The price of title insurance, a mandatory surcharge on every Massachusetts mortgage loan, more than doubled over the last decade. The average borrower last year paid about $1,500 at closing.
A chorus of critics, including state regulators and members of Congress, say the title insurance industry overcharges its customers. The industry says it offers a valuable service at a fair price, and it has opposed reforms with considerable success. But there is still an easy way to cut the cost of insurance in half.
Home buyers actually pay for two types of insurance: A mandatory policy that protects the lender, and an optional policy that protects the home owner. Consumer advocates, real estate lawyers, and financial experts say it can make sense for some buyers to decline the owner's policy.
Joan Koffman, a Newton real estate lawyer who advises buyers exclusively, said she recommends the owner's policy to people who are risk-averse, or who are buying properties with a complicated ownership history. She said about 50 percent of her clients decide to buy a policy.
"It should be a personal decision based on the property being purchased," she said.
The reason for title insurance is that someone else may have a claim on your property, such as an unpaid contractor, an heir of the last owner, or a neighbor who thinks the fence is in the wrong place. Since a mortgage loan is secured by the property, the lender's policy protects the lender against such claims. And the owner's policy protects the owner.
Rates in Massachusetts are a little cheaper than the national average. The prevailing rate for a lender's policy here is $250 for every $100,000 borrowed. Owner's policies are more expensive, in the range of $375 per $100,000. There are discounts for buying both policies at once. On a $350,000 home, the total cost of insurance is about $1,500.
The premium is paid once, at closing. If borrowers refinance, they must purchase a new lender's policy, but the owner's policy remains in effect until the home is sold. In the event of a claim that results in the loss of the home, the policy pays a full reimbursement. But most title issues are paperwork problems that a lawyer can easily fix.
Clients who decline coverage can pay a lawyer themselves should the need arise. Koffman said the most she's ever billed a client in 28 years of practice was $2,000, and that was an unusually complicated case.
"The question is, do you want someone else to be on the hook?" Koffman said.
Tony Proctor opted against insurance when he bought a Natick home in 2004. Proctor is president of Proctor Financial, a wealth-management firm, and said he felt comfortable shouldering the risk.
"We think of title insurance as protecting us from some great big unknown, but in reality, if there's a problem with your title, someone fixes it. You just have to pay someone to fix it," Proctor said.
Still, there is the real chance of catastrophe, and for many people, that's reason enough to buy a policy.
Robert Moriarty, a Boston real estate lawyer, said he always advises clients to purchase an owner's policy. "It provides value to the consumer," Moriarty said. Not buying a policy "is a risk, and it's not a risk that I would advise you to take."
Because many people want or need policies, industry critics mostly focus on reducing the cost.
A Melrose man filed a class-action lawsuit in federal court in Boston last month alleging the largest title companies are engaged in a price-fixing conspiracy, and seeking partial refunds for customers in 10 states. Lucien Gougeon paid $2,215 for title insurance when he refinanced a loan in 2004, an amount his lawyer says was excessive.
Prices rose sharply over the last decade because they are tied to home prices. That may seem intuitive, but title companies historically spend only about 5 percent of the money they collect in premiums to cover claims. The rest is spent on fixed costs such as title searches and commissions, which don't increase with home prices.
As a result, the share of Massachusetts premiums paid out in claims fell from 10.8 percent in 1995 to just 4.2 percent in 2004, according to a 2006 paper by researchers at Florida State University.
The industry reaped a windfall. A 2007 federal report found that the combined return on equity for the five largest companies was consistently higher than for property casualty insurers between 1992 and 2005.
The American Land Title Association notes that rates are subject to regulation in most states. And it notes that claims are now at the highest levels in years, draining reserves set aside during the boom.
"Title insurance provides real benefits to consumers," the trade group wrote in a response to the federal report. "The cost is small considering that the benefits last throughout the life of home ownership."
In states such as Massachusetts, where rates are not regulated, customers also are free to shop around. But there is little price competition among title companies. When the Globe queried four of the largest companies' websites last week on the cost of insuring a $240,000 loan, all quoted the same price for a lender's policy: $600.
Companies also don't compete by marketing their services to borrowers. Instead, companies focus on wooing the middlemen, such as closing attorneys and real estate agents, who generally decide which policy a borrower will buy. Those middlemen keep 70 to 80 percent of the premium.
"It's a system that has no interest in delivering the lowest prices to customers," said Robert Hunter of the Consumer Federation of America, who has testified before Congress in favor of pricing reforms.
The group wants lenders to pay for their own insurance. While the cost would ultimately be charged to customers, the hope is that mortgage lenders - who compete on price - would squeeze title companies for savings.
Then there is also the example of Iowa, where title insurance is illegal. In rejecting a challenge brought by the industry, the state's supreme court in 1977 declared it "an invidious form of business." Instead, the state guarantees titles for a flat fee of $110 on loans up to $500,000, adding a surcharge on more expensive loans. There is no additional cost for an owner's policy. Borrowers do have to pay a few hundred dollars for a title search, but the total bill generally is less than $500.
And the state pays out about 37 percent of premiums to cover claims.
Binyamin Appelbaum can be reached at firstname.lastname@example.org.