A nationwide surge in fraud and forgery has more than doubled claims against title insurance companies within the last decade to more than $250 million.
The actual costs to consumers are hard to quantify, but in the worst cases, uninsured homeowners can lose their property and life savings. Even in the best cases, insured homeowners can be tied up in court for months while conflicting title claims are resolved.
Consumers also face higher premiums for title insurance in the future. A recent study by New Mexico's insurance commissioner said premiums are not keeping up with losses and are about 20% too low.
Whereas the typical home buyer has a working knowledge of homeowners insurance, appraisals and inspections, the need to buy title insurance for a new home is often misunderstood.
Title insurance "guarantees you that the public records have been examined and the title is clear," explained Robert Manuele, vice president and chief underwriting counsel for World Title Co. in Burbank. Some policies cover only what is in those public records; other policies cover non-public matters.
There are two types of title insurance: One to protect the homeowner, which costs an average of $3.50 per $1,000 of home value, and another to protect the lender, which costs $2.50 per $1,000, according to the Better Business Bureau.
The home buyer pays for both at settlement with a one-time premium.
Owner's title insurance, which is optional, protects the owner's interest and is issued in the same amount as the purchase price.
Lender's title insurance is usually required by a lender to protect security interest in the property. It equals the amount of the mortgage loan.
The coverage means the insurer will pay all valid claims on the insured title. In addition, the insurer will pay legal fees for defending the title against attack so long as the owner or heirs continue to own the property.
Before issuing a policy, a title insurance company combs public records and traces the property's chain of ownership to ensure that the seller is the legal owner.
But there are other factors that affect the seller's right to sell, such as liens for back taxes or assessments, claims by others against the property, a utility company's right of way to construct a power line or the insurance industry's biggest problem lately--forged deeds.
"White collar crime is on the rise in every industry," said Richard McCarthy, director of research at the American Land Title Assn. "It's part of the breakdown in morality in industry, part of the get-rich-quick mentality."
Like many white-collar crimes, title fraud is complicated. Indeed, it is so complicated that law enforcement officials often avoid investigating it, said Ashley Williams, a former U.S. Secret Service agent who is director of corporate security for Ticor Title Insurance Co.
"Real estate fraud is difficult to prosecute," he said. "It is very complex, and there are not a lot of law enforcement people trained in the area. In addition, many jurisdictions don't like to deal with it because it is so time consuming and they are so shorthanded."
McCarthy speculates that title fraud begins small, with someone forging a single document, and then grows to multiple crimes. Others say the field has attracted a more serious brand of criminal.
James N. Laichas, senior vice president and chief claims counsel for Ticor, said:
"We have more professionals in the field. It used to be that most forgeries were committed by a husband or a wife in a sticky divorce case, or a son or daughter. But now you have professional forgers who have become more and more sophisticated about the industry. And they are making it more and more expensive for us."
The scams vary, and the perpetrator can be a real estate broker, an escrow agent, an attorney, a developer, a title insurance agent or anyone with a knowledge of deeds and land conveyances, lending and insurance.
When there is insurance, the title insurer is the victim. When there is no insurance, the mortgage lender and the buyer are left holding the bag.
Manuele, of World Title Co., described a recent scheme operated by a woman he identified only as an Orange County resident. Some details have been omitted to guard against copy-cat crimes.
The woman's method was to locate a property where owners had lived for several years so that the property would be worth far more than the mortgage.
She would research the public records on the property and forge a new deed, claiming she was its owner. Police later found dozens of fake notary seals in her apartment that were used to authenticate the documents.
After filing the new deed, she would apply for a loan against the property and pocket the money. She repeated the scheme over and over with new lenders each time.
Ticor's Williams said a man who concentrated on the San Gabriel Valley stole millions from title insurance companies over two years. His strategy was to locate properties that were vacant and for sale. He would break into the property so he could describe it in detail to create a deed, remove the For Sale sign to limit interest from buyers, obtain a quick title and then arrange for a loan. He used false names on the fraudulent titles and was only caught through a tip from a suspicious savings and loan officer.
To combat these problems, some title insurance companies are offering forgery-prevention programs and are training employees to watch for suspicious documents and rewarding those who discover fraud attempts.
At World Title, spotting a forgery earns $1,000 reward and, Manuele said, "It's amazing. We're paying out five or six rewards a month now."
Although the problem is hard to cure, several states are considering legislation to impose new regulations. Florida has increased bonding requirements for title companies to ensure that they can pay off claims, and California is considering legislation to make it harder to obtain a notary seal.
For consumers, both buyers and sellers, Williams advises, "Know who you are dealing with."
The 4,246 shopping centers in California employ more than 1 million people and generate in excess of $2.9 billion in sales tax revenue--more than half the non-automotive sales tax revenue.
Yet the construction of new shopping centers dropped by more than 25% between 1987 and 1989, and there was an additional drop of 16% from the first quarter of 1989 to the first period of 1990.
When testifying last week before the Senate Banking Committee, Irvin B. Maizlish, president of the International Council of Shopping Centers, blamed the situation on the savings and loan crisis.
"Retail sales are up, interest rates aren't the greatest, but we've lived with 10% for a long time," Maizlish said. "Regulators have blamed the whole real estate industry, including shopping centers, for the (S&L;) crisis."
A few months ago, Congress said the nation's regulators had been too easy on savings and loans and insisted on tighter rules. Now hearings are under way to determine if the new and more restrictive standards may have contributed to a credit crunch.
"If they don't ease up, this country will go into a recession," Maizlish warned. "We don't need new regulations. We just need to follow the old ones. But somebody has changed the rules of the ballgame."
Maizlish was the only businessman testifying. Other witnesses included Federal Reserve Chairman Alan Greenspan and FDIC Chairman L. William Seidman.