Out of Control: Title Insurance and Other “Extras” Home Buyers Pay

$18K annually. That’s what the average homeowner pays to be one — above and beyond the price of the home and mortgage, property taxes, and utilities. Mortgage closing costs make up a third of that figure.

U.S. housing costs are outpacing the country’s overall inflation. Homeowners’ insurance alone is up 11% year over year. And then there’s the need to pay for title insurance, to protect home deeds not just for the deed holders themselves — but also for the banks.

All these extras are important for new buyers to anticipate. The Biden administration has repeatedly attempted to press these costs down, calling some of the extra closing charges “junk fees.” And the Consumer Financial Protection Bureau, too, has called out the “junk fees…driving up housing costs.”

Lender’s Title Insurance: A Junk Fee?

Whether we’re buying or refinancing, closing is a whirlwind. Fees and extras can go unexamined, simply because a mortgage borrower doesn’t spot them. Paying for title insurance that covers the lender, not the buyer, is one example.

The Biden Administration is bringing back its abandoned pilot program to let homeowners out of purchasing lender’s title insurance on certain home refinances. The mortgage industry resents the term “junk fees” as applied to lender’s title insurance. But federal regulators are right about title insurance as an extra burden for loan applicants.

According to Diane Tomb at the industry publication HousingWire, the Biden administration is out to reassign responsibility to Freddie Mac and Fannie Mae for dealing with title claims when homes are refinanced. That’s something Freddie and Fannie are not equipped to handle, says Tomb.

When a homeowner refinances, that new loan needs title insurance, just as the homeowner’s first mortgage did. This can’t be taken lightly, Tomb insists. Lenders have to protect their collateral. If something slips through the cracks, a prior mortgage lien could inadvertently be left on a home. It would be up to some yet-unknown departments at Freddie Mac or Fannie Mae to investigate and resolve any possible “refinance fraud.” Deed holders, Tomb suggests, would be left holding the bag.

Tomb goes so far as to say: “The 2008 financial crisis happened the last time these entities took on significant risk for which they were ill-equipped to handle.”

But is backing the insurance for a home title that’s only being re-financed that hard to handle? The administration’s point is that paying — repeatedly — to insure the lending institutions amounts to an unfair burden on deed holders.

What Other Fees Are Under Scrutiny?

The Consumer Financial Protection Bureau is on a roll, investigating consumer experiences with charges that “far exceed the marginal cost of the service they purport to cover.” The agency’s focus, say the experts at the Morgan Lewis law firm, is on unfair, deceptive, or abusive acts and practices (UDAAPs).

Under special scrutiny are certain services for which charges have shot up in recent years.

The legal experts do expect new regulations on mortgage closing fees. For a few examples, look for the government to target:

• Credit reporting fees. Mortgage companies tack these onto the bill for pulling credit reports on applicants. The fees pay for services and data handled by credit report powerhouses Experian, Equifax, and TransUnion.

• Loan origination fees. These are meant to cover the costs of vetting the application and other services related to starting a new loan. Most origination fees run from a half-percent to one percent of the home value. Recently, these costs have risen, leading to particular scrutiny by government watchdogs. 

• Appraisal fees. Lenders charge borrowers fees to have appraisal companies send their professionals out to the homes being purchased, to discern the fair market value of their collateral — the home.

• Discount points. Buyers sometimes pay “points” at closing so they can have lower monthly mortgage payments later on. As described by CBS News: “Mortgage companies pocket the buydown fee, as it is also sometimes called.”

• Title insurance. This protects the lender against losses in the case of unknown liens on the property. It’s necessary, but most buyers would say they need to focus on title coverage for themselves — rather than paying for policies that cover the banks.

To prevent unfair referral fees, the Consumer Financial Protection Bureau, through the Real Estate Settlement Procedures Act, ensures that buyers are not obligated to use a specific title insurance company.

There are fees for preparing documents, notarizing documents, recording documents. For all of these fees, there are solutions. Regulations can cap or prohibit them — or at least relieve the borrowers of some of the burdens.

In this terribly expensive housing market, it’s not just the federal government that’s looking at fees. State law and policy could follow the fed’s lead. California has already built a framework to push back against surprise fees. Shoring up the state’s Consumer Legal Remedies Act, California’s new Hidden Fees Statute (S.B. 478) takes effect on July 1, 2024. It directs businesses to show the total price tag to a buyer — all service charges included. While it primarily impacts stores, hotels and restaurants, the writing is on the wall for hidden fees for a variety of services.

Our Takeaway

Piles of fees can nickel and dime a mortgage applicant out of a successful purchase. For successful buyers, title insurance and other fees can easily add up to thousands of dollars at closing. Even for longtime deed holders, the fees rolled into a mortgage can contribute to monthly budget struggles.

Sure, property values are rising, and that helps deed holders — as long as they can hang in there and build the necessary equity to tap when it’s needed. That’s a heavy burden on a homeowner’s shoulders.

Government efforts to restrict fees won’t lead to a crisis. They’ll help to prevent it.