WEBVTT 00:00:00.000 --> 00:00:03.000 Imagine this scenario. You have finally saved 00:00:03.000 --> 00:00:05.620 up enough for a down payment. You've scoured 00:00:05.620 --> 00:00:07.759 the listings. You've fought through the brutal 00:00:07.759 --> 00:00:10.580 bidding wars. And against all odds, you finally 00:00:10.580 --> 00:00:13.980 find it. The one. You go through the endless 00:00:13.980 --> 00:00:16.640 paperwork. You sign your name about 100 times 00:00:16.640 --> 00:00:19.000 at the closing table until your hand cramps. 00:00:19.260 --> 00:00:22.239 And you get the keys. You move in. The dream. 00:00:22.600 --> 00:00:25.460 Exactly. You paint the walls that perfect shade 00:00:25.460 --> 00:00:28.199 of greige. You start imagining your kids growing 00:00:28.199 --> 00:00:30.859 up in the backyard. And then, six months later, 00:00:31.019 --> 00:00:33.759 there is a knock on the door. It's not a neighbor 00:00:33.759 --> 00:00:37.420 bringing cookies. Oh, no. It's a stranger holding 00:00:37.420 --> 00:00:39.460 a piece of paper that says they actually own 00:00:39.460 --> 00:00:41.799 the land your house sits on. Or maybe it's a 00:00:41.799 --> 00:00:44.600 tax collector saying there was a massive unpaid 00:00:44.600 --> 00:00:46.659 debt attached to the property from three owners 00:00:46.659 --> 00:00:49.200 ago, and they're here to collect or foreclose. 00:00:49.579 --> 00:00:51.520 It sounds like the plot of a horror movie for 00:00:51.520 --> 00:00:53.679 suburbanites, doesn't it? Yeah. It triggers that 00:00:53.679 --> 00:00:56.899 primal fear of displacement. But this is actually 00:00:56.899 --> 00:00:59.600 the fundamental risk that underpins the entire 00:00:59.600 --> 00:01:02.240 American real estate market. It is. It's the 00:01:02.240 --> 00:01:04.159 nightmare scenario that created the industry 00:01:04.159 --> 00:01:07.780 we are diving into today. It is terrifying. And 00:01:07.780 --> 00:01:10.280 today, we're unpacking something that almost 00:01:10.280 --> 00:01:13.459 every homeowner pays for, but almost no one actually 00:01:13.459 --> 00:01:16.099 understands. Yeah. We are talking about title 00:01:16.099 --> 00:01:18.219 insurance. Right. And look, I know what you're 00:01:18.219 --> 00:01:20.840 thinking. I can hear the collective sigh through 00:01:20.840 --> 00:01:23.560 the headphones. Insurance. Really? We're doing 00:01:23.560 --> 00:01:26.219 a deep dive on insurance. But trust me, the story 00:01:26.219 --> 00:01:29.640 behind this is wild. It involves a 19th century 00:01:29.640 --> 00:01:32.620 legal drama, a fundamental split between how 00:01:32.620 --> 00:01:34.859 the U .S. and the rest of the world handle property, 00:01:35.040 --> 00:01:37.560 and a system that is designed to look backwards 00:01:37.560 --> 00:01:40.079 rather than forwards. It really is fascinating 00:01:40.079 --> 00:01:42.659 when you dig into it. Title insurance is technically 00:01:42.659 --> 00:01:45.799 a form of indemnity insurance. It is predominantly 00:01:45.799 --> 00:01:48.560 found in the United States and Canada, which 00:01:48.560 --> 00:01:50.700 is the first clue that we are dealing with something 00:01:50.700 --> 00:01:52.819 unique to our legal system. That's a good point. 00:01:52.959 --> 00:01:55.519 Its purpose is to insure against financial loss 00:01:55.519 --> 00:01:58.439 from defects in the title to real property or 00:01:58.439 --> 00:02:01.560 from the invalidity of mortgage loans. But unlike 00:02:01.560 --> 00:02:03.500 other insurance, it's not about probability. 00:02:03.739 --> 00:02:06.750 It's about history. Right. And usually when we 00:02:06.750 --> 00:02:10.129 buy insurance, like for a car or a toaster or 00:02:10.129 --> 00:02:13.289 our health, we're worried about what might happen 00:02:13.289 --> 00:02:15.490 in the future. Will I crash the car? Will the 00:02:15.490 --> 00:02:17.789 toaster explode? Will I get sick? You're betting 00:02:17.789 --> 00:02:20.289 against the future. Exactly. Yeah. But title 00:02:20.289 --> 00:02:22.969 insurance is different. It's worrying about what 00:02:22.969 --> 00:02:25.210 already happened that you just don't know about 00:02:25.210 --> 00:02:27.710 yet. It's like buying insurance against having 00:02:27.710 --> 00:02:29.969 a secret evil twin you never knew about. That's 00:02:29.969 --> 00:02:32.919 a colorful way to put it, but yes. Unlike buying 00:02:32.919 --> 00:02:35.460 a toaster, which is a fresh object off a factory 00:02:35.460 --> 00:02:38.560 line, land ownership has a long tale of history. 00:02:38.979 --> 00:02:42.340 That plot of land has been owned, sold, divided 00:02:42.340 --> 00:02:44.340 and borrowed against for potentially hundreds 00:02:44.340 --> 00:02:47.550 of years. The mission of this deep dive is to 00:02:47.550 --> 00:02:50.530 explore why this specific financial product exists 00:02:50.530 --> 00:02:52.830 to manage that history, the legal case in the 00:02:52.830 --> 00:02:55.189 1800s that sparked it, and why, as you mentioned, 00:02:55.310 --> 00:02:57.389 the U .S. system of property ownership is fundamentally 00:02:57.389 --> 00:02:59.689 different from the vast majority of the industrialized 00:02:59.689 --> 00:03:01.889 world. So we have a stack of sources here to 00:03:01.889 --> 00:03:04.469 guide us. We're doing a deep dive primarily into 00:03:04.469 --> 00:03:07.050 the comprehensive Wikipedia entry for title insurance, 00:03:07.349 --> 00:03:09.710 but we're also pulling on legal analyses of the 00:03:09.710 --> 00:03:12.349 Watson v. Muirhead case, historical records regarding 00:03:12.349 --> 00:03:15.050 the Torrens system, and industry reports on... 00:03:15.080 --> 00:03:17.819 loss ratios a lot to unpack a whole lot yeah 00:03:17.819 --> 00:03:20.340 so let's get into it where did this all begin 00:03:20.340 --> 00:03:24.000 because people have been buying land for a long 00:03:24.000 --> 00:03:27.360 time long before 1876 how did they do it back 00:03:27.360 --> 00:03:30.840 then they have and for a long time the rule of 00:03:30.840 --> 00:03:33.419 the land was a latin phrase you are probably 00:03:33.419 --> 00:03:36.500 familiar with caveat emptor buyer beware buyer 00:03:36.500 --> 00:03:39.439 beware it sounds harsh but that was the legal 00:03:39.439 --> 00:03:41.900 reality Prior to the invention of title insurance, 00:03:42.240 --> 00:03:44.300 if you were buying real estate, you bore the 00:03:44.300 --> 00:03:46.539 sole responsibility for ensuring the validity 00:03:46.539 --> 00:03:49.099 of the land title held by the seller. All on 00:03:49.099 --> 00:03:50.780 you. All on you. You had to do the homework. 00:03:50.919 --> 00:03:53.199 If the title turned out to be invalid later, 00:03:53.419 --> 00:03:55.280 maybe it was fraudulent. Maybe there was a long 00:03:55.280 --> 00:03:57.060 lost heir who suddenly returned from the war. 00:03:57.180 --> 00:03:59.819 The buyer lost their investment completely. That 00:03:59.819 --> 00:04:02.280 seems incredibly high stakes. You could pay for 00:04:02.280 --> 00:04:04.580 a farm, work the land for a decade, and then 00:04:04.580 --> 00:04:06.740 poof, it's gone because of a paperwork error 00:04:06.740 --> 00:04:09.159 50 years ago. There was no safety net. None. 00:04:09.580 --> 00:04:11.800 If the title is bad, you didn't own the land, 00:04:11.919 --> 00:04:14.800 period. It's as simple as that. And that high 00:04:14.800 --> 00:04:17.259 stakes environment leads us directly to the catalyst 00:04:17.259 --> 00:04:20.120 case. It's a Pennsylvania Supreme Court case 00:04:20.120 --> 00:04:23.980 from 1868 called Watson v. Muirhead. Watson v. 00:04:24.060 --> 00:04:26.660 Muirhead. This is the origin story. Okay, set 00:04:26.660 --> 00:04:29.660 the scene for us. Who is Watson and who is Muirhead? 