One of the largest consumer groups in the U.S. has jumped into the simmering controversy over low-cost title insurance alternatives. The National Community Reinvestment Coalition last week asked an administrative law judge for the California Department of Insurance to allow a mortgage insurance company to market a discount-priced substitute for traditional title insurance for home mortgage refinancings.

The plan cuts title-related expenses on refinancings to a flat $325, well below the $700 and higher fees charged for traditional title insurance. The latest move--a friend-of-the-court filing by the NCRC--is significant because the mortgage insurer, Philadelphia-based Radian Guaranty Inc., says it won’t offer its “Lien Protection” plan nationwide without access to the giant California housing marketplace.

NCRC, a nationwide network of over 500 local community and consumer organizations, argued that California homeowners would save nearly $400 million a year if they could cut traditional title costs with lower-priced alternatives. On a $275,000 refi, according to NCRC, a California homeowner would pay $797 for standard title insurance, but just $325 under the Radian plan. The savings in other states go even higher, according to the group’s brief--topping out at an average $929 on a typical refi in Texas.

Radian offered its program through major mortgage lenders such as ABN-AMRO Mortgage Corp. for more than a year, until state insurance commissions in several states, including California, banned it this spring and summer. The state commissions ruled that Radian’s product amounts to title insurance, a line of business that the mortgage insurer is not licensed to pursue.

Radian, in response, maintains that its lien protection product fits the statutory definition of “mortgage guaranty insurance” in California and elsewhere, and is well within its mortgage insurance charter. The company accuses the title insurance industry of mounting a nationwide campaign against it because it fears low-cost competition.

The Lien Protection coverage is written on pools of refinance loans originated by participating lenders. The insurance offers protections to the lender when defaults occur that are connected with unrecorded liens. Statistically the probability of title-related issues arising on refinancings is low, according to insurance industry experts, so Radian’s risk of heavy payouts on the plan is minimal.

The same statistics, says Radian, beg the question as to why traditional title insuance charges on refis are as high as they are. The American Land Title Association (ALTA), the national trade group for the title industry, argues that Radian overstates the costs of traditional insuance in many parts of the country, particularly when discounted “reissue rates” are offered to consumers. ALTA filed suit to block the Radian program in California earlier this year, and was active in opposing it before the insurance department.

The National Community Reinvestment Coalition’s brief asks the insurance department to re-think its policy because it is harmful to consumers. Radian’s program offers the potential of massive savings on refinancings, according to the group, and “presents no risk” to homeowners. If the insurance department relents, says Radian, this would open the door to similar challenges in other states--and almost certainly trigger the resumption of the cut-rate program in most parts of the U.S.

If the insurance department declines to approve the program, however, consumer groups and Radian are expected to take the issue to legislatures nationwide in 2003. John Taylor, president of the NCRC, said “consumers should not have to pay the price for the title industry’s inability to create a (lower cost) product...American consumers ought to have access to (mortgage refi) products that give them the protection they need at an affordable cost.”

Published: November 25, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.