Company Sparks Fight Over Title Insurance

More than a year ago, Philadelphia-based mortgage insurer Radian Guaranty came to California with what seemed like a great deal for hundreds of thousands of people refinancing their homes.

It offered an alternative to title insurance called lien protection that is often 50% cheaper and takes a fraction of the time to complete.

Refinancing has often been the occasion for homeowners to buy entirely new title coverage. Policies frequently cost $700 or more and can delay completion of refinancing by as long as two weeks as the insurer exhaustively searches anew for defects in the property title, many of which have already been identified when the property was first purchased.

Radian’s policy may cost $275 to $325 and takes only a day or two to search for liens that may have been incurred between the purchase and the date of refinancing. Sometimes, an affidavit is also required from the homeowner in which he or she affirms that there have been no new liens.

But the company’s method has become the focus of an intense battle involving state regulators, consumer activists and traditional title insurers.

Last year, then-California Insurance Commissioner Harry Low ordered Radian to stop issuing the policies, citing a 70-year-old state law making it illegal for mortgage insurers to offer title insurance. An administrative law judge later reached the same conclusion: that the 1930s-era law does apply.

But the current insurance commissioner, John Garamendi, overruled the judge last month and said he would make a final decision about whether the lien protection policies are legal by August. He said he would examine whether lien protection policies are mortgage guaranties, not title insurance, and therefore not covered under the old law.

Critics, including traditional insurers, argue that Radian’s policies are inadequate because the searches for liens are not extensive enough to find all the defects that exist. This places both homeowners and lenders at risk, they say.

Supporters of Radian contend that by retaining the title policy obtained at purchase, the homeowner has all of the protection against defects he or she needs. A lien protection policy obtained in refinancings, second mortgages and equity loans is sufficient to add any protection that is needed, they said.

Consumer groups such as the Consumers Union and the National Community Reinvestment Coalition have been pressing insurance authorities to take into their own hands the question of approving Radian’s policies. Garamendi undertook his review at their behest.

The California review is being watched throughout the country, and approval here could see lien retention offered nearly everywhere in the United States.

John Taylor, head of the National Community Reinvestment Coalition, whose purpose is to lower financial barriers to homeownership, hails the potential savings of lien protection as quite meaningful.

“The mere threat of lien protection policies coming onto the market has led to lower prices already by the title insurers,” Taylor said recently.

“If lien protection were to become accepted as an option to multiple title insurance policies, we estimate that California refinancers may save $300 million a year,” he said.

Taylor and other consumer advocates note that, with the surge of recent refinancings, title insurer profits have been soaring to record levels.

In an interview, Garamendi said the issue facing him is relatively simple.

“Is what Radian offers a title insurance product? -- in which case it is not legal,” observed the commissioner. “If it’s a mortgage guarantee, then it is legal.”

Garamendi left little doubt, however, that he would prefer to rule, if he finds a legal basis, on behalf of lower prices for consumers.

“Given the fact that a vast majority of homeowners have refinanced, there is a lot of discussion about overcharging and unnecessary high fees,” he said. “ ‘What in the world are these charges all about? What am I paying for again?’ ”

Legislation sponsored by state Sen. Jackie Speier (D-San Mateo) is also pending that would revise state law to allow both title and mortgage insurers to offer title coverage. But the bill is the subject of intense lobbying by both sides, and its outcome remains uncertain.

Title insurers strongly defend a system that sometimes is assailed for paying only 47 cents in claims for every $10 paid in premiums.

One of their spokesmen, Mark Bogatich in Sacramento, said the higher cost of traditional title insurance is necessary to repeat the extensive check of possible defects with the property being refinanced.

About $9 out of the $10 goes into the comprehensive search of the records to determine if there are defects, he said, and when there are some, to correct the defects before the title insurance is issued.

It is this corrective work -- avoiding problems -- that helps make title insurance a good value, Bogatich said.

Frank Filipps, chairman and CEO of Radian, said that refinancings in recent years have often followed original purchases by only a few years and that redoing all the work of the original sellers of the title policies is unnecessary.

He added, however, that the lien protection policies would only be sold in package deals with lenders, paid for by the homeowners but subject to an “aggregate limit” of claims agreed to by the lenders. Although the policies would be paid for by individuals as part of refinancing fees, the big lenders would be paid through thousands of packaged policies.

This seemed to raise the possibility that the limit in a package deal could be exhausted for a particular group of policies, leaving no money left to pay some claims.

Norma Garcia of the Consumers Union office in San Francisco said that such questions about reliability were one reason the Consumers Union has not endorsed the lien protection policies but has simply asked Garamendi to look into them to see if they were acceptably reliable as a protection to the insured.

Radian’s general counsel, Howard Yaruss, said in an interview that if Garamendi approves the lien protection policies, most would be sold without limits and that any limits written into package deals would be the choice of lenders who would be insuring themselves, willing to pay any claims that went beyond the limits.