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Buying a home comes with a host of expenses at closing. One of the most costly and confusing, title insurance. It's lightly regulated in many states. An investigation by member station WBUR found that the person selling the insurance makes most of the money, often without telling you. Here's the story from Beth Healy. She's a senior investigative reporter at the station.
BETH HEALY, BYLINE: Peter Ott and his partner bought their first home in Boston this year. Ott's a numbers guy in the insurance business, so he had questions. First, it cost a pretty modest $200 for the title search itself. That's to prove your legal right to own a property and make sure nobody else can say it's theirs.
PETER OTT: So on the face of it, I'm thinking, oh, OK, that is the amount that it costs to do a title search. Cool.
HEALY: Then Ott paid his real estate lawyer about $1,400 to handle other title work and represent him. But there was more, insurance on the title. They were required to buy title coverage for the bank that wrote the mortgage. Then their lawyer strongly urged them to buy a second policy for themselves.
OTT: Then I also see my lender's title insurance amount. And I believe if I scroll down, I can see my owner's title insurance amount. So roughly those two - it's almost $5,000.
HEALY: The lawyer said the homebuyer's policy was optional, in case a legal fight comes up later over the title, like a tax lien on the seller or a dispute over property lines. But as Ott and many others have experienced, there's pressure to purchase it.
OTT: And your real estate attorney is telling you, we highly suggest this. You know, here's the risk that you're taking on if you don't purchase it. Why wouldn't you buy it?
HEALY: Ott wasn't about to argue. He signed the papers. But later, he asked his lawyer how much she had earned on the title insurance. The answer was 80%, or about $3,800. It turns out that's typical across most of the country. Big insurers pay lawyers and title agents the majority of the money charged to the home buyer. There are very few insurance claims paid out for bad titles.
BRUCE MARKS: I mean, it's a scam not just in Massachusetts. It's a scam nationwide.
HEALY: That's Bruce Marks. He runs a nonprofit that helps people get mortgages called NACA, or Neighborhood Assistance Corporation of America. He says the big payouts to lawyers and agents that are buried in title insurance drive up costs for consumers.
MARKS: You know, they get so much of what I call a kickback. You know, you can call it a fee. I believe it's a kickback.
HEALY: Federal regulators didn't help matters when they dropped a requirement for lawyers and title agents to disclose how much they make on insurance fees. In a half dozen states, including Massachusetts, title rates are not regulated at all. When it comes to protecting consumers, Iowa is the one state that stands out. They outlawed title insurance companies decades ago. Instead, the state offers coverage at a low cost and essentially guarantees a clean title. Here's Dillon Malone, director of the Iowa program.
DILLON MALONE: In a residential transaction, we charge a flat-rate premium of $175.
HEALY: One hundred seventy-five dollars. And yet in the other 49 states, a multibillion-dollar industry is built around the possibility that a title problem could be missed or could crop up later. For most home purchases today, title searches are done online, and an examiner can do one in a few hours. Real estate lawyers say the insurance fees are a way to help pay for their work when title searches are more complex. Noel Di Carlo is an expert on titles at the Real Estate Bar Association in Boston.
NOEL DI CARLO: The reality is if attorneys weren't getting a portion of the title insurance, our fees for representing borrowers and lenders would be significantly higher.
HEALY: But home buyers don't know that. And so far, regulators have done little to help educate them or bring down the cost of the insurance. For NPR News, I'm Beth Healy in Boston.
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