00:04:29.779 --> 00:04:31.920 What are we talking about here? So Watson is 00:04:31.920 --> 00:04:34.399 our plaintiff. He's an investor looking to buy 00:04:34.399 --> 00:04:36.259 some real estate in Philadelphia. He's doing 00:04:36.259 --> 00:04:38.240 what savvy investors do. He's trying to be careful. 00:04:38.500 --> 00:04:40.420 He's not just throwing his money around. Right, 00:04:40.459 --> 00:04:43.040 he's doing his due diligence. Exactly. Muirhead 00:04:43.040 --> 00:04:46.579 is the defendant and he is a conveyancer. Now 00:04:46.579 --> 00:04:48.889 we... don't really have conveyancers in the same 00:04:48.889 --> 00:04:51.870 way anymore. But in the 19th century, a conveyancer 00:04:51.870 --> 00:04:54.170 was the professional you hired to handle the 00:04:54.170 --> 00:04:56.310 transfer of property. So like a mix between a 00:04:56.310 --> 00:04:59.050 title searcher and a closing agent today? That's 00:04:59.050 --> 00:05:01.589 a great way to think about it. Yes. So Watson 00:05:01.589 --> 00:05:03.910 hires Muirhead to check the title on a property 00:05:03.910 --> 00:05:06.449 he wants to buy. Standard procedure. Check the 00:05:06.449 --> 00:05:08.529 records. Make sure I'm good to buy this. Here's 00:05:08.529 --> 00:05:10.649 your fee. Right. Now, here is where the drama 00:05:10.649 --> 00:05:14.569 starts. Muirhead actually did his job. He scoured 00:05:14.569 --> 00:05:17.189 the records and he found something. He found 00:05:17.189 --> 00:05:19.930 a prior judgment lien on the property. A lien, 00:05:20.069 --> 00:05:22.490 just to clarify for everyone, that's a legal 00:05:22.490 --> 00:05:24.970 claim, right? A debt attached to the property 00:05:24.970 --> 00:05:27.649 itself. Yes. A lien is essentially a legal claim 00:05:27.649 --> 00:05:30.329 on assets, which allows the holder to obtain 00:05:30.329 --> 00:05:33.170 access to the property if debts aren't paid. 00:05:33.470 --> 00:05:36.449 So if the previous owner owed money, the creditor 00:05:36.449 --> 00:05:38.860 puts a lien on the house. If the debt isn't paid, 00:05:39.040 --> 00:05:41.459 the creditor can take the house. OK, so Muirhead 00:05:41.459 --> 00:05:43.980 sees this. He's not asleep at the wheel. Not 00:05:43.980 --> 00:05:46.160 at all. He sees this judgment lien. He doesn't 00:05:46.160 --> 00:05:49.160 ignore it. But conveyancing law is tricky. He 00:05:49.160 --> 00:05:51.279 wants to know if this specific lien is actually 00:05:51.279 --> 00:05:53.560 enforceable against the property Watson wants 00:05:53.560 --> 00:05:56.120 to buy. So he goes to a lawyer. He calls in the 00:05:56.120 --> 00:05:59.240 cavalry. Smart move. He consults a prominent 00:05:59.240 --> 00:06:01.500 attorney and asks for a professional opinion. 00:06:02.160 --> 00:06:06.680 He asks, is this lien valid? Is it going to be 00:06:06.680 --> 00:06:09.540 a problem for my client? And what did the lawyer 00:06:09.540 --> 00:06:12.519 say? The lawyer erroneously determined that the 00:06:12.519 --> 00:06:15.120 Linn was not valid. He looked at the statutes, 00:06:15.120 --> 00:06:17.240 looked at the judgment, and gave his professional 00:06:17.240 --> 00:06:19.579 opinion that it wasn't a threat. He basically 00:06:19.579 --> 00:06:22.899 said it was junk paper. Oh. So, armed with this 00:06:22.899 --> 00:06:25.660 legal opinion from a respected lawyer, Mirrorhead 00:06:25.660 --> 00:06:28.379 goes back to Watson and says, the title is clear. 00:06:28.560 --> 00:06:31.319 I found a Linn, but my lawyer says it's garbage. 00:06:31.420 --> 00:06:33.699 Go ahead and buy. I think I see where this is 00:06:33.699 --> 00:06:36.600 going. It's not going to a happy place. Watson 00:06:36.600 --> 00:06:39.180 buys the land. He buys the land. He puts his 00:06:39.180 --> 00:06:41.019 money down. And of course, the lawyer was wrong. 00:06:41.240 --> 00:06:43.800 The limb was valid. The creditors came calling. 00:06:43.959 --> 00:06:46.199 They foreclosed on the property to pay the debt. 00:06:46.360 --> 00:06:48.660 And Watson lost his investment. He was out a 00:06:48.660 --> 00:06:50.879 significant amount of money. OK, so Watson is 00:06:50.879 --> 00:06:53.120 sitting there. He's bought the land. He's presumably 00:06:53.120 --> 00:06:55.600 happy. And then the creditors knock on the door 00:06:55.600 --> 00:06:58.220 and say, actually, this land belongs to us to 00:06:58.220 --> 00:07:02.560 pay off a debt. Watson loses the farm. Literally. 00:07:02.720 --> 00:07:04.480 Literally. So naturally, he turns around and 00:07:04.480 --> 00:07:06.980 looks at Muirhead, the guy he hired specifically 00:07:06.980 --> 00:07:09.259 to prevent this very thing from happening. Right. 00:07:09.339 --> 00:07:12.620 He sues Muirhead. The logic is simple. I paid 00:07:12.620 --> 00:07:14.680 you to check the title. You said it was clean. 00:07:14.720 --> 00:07:17.660 It wasn't. You owe me my money back. It seems 00:07:17.660 --> 00:07:20.379 like an open and shut malpractice case. Please 00:07:20.379 --> 00:07:23.220 tell me he won. Because if I paid a mechanic 00:07:23.220 --> 00:07:26.040 to check my brakes, they said, you're good. And 00:07:26.040 --> 00:07:28.310 then my brakes failed. I'm suing that mechanic 00:07:28.310 --> 00:07:30.769 into oblivion. You would think so. It seems like 00:07:30.769 --> 00:07:33.649 the most logical outcome. But the case goes all 00:07:33.649 --> 00:07:35.470 the way to the Pennsylvania Supreme Court in 00:07:35.470 --> 00:07:40.970 1868. And the judges, they pause. They look at 00:07:40.970 --> 00:07:43.949 what Muirhead did. He found the lien. He didn't 00:07:43.949 --> 00:07:46.509 hide it. He went to a lawyer, a prominent lawyer, 00:07:46.589 --> 00:07:48.290 by the way, and asked for an opinion on that 00:07:48.290 --> 00:07:49.829 lien. The lawyer said, don't worry about it. 00:07:50.110 --> 00:07:52.670 So Muirhead got bad advice, passed it on to Watson, 00:07:52.790 --> 00:07:55.089 and Watson paid the price. Exactly. And the court 00:07:55.089 --> 00:07:57.149 ruled that because Muirhead acted in good faith 00:07:57.149 --> 00:07:59.490 and followed the standard custom of consulting 00:07:59.490 --> 00:08:02.610 a lawyer, he was not negligent. He made a mistake, 00:08:02.750 --> 00:08:05.230 yes, but it was an honest mistake. An honest 00:08:05.230 --> 00:08:08.089 mistake. An honest mistake. And under the laws 00:08:08.089 --> 00:08:11.329 of 1868, you couldn't be sued for an honest mistake 00:08:11.329 --> 00:08:13.250 if you were following professional standards. 