title insurance loss provision

[hyten1]

folks,

 

i have been researching title insurance companies (just learning and reading). one thing that puzzle me is the industry title loss provision on the yearly bases is around 8-10%

 

why is it so high?

 

it just seem to me so high that 1 out of 10 real estate transaction there is an title issue? why is that? is there that many fraud in this space? I would think before an real estate transaction occurs the buyer/seller/lawyer/bank etc would have done the research and would know if the title is good?

 

anyone have any background on the industry etc. on why 1 out of ever 10 RE transaction we have a title problem?

 

thank you

 

hy

[ItsAValueTrap]

Value Investors' Club has some writeups on title insurance companies.

 

Here's how I see the industry:

 

When you buy a house, you HAVE to buy title insurance to get a mortgage.  Usually the buyer will just go with whatever company that the seller recommends.  The seller receives kickbacks/commissions for referring the customer (unless they provide title insurance themselves through an affiliated company).

 

The margins on title insurance are insane because the buyer's don't care that much.  The cost of title insurance is insignificant compared to the cost of your house.  The real estate agents don't care about how much title insurance costs because they just want the deal to close and it's their client that pays for title insurance, not them.

 

I believe the chance of there being a problem with the title is a lot lower than 8-10%...? 

 

*I could be totally wrong.  I only know a little bit about title insurance from researching Altisource and AAMC.

[A_Hamilton]

folks,

 

i have been researching title insurance companies (just learning and reading). one thing that puzzle me is the industry title loss provision on the yearly bases is around 8-10%

 

why is it so high?

 

it just seem to me so high that 1 out of 10 real estate transaction there is an title issue? why is that? is there that many fraud in this space? I would think before an real estate transaction occurs the buyer/seller/lawyer/bank etc would have done the research and would know if the title is good?

 

anyone have any background on the industry etc. on why 1 out of ever 10 RE transaction we have a title problem?

 

thank you

 

hy

 

The 8-10% combined loss rate is a loss on the premium dollars received in a given year, the notional exposures are significantly higher than premiums received.

[jay21]

I don't know too much about title insurance but, I would think it's a question of severity rather than frequency.  Don't these guys pick up a bunch of small premiums on each transaction?  It's the few that go bad that will end of costing a lot.

 

Title insurance could be an interesting way to play the housing recovery.

[hyten1]

A_Hamilton

 

you are correct

 

any idea why its so high?

 

before i started looking I would think 1 out of 100 or so title insurance have losses. what is it about this industry that 1 out of every 10 real estate transation result in title having some sort of issue.

 

as you can tell i am new to this :)

 

 

EDIT: forgive me, after i posted this i realize. so the # of title insurance that goes bad is considerably less that 10%, since the notional exposure of the loss is significantly higher than the premium received.

 

 

hy

[A_Hamilton]

A_Hamilton

 

you are correct

 

any idea why its so high?

 

before i started looking I would think 1 out of 100 or so title insurance have losses. what is it about this industry that 1 out of every 10 real estate transation result in title having some sort of issue.

 

as you can tell i am new to this :)

 

hy

 

It is not 1 out of 10 policies that have losses. It's substantially lower.

 

However, when you have a claim you typically get a real gem in terms of severity.

Here's one we covered in my law school class: A railroad with a 200 year easement to run tracks on another's property hasn't used the property in 50 years and you decide to give title coverage to a company building a factory over the easement (you don't think the railroad will ever use its easement) without getting the easement waived by the railroad. 20 years later railroad comes back and says WTF I'm now wanting to put in my rail line. Title company has absurd payout for the $1,000 premium they received 20 years ago to fix the problem satisfactorily to both parties.

 

The industry is low price per premium, low frequency in claims, extremely high severity when claims hit.

[hyten1]

a_hamilton

 

thanks

 

hy

[hyten1]

maybe some of these title company should stick with simple residential properties, one condo/coop, one house at a time

 

 

[A_Hamilton]

maybe some of these title company should stick with simple residential properties, one condo/coop, one house at a time

 

Nah...the problem is not your 8-10% loss ratio. The problem is the high fixed cost of having a title plant and having the necessary personnel in place when transactions pick up.