Americans Desperately Need a Break on Home Closing Costs
President Trump has ordered the heads of all executive departments to lower the cost of housing as part of his initiative to deliver emergency price relief to Americans. Battling the runaway cost of homeownership is a noble cause, and Fannie Mae’s new Title Acceptance program is helping in a big way. According to a recent study from George Mason University’s Antonin Scalia School of Law, Title Acceptance could save homeowners $2.19B in lower closing fees.
The program’s savings are so huge that housing experts have rightly put it under a magnifying glass. If we are really going to cut $2.19B from the fees we charge to close real estate transactions, are we just eliminating waste, or are we cutting protections that could come back to haunt us in the form of another housing crisis?
To understand why Title Acceptance is the right choice, and why these savings don’t come at the expense of safety, we need to take a closer look at the role of title insurance — and how Doma’s instant title solution (which is the first to power Title Acceptance) changes the game.
Clearing Title Is Important, Necessary, and Should Not Be “Waived”
Title is a vital part of a real estate transaction. By searching, examining, and fixing (or clearing) the title record, closing companies prevent past legal issues – unpaid taxes, unpaid debts (known as liens), unresolved deaths, divorces, and more – from becoming future problems for the new lender and homeowner. It’s protection the homeowner and lender deserve – on every transaction.
Title Acceptance, though sometimes misleadingly called a “title waiver,” does not waive this critical process. Every refinance considered for Title Acceptance is screened for title issues. If serious risks are detected or the data isn’t sufficient to give high confidence, the property simply is not eligible – and traditional title insurance is required instead. (And the program doesn’t apply to home purchases at all – the $2.19B in savings is just on refinances).
Title Insurance and Title Acceptance offer the same essential protection: a data-driven process that results in the elimination of most title risks on a home before the transaction closes. And they both eliminate roughly the same amount of risk, as we use our data to argue below.
In short: Title Acceptance cuts costs — not corners.
So, if the protection is similar, what explains the $2.19 billion difference in savings?
Instant Title Lowers Cost – Not Protection – for Refinance Title Insurance
During a refinance transaction, only the lender – not the homeowner – requires title protection (usually in the form of an insurance policy paid for by the borrower). But as the Wall Street Journal reports, less than 5% of the cost of refi title insurance goes to paying title claims to the lender. Traditional insurers often suggest that the other 95% is the operational cost of doing the title search and verification itself.
But at Doma, we know there’s a better way. We have over 20 years of digitized title insurance policy data, and a passion for reinvigorating the title industry. We know that by using modern technology, machine learning, and data science, we can automate large parts of the process. Instant title solutions verify and clear title safely for a fraction of that cost.
Using our deep historical data, we have reported that the instant title method separates safe transactions from risky ones and delivers outcomes as good, or even better than, traditional title insurance. Now, with another year of updated results shown in Figure 1, we’re happy to confirm that the trend continues.
In short: refinance title insurance misprices risk. Instant title solutions allow us to reserve traditional processes for the riskiest cases, while “easy” homes are cleared thoroughly, efficiently, and instantly. And whether instant or traditional, the title claims process is still available in case any issues are missed.
Cutting Through the Noise: Instant Title Is Built on Safety
Housing affordability is one of the biggest challenges facing Americans today — and it’s clear that the old ways of doing things won’t solve it. Our analysis shows that it’s possible to lower costs without lowering standards. By using data intelligently and focusing efforts where real risks exist, instant title solutions can deliver faster, safer, and more affordable real estate transactions.
Figure 1. Claims paid out for title insurance. The vertical axis shows average dollars of claims paid out per policy (meaning that a title issue was not found during closing and became a problem later). The horizontal axis shows the year after policy issuance in which the claims were filed. The blue and green curves show traditional title insurance losses, and the orange curve shows instant title losses. This graph provides evidence that despite carrying a much lower title verification cost, instant title does not produce more claims losses than traditional title — it is arguable less risky. The typical title insurance premium paid on the average refinance loan is $500.