00:08:14.170 --> 00:08:16.779 Muirhead was off the hook. That is... That is 00:08:16.779 --> 00:08:19.600 wildly unsatisfying. That leaves Watson holding 00:08:19.600 --> 00:08:22.519 the bag. He did everything right. He hired the 00:08:22.519 --> 00:08:25.160 expert, he paid the fees, and he still lost his 00:08:25.160 --> 00:08:27.579 investment with zero recourse. It was a shock 00:08:27.579 --> 00:08:30.240 to the system. It sent a chill through every 00:08:30.240 --> 00:08:32.519 investor in Philadelphia because it revealed 00:08:32.519 --> 00:08:35.440 a terrifying gap in the economy. You could do 00:08:35.440 --> 00:08:38.659 everything right and still lose. The aha moment 00:08:38.659 --> 00:08:41.340 wasn't that conveyancers were bad at their jobs. 00:08:41.580 --> 00:08:44.379 It was that negligence law wasn't enough to protect 00:08:44.379 --> 00:08:46.820 capital. They didn't need a better lawyer. They 00:08:46.820 --> 00:08:49.259 needed a financial guarantee that paid out even 00:08:49.259 --> 00:08:51.940 if no one screwed up. I see. So if you can't 00:08:51.940 --> 00:08:54.019 sue the conveyancer for an honest mistake, you 00:08:54.019 --> 00:08:56.039 need a different product. You need an insurance 00:08:56.039 --> 00:08:58.659 policy that pays out purely based on the fact 00:08:58.659 --> 00:09:00.860 that you lost money, regardless of whose fault 00:09:00.860 --> 00:09:03.080 it was. Exactly. They realized that professional 00:09:03.080 --> 00:09:05.879 opinions weren't enough security for big financial 00:09:05.879 --> 00:09:08.740 investments. The market saw a need and it responded 00:09:08.740 --> 00:09:12.240 quickly. In 1874, the Pennsylvania legislature 00:09:12.240 --> 00:09:15.480 passed an act specifically allowing for the incorporation 00:09:15.480 --> 00:09:18.220 of title insurance companies. And just two years 00:09:18.220 --> 00:09:22.259 later, in 1876, a group of colleagues met in 00:09:22.259 --> 00:09:24.899 Philadelphia to form the very first one. And 00:09:24.899 --> 00:09:27.600 what was it called? It was called, very creatively, 00:09:27.879 --> 00:09:30.840 the Real Estate Title Insurance Company of Philadelphia. 00:09:31.019 --> 00:09:34.279 I love literal naming conventions. We insure 00:09:34.279 --> 00:09:37.759 real estate titles in Philadelphia. Done. No 00:09:37.759 --> 00:09:41.169 marketing fluff. It gets the point across. Their 00:09:41.169 --> 00:09:43.970 stated mission was to ensure the purchasers of 00:09:43.970 --> 00:09:46.370 real estate and mortgages against losses from 00:09:46.370 --> 00:09:49.490 defective titles, liens and encumbrances. He 00:09:49.490 --> 00:09:51.529 promised that through these facilities, transferring 00:09:51.529 --> 00:09:53.509 real estate would be speedier and more secure 00:09:53.509 --> 00:09:56.509 than heretofore. Heretofore. I love 19th century 00:09:56.509 --> 00:09:59.250 business speak. It sounds so formal. So who bought 00:09:59.250 --> 00:10:01.529 the first policy? Do we know? Is that lost to 00:10:01.529 --> 00:10:04.129 history? We do know, which is amazing. One of 00:10:04.129 --> 00:10:06.370 the founders was a conveyancer named Joshua Morris. 00:10:06.490 --> 00:10:08.909 The very first policy was purchased by his aunt. 00:10:09.090 --> 00:10:11.090 Of course it was. Hey, Aunt Mildred, I've got 00:10:11.090 --> 00:10:13.049 this new product for you. Something like that. 00:10:13.409 --> 00:10:16.649 She bought a policy for a home on North 43rd 00:10:16.649 --> 00:10:19.409 Street in Philadelphia. The home was valued at 00:10:19.409 --> 00:10:23.529 $1 ,500. $1 ,500 for a house. I know, inflation 00:10:23.529 --> 00:10:25.669 and all that, but still, that hurts to hear. 00:10:26.490 --> 00:10:30.269 So, Joshua Morris' aunt is patient zero. for 00:10:30.269 --> 00:10:32.870 title insurance. This solves the problem for 00:10:32.870 --> 00:10:35.470 Americans. But you mentioned earlier that this 00:10:35.470 --> 00:10:38.009 is largely a U .S. and Canada phenomenon. That's 00:10:38.009 --> 00:10:39.809 right. Why didn't the rest of the world look 00:10:39.809 --> 00:10:42.129 at this and say, hey, great idea, let's do that 00:10:42.129 --> 00:10:44.149 too? Because they solved the problem a different 00:10:44.149 --> 00:10:47.169 way. And this brings us to the really heavy conceptual 00:10:47.169 --> 00:10:50.950 difference, recording versus registration. This 00:10:50.950 --> 00:10:52.889 is probably the most important technical distinction 00:10:52.889 --> 00:10:55.149 to understand about American property law. OK, 00:10:55.210 --> 00:10:57.409 let's unpack this, because I think most people 00:10:57.409 --> 00:10:59.409 assume that when they buy a house and record 00:10:59.409 --> 00:11:01.830 the deed at the county courthouse, the government 00:11:01.830 --> 00:11:04.340 is confirming they own it. That is the common 00:11:04.340 --> 00:11:06.559 misconception. The U .S. uses a land recording 00:11:06.559 --> 00:11:08.879 system. In a recording system, the government 00:11:08.879 --> 00:11:11.360 is essentially a giant filing cabinet. A filing 00:11:11.360 --> 00:11:13.960 cabinet. That's it. You bring a deed, they stamp 00:11:13.960 --> 00:11:16.399 it, they index it, and they file it. The government 00:11:16.399 --> 00:11:18.620 recorder does not read it to see if it's legal. 00:11:18.820 --> 00:11:20.919 They don't check if the seller actually owned 00:11:20.919 --> 00:11:22.779 the land. They don't check if the signature is 00:11:22.779 --> 00:11:25.379 forged. They just file it. I want to stick on 00:11:25.379 --> 00:11:27.139 this distinction because I think it's the hardest 00:11:27.139 --> 00:11:30.299 part of this whole topic to grasp. When I walk 00:11:30.299 --> 00:11:32.419 into a county clerk's office and I hand them 00:11:32.419 --> 00:11:36.039 a deed, I assume they are checking it. Like if 00:11:36.039 --> 00:11:39.019 I try to deposit a fake check at a bank, the 00:11:39.019 --> 00:11:41.960 teller stops me. Right. You're saying the government 00:11:41.960 --> 00:11:44.240 recorder doesn't do that? Not in the way you 00:11:44.240 --> 00:11:46.659 think. Think of the U .S. system, the recording 00:11:46.659 --> 00:11:49.279 system, like a bulletin board in a college dorm. 00:11:49.500 --> 00:11:52.080 Okay, I'm with you. An analogy. I like it. If 00:11:52.080 --> 00:11:54.340 I pin up a flyer that says I am selling this 00:11:54.340 --> 00:11:57.940 bike for $50, the college doesn't verify that 00:11:57.940 --> 00:12:00.039 I actually own the bike? They don't check the 00:12:00.039 --> 00:12:02.080 serial number. They just provide the board and 00:12:02.080 --> 00:12:04.480 the thumbtack. Exactly. The board is the public 00:12:04.480 --> 00:12:06.799 record. If you buy that book and it turns out 00:12:06.799 --> 00:12:09.379 I stole it, the college says, hey, we just own 00:12:09.379 --> 00:12:11.700 the cork board. You should have checked. In a 00:12:11.700 --> 00:12:14.259 recording system, the risk is borne by the user, 00:12:14.299 --> 00:12:17.480 not the public. That is horrifyingly simple. 00:12:17.720 --> 00:12:20.220 That is the U .S. system. That is the U .S. system. 