of ownership. But three years after you move in, Fred Harrington's real wife -- call her Julie -- arrives in town and produces documentary evidence that Fred forged her signature on the deed of the sale to the house years ago. She still has a legally valid ownership interest in the house you now live in. And she wants her house back.

Without insurance, your lender could suffer major financial loss and extensive legal fees in fighting and ultimately settling with Julie. The lender's policy you pay for at settlement covers the bank against such eventualities.

A successful title challenge literally could cost you your equity in the property -- and the home itself. Though wipeouts like this are relatively rare, their existence causes many homebuyers to take out title insurance for themselves for the home's full value.

This so-called peace-of-mind coverage extends for as long as you own the property, and pledges the insurer to defend and compensate you for claims up to certain limits.

Enter TOP. Norwest Mortgage, Inc., headquartered in Des Moines, Iowa, is the third-largest originator of home loans in the country, with $34 billion in volume last year. It owns a large title insurance subsidiary, ATI Title Co.

Under the TOP program, applicants for Norwest mortgages are now offered a choice of title coverage options: A traditional insurance policy or as an alternative, at a minimum 10 percent discount below the lender's policy rate, the TOP plan.

TOP works like this. The customary courthouse search is performed by ATI to make certain the lender has a legally enforceable first lien on the house. No insurance is provided, according to Norwest. Risk of loss is assumed by Norwest's bank holding company parent, with net assets of $11 billion.

Michael Fahey, president of ATI Title, says his firm is not worried about the assumption of risk because even in its regular title insurance business losses run less than 1 percent of premium dollars per year. The TOP plan is not available on newly constructed homes, condos or jumbo mortgages -- traditionally considered higher risk than existing homes.

To attract business, Fahey says, the TOP program is priced at least 10 percent below title insurance, depending upon the state. In high cost areas like New York, he says, a borrower refinancing might pay $700 at settlement on a standard insurance policy but be charged only $270 for TOP. The TOP feeis pegged at 10 percent below the prevailing "reissue" insurance rate for the same size loan on the same, previously insured property. Many refinancers fail to ask for a reissue rate, Fahey said, and "nobody in the title industry is out there telling them to ask" for the lower rate.

The title industry, for its part, thinks TOP spells bad news. James R. Maher, executive vice president of the American Land Title Association, calls TOP "a disservice to homebuyers" because it attracts them with discount fees but provides no insurance coverage to individual owners.

Maher also acknowledges that if other large lenders with title insurance subsidiaries roll out similar cut-rate programs -- a distinct possibility -- traditional insurers will lose a lot of business.

But is TOP for you? Your answer depends partly on whether owner's title insurance is for you.If you have substantial down payment or equity at risk in your house, owner's insurance will give you peace-of-mind coverage. If you are refinancing, however, and your property is already covered by your existing owner's title policy, cut-rate TOP may be worth a close look. So, too, if you don't have much equity, and you're willing to play roulette that no one will bang on your door and challenge your title.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071

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