00:12:21.309 --> 00:12:23.450 Most of the rest of the industrialized world, 00:12:23.529 --> 00:12:26.750 Europe, Australia, the UK, they use a land registration 00:12:26.750 --> 00:12:28.789 system. It's often called the Torrens system, 00:12:29.049 --> 00:12:31.190 named after Sir Robert Torrens, who developed 00:12:31.190 --> 00:12:33.889 it in Australia. And how is the Torrens system 00:12:33.889 --> 00:12:36.210 different? The Torrens system, which is what 00:12:36.210 --> 00:12:39.029 Europe, Australia, and Canada use, is more like 00:12:39.029 --> 00:12:41.990 the DMV. The Department of Motor Vehicles. Okay. 00:12:42.090 --> 00:12:44.549 When you sell a car, you don't just pin a note 00:12:44.549 --> 00:12:47.639 on a board. You go to the DMV. The DMV takes 00:12:47.639 --> 00:12:49.799 the old title, cancels it, and issues a brand 00:12:49.799 --> 00:12:52.679 new one in the new owner's name. The DMV guarantees 00:12:52.679 --> 00:12:55.019 that the new title is valid. So the government 00:12:55.019 --> 00:12:56.980 puts its stamp of approval on it and says, this 00:12:56.980 --> 00:12:59.659 person now owns this thing. Yes. And if they 00:12:59.659 --> 00:13:02.059 mess up, the state pays for it. They have an 00:13:02.059 --> 00:13:04.860 indemnification fund. The government guarantees 00:13:04.860 --> 00:13:08.179 the title. The risk is borne by the public. The 00:13:08.179 --> 00:13:11.120 DMV model sounds infinitely safer. Why on earth 00:13:11.120 --> 00:13:13.980 did we reject that? I see in the notes here that 00:13:13.980 --> 00:13:15.980 we actually tried to switch to the DMV model 00:13:15.980 --> 00:13:18.480 in the early 1900s. We did. This is a forgotten 00:13:18.480 --> 00:13:22.679 chapter of history. Between 1896 and 1917, 19 00:13:22.679 --> 00:13:25.840 U .S. states adopted some form of the Torrens 00:13:25.840 --> 00:13:29.440 system. Minnesota, Massachusetts, New York, they 00:13:29.440 --> 00:13:32.659 all gave it a shot. 19 states. That's a serious 00:13:32.659 --> 00:13:35.490 effort. It was. They tried to move to a system 00:13:35.490 --> 00:13:37.610 where the government guaranteed the title, which 00:13:37.610 --> 00:13:40.090 on the surface seems so much more secure and 00:13:40.090 --> 00:13:42.269 efficient for the consumer. But clearly it didn't 00:13:42.269 --> 00:13:44.230 stick since I just paid for title insurance on 00:13:44.230 --> 00:13:47.759 my house. What happened? Why did 19 states give 00:13:47.759 --> 00:13:49.840 up on a better system? A few things happened. 00:13:49.940 --> 00:13:52.220 First, there were disasters. There was a famous 00:13:52.220 --> 00:13:54.980 case in Imperial County, California. A single 00:13:54.980 --> 00:13:57.480 judgment regarding a title error was so massive 00:13:57.480 --> 00:13:59.679 that it completely bankrupted the state's title 00:13:59.679 --> 00:14:02.000 indemnification fund. Oh, wow. So the government 00:14:02.000 --> 00:14:04.779 realized, wait. Backing all this land is expensive 00:14:04.779 --> 00:14:06.919 and one big mistake can wipe us out. Exactly. 00:14:07.139 --> 00:14:09.299 When the fund goes bust, the guarantee is worthless. 00:14:09.600 --> 00:14:11.480 It showed the states the potential liability 00:14:11.480 --> 00:14:13.879 they were taking on and it scared them. So financial 00:14:13.879 --> 00:14:16.379 risk was a big part of it. But there must have 00:14:16.379 --> 00:14:18.700 been more. There was a stronger force at play. 00:14:19.059 --> 00:14:22.080 The lenders and the skyscraper argument. The 00:14:22.080 --> 00:14:24.980 skyscraper argument. Is this about building heights? 00:14:25.519 --> 00:14:28.980 It's about financing complexity. Carl Llewellyn, 00:14:29.100 --> 00:14:33.440 a famous legal scholar, put it this way. Imagine 00:14:33.440 --> 00:14:35.639 you want to build a skyscraper in New York City. 00:14:36.139 --> 00:14:39.019 You need to buy up a whole city block consisting 00:14:39.019 --> 00:14:42.480 of maybe 20 different lots. OK, a huge, complex 00:14:42.480 --> 00:14:45.179 assembly of land. Right. Now, if even one of 00:14:45.179 --> 00:14:47.919 those lots has a Torrens title, meaning it's 00:14:47.919 --> 00:14:50.240 dependent on a government bureaucracy to certify 00:14:50.240 --> 00:14:53.120 it and there is a dispute or a delay, the whole 00:14:53.120 --> 00:14:55.440 project stalls. Because bureaucracies are slow. 00:14:55.679 --> 00:14:59.360 You're waiting in line at the DMV 20 times. Exactly. 00:14:59.360 --> 00:15:01.940 And if there is a dispute on plot number 12. 00:15:02.429 --> 00:15:04.750 The bureaucrat freezes everything. A government 00:15:04.750 --> 00:15:07.129 official has to follow the rules strictly. They 00:15:07.129 --> 00:15:08.730 can't take risks. They can't make a judgment 00:15:08.730 --> 00:15:11.169 call. They can't. But a private insurance company, 00:15:11.350 --> 00:15:13.230 they are capitalists. They can look at plot number 00:15:13.230 --> 00:15:15.950 12, see a minor error and say, you know what? 00:15:16.009 --> 00:15:18.210 We'll take the risk. Here's your policy. Build 00:15:18.210 --> 00:15:20.769 the tower. Llewellyn argued that a Torrance title 00:15:20.769 --> 00:15:23.289 on one lot could render a whole block unavailable 00:15:23.289 --> 00:15:25.870 for skyscrapers because lenders wouldn't finance 00:15:25.870 --> 00:15:27.870 it without the speed and flexibility of private 00:15:27.870 --> 00:15:31.360 insurance guarantees. So capitalism won. The 00:15:31.360 --> 00:15:33.779 banks wanted speed and certainty that they could 00:15:33.779 --> 00:15:36.980 control, not a government queue. That, and let's 00:15:36.980 --> 00:15:39.240 not underestimate the industry opposition. By 00:15:39.240 --> 00:15:41.980 the time Torrens was being tried, the title insurance 00:15:41.980 --> 00:15:44.879 industry was already established. They lobbied 00:15:44.879 --> 00:15:47.360 hard against registration systems. I was going 00:15:47.360 --> 00:15:48.960 to ask about that. They wouldn't just sit by 00:15:48.960 --> 00:15:50.879 and watch their business model disappear. Of 00:15:50.879 --> 00:15:53.580 course not. They argued that registration systems 00:15:53.580 --> 00:15:56.600 were vulnerable to fraud, which is true. Fraud 00:15:56.600 --> 00:15:59.509 happens everywhere. And that the complex countermeasures 00:15:59.509 --> 00:16:01.710 required to stop fraud in a government system 00:16:01.710 --> 00:16:05.190 were too expensive for the taxpayer. Cartel language. 00:16:05.490 --> 00:16:07.450 Is that fair? Some critics have used that word. 00:16:07.820 --> 00:16:11.279 A 2007 book titled The American Title Insurance 00:16:11.279 --> 00:16:15.019 Industry, How a Cartel Fleeces the American Consumer's 00:16:15.019 --> 00:16:17.460 Subtle Title, right? Very subtle. Argued that 00:16:17.460 --> 00:16:19.799 the industry successfully killed off the superior 00:16:19.799 --> 00:16:22.039 Torrance system to protect their business model. 00:16:22.340 --> 00:16:25.419 But the industry has a defense. And what's that? 00:16:25.720 --> 00:16:28.440 They argued that a system of recordation combined 00:16:28.440 --> 00:16:30.539 with private insurance is actually more robust 00:16:30.539 --> 00:16:32.940 because it decentralizes the records. How so? 00:16:33.080 --> 00:16:35.159 What does that mean in practice? Well, look at 00:16:35.159 --> 00:16:38.179 the San Francisco earthquake of 1906. The fires 00:16:38.179 --> 00:16:40.559 destroyed the public records hall. All the government 00:16:40.559 --> 00:16:44.019 records of who owned what were ash. A complete 00:16:44.019 --> 00:16:46.659 wipe out of the official record. Right. But the 00:16:46.659 --> 00:16:48.759 title companies had their own private records, 00:16:48.960 --> 00:16:51.700 their title plants stored elsewhere. They were 00:16:51.700 --> 00:16:54.039 able to reconstruct the ownership map of the 00:16:54.039 --> 00:16:56.679 city. If it had been purely a government monopoly, 00:16:56.940 --> 00:16:59.620 that data might have been lost forever. That 00:16:59.620 --> 00:17:02.100 is a pretty strong point for redundancy. OK, 00:17:02.220 --> 00:17:05.599 so we are stuck with the recording system, the 00:17:05.599 --> 00:17:07.880 bulletin board model. We have to do the homework 00:17:07.880 --> 00:17:11.140 ourselves or rather we pay these companies to 00:17:11.140 --> 00:17:13.559 do it. Correct. Let's move to segment three and 00:17:13.559 --> 00:17:15.519 talk about how this actually works, because earlier 00:17:15.519 --> 00:17:18.099 you said title insurance is retrospective rather 00:17:18.099 --> 00:17:20.839 than perspective. Right. This is the key to understanding 00:17:20.839 --> 00:17:23.819 why the premiums work the way they do. Most insurance 00:17:23.819 --> 00:17:27.680 think car. Health, life is risk assumption. The 00:17:27.680 --> 00:17:29.920 insurance company assumes the risk that a future 00:17:29.920 --> 00:17:32.119 event might happen. They're making a bet. They 00:17:32.119 --> 00:17:34.559 use actuarial science to guess the probability 00:17:34.559 --> 00:17:36.980 of you crashing your car or getting sick. They 00:17:36.980 --> 00:17:39.319 are betting on the odds. But title insurance 00:17:39.319 --> 00:17:42.099 isn't a bet on the future. No, it's risk elimination. 00:17:42.799 --> 00:17:45.119 They aren't betting on the odds of a hidden error 00:17:45.119 --> 00:17:48.059 showing up. They're spending the money up front 00:17:48.059 --> 00:17:50.180 to make sure there are no hidden errors. So they 00:17:50.180 --> 00:17:52.339 are detectives, not gamblers. That's a great 00:17:52.339 --> 00:17:55.240 analogy. The premium you pay isn't really for 00:17:55.240 --> 00:17:57.480 the payout pool. It's for the investigation. 00:17:58.240 --> 00:18:00.700 In the industry, they call this the search and 00:18:00.700 --> 00:18:03.500 exam. The search and exam. They go to their title 00:18:03.500 --> 00:18:06.029 plant. which is a cool term for their massive 00:18:06.029 --> 00:18:09.329 database of geographical indexes. And they trace 00:18:09.329 --> 00:18:12.829 the chain of title back 40, 50, 60 years. What 00:18:12.829 --> 00:18:15.069 does a title plant look like? I'm imagining a 00:18:15.069 --> 00:18:17.710 greenhouse, but with file cabinets instead of 00:18:17.710 --> 00:18:20.630 flowers. Think less greenhouse, more Indiana 00:18:20.630 --> 00:18:23.930 Jones Library. Historically, these were massive 00:18:23.930 --> 00:18:26.670 rooms filled with tract books. While the public 00:18:26.670 --> 00:18:29.130 records are filed by name, a grant -a -grantee 00:18:29.130 --> 00:18:31.869 index title plans organized records by geography. 00:18:32.210 --> 00:18:34.490 So they have a specific page for Lot 4, Block 00:18:34.490 --> 00:18:37.410 B. Precisely. It makes searching the history 00:18:37.410 --> 00:18:39.990 of a specific dirt patch much faster than searching 00:18:39.990 --> 00:18:42.529 by names, which can be misspelled or common. 00:18:43.130 --> 00:18:46.089 Nowadays, it's mostly digitized, but these databases 00:18:46.089 --> 00:18:49.559 are proprietary and massive. They're the company's 00:18:49.559 --> 00:18:51.920 crown jewels. And do they actually find stuff 00:18:51.920 --> 00:18:55.079 or is this just paper pushing to justify a fee? 00:18:55.259 --> 00:18:57.660 They absolutely find stuff. There is a statistic 00:18:57.660 --> 00:19:00.119 often cited by the American Land Title Association 00:19:00.119 --> 00:19:03.299 or ALTA. They claim that more than one third 00:19:03.299 --> 00:19:05.920 of all title searches reveal a problem that must 00:19:05.920 --> 00:19:09.119 be fixed before closing. One in three. That's 00:19:09.119 --> 00:19:11.579 incredibly high. If one in three cars on the 00:19:11.579 --> 00:19:13.960 assembly line had a defect, the factory would 00:19:13.960 --> 00:19:16.240 be shut down. It is high. Now, many of these 00:19:16.240 --> 00:19:19.670 are minor. Unpaid local taxes are common or a 00:19:19.670 --> 00:19:21.529 mortgage that was paid off, but the release was 00:19:21.529 --> 00:19:24.069 never properly recorded. But sometimes it's weirder. 00:19:24.150 --> 00:19:26.529 Like what? A mechanic's lien is a classic example. 00:19:26.789 --> 00:19:28.789 Let's say the previous owner fixed the roof in 00:19:28.789 --> 00:19:31.029 1995, but got into a fight with the contractor 00:19:31.029 --> 00:19:34.430 and shorted him $500. The contractor filed a 00:19:34.430 --> 00:19:36.930 lien. That lien sits there accruing interest 00:19:36.930 --> 00:19:40.890 for decades. So if I buy a house and the previous 00:19:40.890 --> 00:19:43.809 guy didn't pay the roofer in 1995 and I don't 00:19:43.809 --> 00:19:46.349 have title insurance or a proper search. The 00:19:46.349 --> 00:19:48.250 roofie can come after me. They can put a lien 00:19:48.250 --> 00:19:50.650 on your house, yes. Because the debt attaches 00:19:50.650 --> 00:19:53.150 to the land, not just the person. And if you 00:19:53.150 --> 00:19:55.309 don't pay it... they can force a sale of your 00:19:55.309 --> 00:19:57.990 home to satisfy their 20 -year -old debt. That 00:19:57.990 --> 00:20:00.829 is terrifying. It's like buying a used car and 00:20:00.829 --> 00:20:03.089 finding out you owe the mechanic for an oil change 00:20:03.089 --> 00:20:06.349 done 10 years ago. Exactly. And this is what 00:20:06.349 --> 00:20:08.710 the title search is designed to find and fix. 00:20:09.029 --> 00:20:11.490 This creates a very unique financial structure 00:20:11.490 --> 00:20:14.049 for the insurance companies. How so? In most 00:20:14.049 --> 00:20:17.150 insurance, like car insurance, maybe 80 % of 00:20:17.150 --> 00:20:20.049 the premiums go to paying claims and 20 % covers 00:20:20.049 --> 00:20:22.430 operations and profit. Right. In title insurance, 00:20:22.730 --> 00:20:34.700 it's flip. Because if they do their job right, 00:20:34.859 --> 00:20:37.759 there shouldn't be any claims. Exactly. A claim 00:20:37.759 --> 00:20:40.559 in title insurance means the search failed. It's 00:20:40.559 --> 00:20:43.619 an error. The goal is zero claims. Another thing 00:20:43.619 --> 00:20:44.960 that makes it unique is the payment structure. 00:20:45.500 --> 00:20:48.440 I feel like I am constantly paying premiums for 00:20:48.440 --> 00:20:52.279 my car and my health. But title insurance was 00:20:52.279 --> 00:20:56.460 just... One check. One and done at closing. Yes, 00:20:56.480 --> 00:20:58.920 a single premium at closing, no annual fees, 00:20:59.180 --> 00:21:02.160 and the coverage lasts as long as you or your 00:21:02.160 --> 00:21:04.900 heirs retain an interest in the property. Wait, 00:21:04.960 --> 00:21:06.920 or your heirs. So if I pass the house down to 00:21:06.920 --> 00:21:10.579 my kids, the policy I bought in 2024 still covers 00:21:10.579 --> 00:21:12.960 them? Typically, yes. The language of the policy 00:21:12.960 --> 00:21:15.599 usually extends coverage to heirs as long as 00:21:15.599 --> 00:21:17.500 they acquire the title from you. It's a very 00:21:17.500 --> 00:21:19.700 long -term product for a one -time fee. Okay, 00:21:19.740 --> 00:21:21.319 that makes the sticker shock a little easier 00:21:21.319 --> 00:21:24.339 to swallow. There's a lifetime guarantee. But 00:21:24.339 --> 00:21:26.279 let's talk about what we are actually buying. 00:21:26.460 --> 00:21:28.400 Because I remember looking at my closing documents, 00:21:28.579 --> 00:21:30.299 which was a stack of paper three inches thick, 00:21:30.420 --> 00:21:33.680 and seeing lender's policy and owner's policy. 00:21:33.859 --> 00:21:36.140 The two policies. I just signed both because 00:21:36.140 --> 00:21:38.819 I wanted the keys. Why are there two? Why isn't 00:21:38.819 --> 00:21:40.839 it just one policy for the house? This is the 00:21:40.839 --> 00:21:43.059 most common confusion for homebuyers, and it's 00:21:43.059 --> 00:21:45.660 dangerous if you get it wrong. The lender's policy 00:21:45.660 --> 00:21:48.059 is mandatory. If you are getting a mortgage, 00:21:48.359 --> 00:21:50.640 the bank will force you to buy this. And I pay 00:21:50.640 --> 00:21:52.660 for it, even though it protects the bank? Yes. 00:21:53.099 --> 00:21:56.000 You pay the premium. It covers the bank's interest, 00:21:56.200 --> 00:21:58.259 which is the loan amount. So if you have a $400 00:21:58.259 --> 00:22:01.059 ,000 mortgage... the policy insures the $400 00:22:01.059 --> 00:22:04.279 ,000. Okay. If the title turns out to be bad 00:22:04.279 --> 00:22:06.819 and the house is lost, this policy pays off the 00:22:06.819 --> 00:22:09.319 bank, but it does not protect your equity. So 00:22:09.319 --> 00:22:12.920 if I put $100 ,000 down and the house is taken 00:22:12.920 --> 00:22:15.359 away because of a title fraud, the bank gets 00:22:15.359 --> 00:22:19.079 their $400 ,000 back and I get nothing. I lose 00:22:19.079 --> 00:22:21.039 my down payment. If you only have a lender's 00:22:21.039 --> 00:22:23.869 policy, yes. You lose your down payment and any 00:22:23.869 --> 00:22:25.829 principal you've paid. Your investment is wiped 00:22:25.829 --> 00:22:28.170 out. Oh, my God. That is why the owner's policy 00:22:28.170 --> 00:22:30.329 is critical. It is technically optional in many 00:22:30.329 --> 00:22:32.670 places, but you would be crazy not to get it. 00:22:32.750 --> 00:22:35.009 It sounds like it. The owner's policy covers 00:22:35.009 --> 00:22:37.410 the purchase price. It assures you that the title 00:22:37.410 --> 00:22:40.130 is vested in you. And crucially, it covers legal 00:22:40.130 --> 00:22:43.589 defense costs. That's the big one. If someone 00:22:43.589 --> 00:22:45.789 sues claiming they own my porch because of some 00:22:45.789 --> 00:22:48.210 100 -year -old survey error, I don't have to 00:22:48.210 --> 00:22:50.470 hire a lawyer. The title company has a duty to 00:22:50.470 --> 00:22:53.759 defend you. And property litigation is incredibly 00:22:53.759 --> 00:22:56.559 expensive. Even if you win, the legal fees could 00:22:56.559 --> 00:22:59.099 bankrupt you. The policy covers that. OK, so 00:22:59.099 --> 00:23:01.779 get the owner's policy. Yeah. Got it. Now let's 00:23:01.779 --> 00:23:03.380 talk about shopping, because when I bought my 00:23:03.380 --> 00:23:06.019 house, my real estate agent just said, use this 00:23:06.019 --> 00:23:08.319 title company. And I said, OK. Yeah. I assumed 00:23:08.319 --> 00:23:10.220 it was like the gas company. You just use whoever 00:23:10.220 --> 00:23:13.579 services the area. Did I mess up? You didn't 00:23:13.579 --> 00:23:15.500 necessarily mess up, but you might have overpaid. 00:23:16.640 --> 00:23:19.359 This brings us to a very important federal law 00:23:19.359 --> 00:23:22.440 called RESPEA, the Real Estate Settlement Procedures 00:23:22.440 --> 00:23:25.880 Act. RESPEA. Sounds friendly. It is friendly 00:23:25.880 --> 00:23:28.700 to consumers. It explicitly gives you the right 00:23:28.700 --> 00:23:31.339 to choose your title insurer. Federal law says 00:23:31.339 --> 00:23:33.799 that banks, brokers, or attorneys cannot mandate 00:23:33.799 --> 00:23:36.099 a specific company. But they can recommend one, 00:23:36.180 --> 00:23:38.700 right? And I imagine their recommendations carry 00:23:38.700 --> 00:23:40.940 a lot of weight. They can recommend, and they 00:23:40.940 --> 00:23:44.119 often do. but they cannot require it. And there 00:23:44.119 --> 00:23:47.599 is a specific section of REITCA that is fascinating. 00:23:47.839 --> 00:23:50.759 It says that sellers cannot require a buyer to 00:23:50.759 --> 00:23:53.940 use a specific title company as a condition of 00:23:53.940 --> 00:23:56.920 sale. So a seller can't say, I'll only sell you 00:23:56.920 --> 00:23:59.279 this house if you use my brother's title company. 00:24:00.269 --> 00:24:02.650 And if they do and you catch them, the penalty 00:24:02.650 --> 00:24:06.210 is severe. The buyer can sue the seller for three 00:24:06.210 --> 00:24:09.029 times the title insurance charges. Triple damages. 00:24:09.269 --> 00:24:11.630 I like that. So the government really wants to 00:24:11.630 --> 00:24:13.950 protect our choice here. They do. And this extends 00:24:13.950 --> 00:24:16.390 to the transparency of the costs. Have you heard 00:24:16.390 --> 00:24:19.369 of the loan estimate or LE? Yes. That's the standard 00:24:19.369 --> 00:24:21.130 form you get when you apply for a mortgage. It 00:24:21.130 --> 00:24:23.180 breaks down all the costs. Right. It used to 00:24:23.180 --> 00:24:24.960 be called the good faith estimate, but the new 00:24:24.960 --> 00:24:27.900 loan estimate from the CFPB, the Consumer Financial 00:24:27.900 --> 00:24:30.660 Protection Bureau, is much stricter. It puts 00:24:30.660 --> 00:24:33.359 lenders in tolerance buckets. Tolerance buckets. 00:24:33.519 --> 00:24:35.740 Explain. That sounds like jargon. It is, but 00:24:35.740 --> 00:24:38.160 it's important. So when a lender quotes you a 00:24:38.160 --> 00:24:40.809 fee on that form, they are held to it. There 00:24:40.809 --> 00:24:43.809 are three categories. First is 0 % tolerance. 00:24:44.049 --> 00:24:47.049 Zero tolerance. Sounds serious. It is. These 00:24:47.049 --> 00:24:49.990 are fees for things you cannot shop for, like 00:24:49.990 --> 00:24:52.690 the appraisal or credit report fee from the lender. 00:24:53.029 --> 00:24:56.309 If the lender says the appraisal will cost $500 00:24:56.309 --> 00:24:59.849 and it ends up costing $600, the lender has to 00:24:59.849 --> 00:25:02.869 eat that $100 difference. You pay 0 % more. Okay, 00:25:02.910 --> 00:25:05.009 I like that. What about title insurance? Where 00:25:05.009 --> 00:25:07.369 does that fall? Title insurance usually falls 00:25:07.369 --> 00:25:10.150 into the 10 % tolerance bucket if you use the 00:25:10.150 --> 00:25:12.869 provider on the lender's written list of service 00:25:12.869 --> 00:25:14.470 providers. So if I go with their recommendation, 00:25:14.710 --> 00:25:16.990 the price can't go up by more than 10 % from 00:25:16.990 --> 00:25:19.230 the initial quote. Exactly. If the aggregate 00:25:19.230 --> 00:25:22.109 of all those 10 % bucket fees goes up by 15%, 00:25:22.109 --> 00:25:25.789 the lender has to pay the 5 % overage. This stops 00:25:25.789 --> 00:25:27.829 bait -and -switch tactics where they quote you 00:25:27.829 --> 00:25:30.309 a low closing cost to get you hooked and then 00:25:30.309 --> 00:25:32.430 jack it up at the signing table. That is a huge 00:25:32.430 --> 00:25:34.710 consumer protection. Yeah. But who actually sets 00:25:34.710 --> 00:25:37.890 the prices? Can I haggle, is it like a car dealership? 00:25:38.029 --> 00:25:39.990 It depends wildly on where you live. This is 00:25:39.990 --> 00:25:42.109 a state -by -state regulation map. The rules 00:25:42.109 --> 00:25:43.970 are all over the place. Give me some examples. 00:25:44.089 --> 00:25:46.529 What are the extremes? Okay, the biggest extreme 00:25:46.529 --> 00:25:49.789 is probably Texas. The state sets the exact rate. 00:25:49.890 --> 00:25:52.809 It's called promulgation. You can shop for better 00:25:52.809 --> 00:25:55.390 service, but the price for the policy will be 00:25:55.390 --> 00:25:58.589 identical at every single company. It is set 00:25:58.589 --> 00:26:02.170 by law after a hearing each year. So in Texas... 00:26:02.440 --> 00:26:04.500 haggling is useless. You're just shopping for 00:26:04.500 --> 00:26:07.339 who answers the phone faster. Correct. But then 00:26:07.339 --> 00:26:09.740 you have states like Illinois or Georgia, where 00:26:09.740 --> 00:26:12.859 there is no direct rate regulation. Insurers 00:26:12.859 --> 00:26:15.059 set their own rates. So there, shopping around 00:26:15.059 --> 00:26:17.019 could save you hundreds or even thousands of 00:26:17.019 --> 00:26:19.329 dollars. And what about Pennsylvania? the birthplace 00:26:19.329 --> 00:26:21.430 of the industry. They have a hybrid system with 00:26:21.430 --> 00:26:23.430 discounts. They have something called a reissue 00:26:23.430 --> 00:26:25.609 rate. If the property was insured in the last 00:26:25.609 --> 00:26:28.150 10 years or if you are refinancing, you get a 00:26:28.150 --> 00:26:30.970 discount often around 10 % to 30%. Wait, hang 00:26:30.970 --> 00:26:33.869 on. I need to check my closing statement. I refinanced 00:26:33.869 --> 00:26:36.609 a few years ago. I did not know about this. I 00:26:36.609 --> 00:26:39.009 hope I got that reissue rate. Many people miss 00:26:39.009 --> 00:26:41.009 it. You have to ask for it or make sure the title 00:26:41.009 --> 00:26:43.069 officer knows there was a prior policy. It's 00:26:43.069 --> 00:26:45.819 free money if you qualify. That makes me so angry 00:26:45.819 --> 00:26:48.740 at my past self. OK, this is great practical 00:26:48.740 --> 00:26:51.680 advice, but let's pivot to the juicy stuff. Segment 00:26:51.680 --> 00:26:55.119 five, industry dynamics and controversies. You 00:26:55.119 --> 00:26:57.799 mentioned referrals earlier. My agent recommended 00:26:57.799 --> 00:26:59.799 a title company. Is there something happening 00:26:59.799 --> 00:27:02.220 behind the scenes there? This is the elephant 00:27:02.220 --> 00:27:04.599 in the room. It's called an affiliated business 00:27:04.599 --> 00:27:07.819 arrangement or ABA. This is when a lender, a 00:27:07.819 --> 00:27:10.779 realtor or a developer actually owns or has a 00:27:10.779 --> 00:27:13.299 financial stake in the title company they are 00:27:13.299 --> 00:27:16.009 referring you to. So my realtor says, use ABC 00:27:16.009 --> 00:27:19.009 Title. And it turns out my realtor owns ABC Title. 00:27:19.130 --> 00:27:21.650 Or their brokerage firm does, yes. This is essentially 00:27:21.650 --> 00:27:24.130 a one -stop shop concept. The industry argues 00:27:24.130 --> 00:27:26.829 it's for your convenience. Hey, we can handle 00:27:26.829 --> 00:27:28.789 the loan, the finding of the house, and the title 00:27:28.789 --> 00:27:31.809 work all under one roof. Seamless. Convenience 00:27:31.809 --> 00:27:34.569 is nice. But it sounds like a massive conflict 00:27:34.569 --> 00:27:37.339 of interest. If I'm hiring a title company to 00:27:37.339 --> 00:27:40.160 find problems, do I really want them owned by 00:27:40.160 --> 00:27:42.319 the person who only gets paid as the deal closes? 00:27:42.660 --> 00:27:44.980 That is the exact question. Consumers seem to 00:27:44.980 --> 00:27:46.799 think it's a conflict, too, when they know about 00:27:46.799 --> 00:27:49.980 it. The Ohio Association of Independent Title 00:27:49.980 --> 00:27:54.279 Agents, or OAIATI, did a survey in 2009 -2010. 00:27:54.480 --> 00:27:57.640 They found that 58 % of respondents felt these 00:27:57.640 --> 00:28:00.039 arrangements were a conflict of interest. That's 00:28:00.039 --> 00:28:02.460 majority. And it gets more interesting. When 00:28:02.460 --> 00:28:04.539 people realized the referral came with a profit 00:28:04.539 --> 00:28:07.359 share, 50 % said they would prefer an independent 00:28:07.359 --> 00:28:09.779 third party. Because if the realtor owns the 00:28:09.779 --> 00:28:12.299 title company, is the title company really going 00:28:12.299 --> 00:28:14.839 to dig deep to find a problem that might kill 00:28:14.839 --> 00:28:17.339 the realtor's commission? That is the fear. The 00:28:17.339 --> 00:28:20.019 fear is that the checks and balances are eroded. 00:28:20.180 --> 00:28:22.759 Of course, the industry has its own data. The 00:28:22.759 --> 00:28:24.740 Real Estate Services Providers Council cites 00:28:24.740 --> 00:28:27.619 studies from 2002 and 2008 claiming higher customer 00:28:27.619 --> 00:28:30.720 satisfaction with one -stop shopping. We investigated 00:28:30.720 --> 00:28:33.299 ourselves and found that customers love us. I'm 00:28:33.299 --> 00:28:35.839 skeptical. To be fair, convenience is a value. 00:28:36.380 --> 00:28:39.579 But legally, if an ABA exists, they must disclose 00:28:39.579 --> 00:28:41.779 it to you. You get a piece of paper saying we 00:28:41.779 --> 00:28:43.980 have a relationship with this company and you 00:28:43.980 --> 00:28:46.559 are free to shop elsewhere. The problem is that 00:28:46.559 --> 00:28:48.680 paper is usually buried in a 100 -page stack 00:28:48.680 --> 00:28:51.000 you sign in a hurry at closing. Right. Sign here, 00:28:51.059 --> 00:28:53.099 sign here, sign here. I probably signed three 00:28:53.099 --> 00:28:55.039 of those and didn't read them. Let's talk about 00:28:55.039 --> 00:28:57.680 the money. How profitable is this industry? You 00:28:57.680 --> 00:29:00.240 said claims are rare? They are very rare. Let's 00:29:00.240 --> 00:29:03.319 look at the 2012 data from ALLTA. the industry 00:29:03.319 --> 00:29:06.500 took in 11 .2 billion dollars in premiums they 00:29:06.500 --> 00:29:10.640 paid out 908 million dollars in claims okay i'm 00:29:10.640 --> 00:29:12.779 looking at these loss ratios in the source material 00:29:12.779 --> 00:29:15.640 and the math is blowing my mind you're telling 00:29:15.640 --> 00:29:18.500 me that for every 100 in premiums they collect 00:29:19.039 --> 00:29:21.579 They only pay out about $8 in claims. Roughly, 00:29:21.579 --> 00:29:25.019 yes. In 2012, it was about 8 .1%. They call this 00:29:25.019 --> 00:29:27.819 the loss ratio. That is obscene. I mean, look 00:29:27.819 --> 00:29:30.579 at car insurance. If Daico collects $100, they 00:29:30.579 --> 00:29:33.039 are paying out $70 or $80 to fix crashed cars. 00:29:33.259 --> 00:29:35.940 Or boiler insurance, another inspection -heavy 00:29:35.940 --> 00:29:39.299 type, pays out 25%. Title insurance is giving 00:29:39.299 --> 00:29:42.279 92 % of the revenue. How is that not just a massive 00:29:42.279 --> 00:29:44.900 scam? If you ask the consumer advocates, it is 00:29:44.900 --> 00:29:47.000 a scam. They argue it's a reverse lottery where 00:29:47.000 --> 00:29:49.240 the house always wins. But, and I have to play 00:29:49.240 --> 00:29:51.180 devil's advocate here, the industry has a very 00:29:51.180 --> 00:29:53.319 specific defense for this. Okay, let's hear it. 00:29:53.400 --> 00:29:55.519 They say you are misunderstanding what you're 00:29:55.519 --> 00:29:57.859 paying for. I'm paying for insurance. It's in 00:29:57.859 --> 00:30:00.859 the name. They would say no. They say you are 00:30:00.859 --> 00:30:03.000 paying for prevention. Think of it like a security 00:30:03.000 --> 00:30:06.440 guard versus a theft policy. Do what? A theft 00:30:06.440 --> 00:30:09.240 policy pays you after you get robbed. A security 00:30:09.240 --> 00:30:11.220 guard stops you from getting robbed in the first 00:30:11.220 --> 00:30:14.619 place. Title insurers argue that the 90 plus 00:30:14.619 --> 00:30:16.779 percent of the premium they keep isn't profit. 00:30:16.920 --> 00:30:19.220 It's the salary of the security guard. I see. 00:30:19.319 --> 00:30:21.920 They spend that money maintaining the title plants, 00:30:22.200 --> 00:30:24.900 paying the researchers and fixing the one in 00:30:24.900 --> 00:30:27.400 three errors before the closing happens. So their 00:30:27.400 --> 00:30:29.960 argument is the reason our claims are so low 00:30:29.960 --> 00:30:32.880 is because we are so expensive. Precisely. If 00:30:32.880 --> 00:30:35.180 they stop spending that money on research. the 00:30:35.180 --> 00:30:37.759 claims would skyrocket. It's a risk elimination 00:30:37.759 --> 00:30:41.660 model, not a risk assumption model. The low payout 00:30:41.660 --> 00:30:43.980 is a feature, not a bug. It proves the system 00:30:43.980 --> 00:30:47.059 is working. I get the logic. I really do. But 00:30:47.059 --> 00:30:48.799 then I look at the profit margins of the big 00:30:48.799 --> 00:30:51.380 four insurers, and I wonder if that security 00:30:51.380 --> 00:30:54.559 guard is really costing them that much, or if 00:30:54.559 --> 00:30:57.240 we're just paying for a monopoly. Because looking 00:30:57.240 --> 00:30:58.799 at the market share here, there isn't exactly 00:30:58.799 --> 00:31:01.240 a lot of competition driving prices down, is 00:31:01.240 --> 00:31:03.539 there? Not really. It's highly concentrated. 00:31:03.859 --> 00:31:06.240 There are the big four families of insurers, 00:31:06.500 --> 00:31:09.440 Fidelity National Financial, First American Corporation, 00:31:09.960 --> 00:31:12.359 Old Republic, and Stewart Title. How much of 00:31:12.359 --> 00:31:14.559 the market do they control? In 2012, Fidelity 00:31:14.559 --> 00:31:19.059 had about 34%, First American 26%, Old Republic 00:31:19.059 --> 00:31:23.559 13 .5%, and Stewart about 13%. So wait, let me 00:31:23.559 --> 00:31:26.279 do the math. That's... Over 86 % of the entire 00:31:26.279 --> 00:31:28.119 market is controlled by just four companies. 00:31:28.279 --> 00:31:31.859 Yes. Collectively, these four giants control 00:31:31.859 --> 00:31:34.740 the overwhelming majority of the market. Regional 00:31:34.740 --> 00:31:37.440 companies only make up about 13%. So it's an 00:31:37.440 --> 00:31:40.160 oligopoly. Four giant companies dominating the 00:31:40.160 --> 00:31:42.259 landscape. Yes, which makes the shopping around 00:31:42.259 --> 00:31:44.859 advice interesting. You are often shopping between 00:31:44.859 --> 00:31:46.839 agents who are essentially reselling policies 00:31:46.839 --> 00:31:49.160 from one of these four big underwriters, not 00:31:49.160 --> 00:31:51.519 always getting true market diversity. And since 00:31:51.519 --> 00:31:53.180 their revenue is tied to the housing market, 00:31:53.279 --> 00:31:55.339 they must have taken a beating in 2008. They 00:31:55.339 --> 00:31:58.880 did. Revenue fell off a cliff in 2007. It's a 00:31:58.880 --> 00:32:01.579 highly cyclical industry. They have to bank cash 00:32:01.579 --> 00:32:05.319 during the boom years, like the 2000 -2006 bubble 00:32:05.319 --> 00:32:08.400 where revenue doubled, to survive the busts when 00:32:08.400 --> 00:32:10.960 no one is buying or selling houses. Okay, this 00:32:10.960 --> 00:32:12.799 has been a whirlwind tour of a piece of paper 00:32:12.799 --> 00:32:15.440 I definitely took for granted. So let's bring 00:32:15.440 --> 00:32:17.819 it in for a landing. What is the big picture 00:32:17.819 --> 00:32:20.809 here? Let's summarize. The summary is this. Title 00:32:20.809 --> 00:32:23.150 insurance is the invisible shield that allows 00:32:23.150 --> 00:32:24.829 the American real estate market to function. 00:32:25.480 --> 00:32:28.059 Because we rejected the torn system where the 00:32:28.059 --> 00:32:30.240 government guarantees ownership and stuck with 00:32:30.240 --> 00:32:32.839 the bulletin board recording system, we created 00:32:32.839 --> 00:32:36.019 a massive gap in security. A gap of trust. We 00:32:36.019 --> 00:32:38.460 don't know for sure if we own what we buy. Exactly. 00:32:38.559 --> 00:32:40.880 And private industries stepped in to fill that 00:32:40.880 --> 00:32:43.140 gap. They monetize the risk of the past. They 00:32:43.140 --> 00:32:45.359 check the records. They fix the errors. And they 00:32:45.359 --> 00:32:47.779 insure against the unknown problems that they 00:32:47.779 --> 00:32:49.700 might have missed. And for the listener, the 00:32:49.700 --> 00:32:52.819 so what seems pretty clear. First off, check 00:32:52.819 --> 00:32:56.200 your loan estimate. Absolutely. Do not just blindly 00:32:56.200 --> 00:32:58.759 accept the provider your lender or realtor suggests, 00:32:59.039 --> 00:33:01.039 especially if you see an affiliated business 00:33:01.039 --> 00:33:03.700 arrangement disclosure. You have the right to 00:33:03.700 --> 00:33:05.599 shop. Unless you're in Texas. Unless you're in 00:33:05.599 --> 00:33:08.400 Texas. But even then, you can shop on service. 00:33:08.680 --> 00:33:11.019 But in most places, call a few independent title 00:33:11.019 --> 00:33:14.420 agencies, ask about their rates. And if you are 00:33:14.420 --> 00:33:16.740 refinancing or bought the house recently, ask 00:33:16.740 --> 00:33:19.059 about the reissue rate. And make sure you get 00:33:19.059 --> 00:33:21.319 the owner's policy, not just the lender's policy. 00:33:21.599 --> 00:33:24.349 Don't leave your equity naked. Critical advice. 00:33:24.430 --> 00:33:27.150 That's probably the single most important takeaway. 00:33:27.390 --> 00:33:29.430 So here is the final provocative thought I want 00:33:29.430 --> 00:33:32.069 to leave everyone with. We pay billions of dollars 00:33:32.069 --> 00:33:35.970 every year, $11 billion back in 2012, surely 00:33:35.970 --> 00:33:39.369 more now, to private companies to maintain records 00:33:39.369 --> 00:33:41.730 and ensure titles because we don't trust our 00:33:41.730 --> 00:33:43.549 own government to guarantee property ownership. 00:33:43.869 --> 00:33:47.630 We are paying a tax to private corporations for 00:33:47.630 --> 00:33:50.220 efficiency and risk management. So the question 00:33:50.220 --> 00:33:53.019 is, is the speed and flexibility of this recording 00:33:53.019 --> 00:33:56.000 system actually worth that extra cost to every 00:33:56.000 --> 00:33:58.799 single homebuyer? Or was the rejection of the 00:33:58.799 --> 00:34:01.799 torrent system a century -old mistake that we 00:34:01.799 --> 00:34:03.900 are literally still paying for every time we 00:34:03.900 --> 00:34:06.640 close on a house? It raises a profound question 00:34:06.640 --> 00:34:09.460 about the role of government versus private enterprise 00:34:09.460 --> 00:34:13.119 in the most fundamental asset we have, our land. 00:34:13.320 --> 00:34:14.739 Something to think about next time you see a 00:34:14.739 --> 00:34:16.699 for sale sign. Thanks for diving deep with us. 00:34:16.739 --> 00:34:17.420 We'll see you next time.