As I started to learn about how real estate works in the U.S., one general question that I’ve found is always helpful to investigate about any aspect of the business is: Do other countries do it this way, too, and if not, what are the results of any differences? Title insurance, it turns out, is more or less an artifact of the peculiar land registration system in the U.S.
Though home buyers are often very excited at the prospect of making their purchase “official” at closing, this is actually something of an illusion; in fact, the government does not make any official determination as to whether or not you “officially” own the property. Strangely, though the system varies slightly between jurisdictions, in general the government acts as something of a neutral repository of information about property and transfers of property. Only in the case of a court dispute does the government have any role in determining the validity of any claim to ownership.
It is this system that creates the market for title insurance: Determining whether the person claiming to sell you a property actually owns the property is a time-consuming task which involves going to the courthouse and poring over documents filled with legal mumbo-jumbo, something a typical home buyer probably wouldn’t want to do on his own. (Or, at least, all this was the case at the time title insurance first came into being; more on that in a later post.) Title insurance, then, provides a service to the prospective home buyer which consists of 2 key parts:
- Verifying that the seller’s claim to the title is valid by following the historical trail of ownership, and searching for other claims and liens on the property by third parties (e.g., a contractor’s lien for unpaid work, or a tax lien.)
- Indemnifying the buyer against any future claims by others to the title which, for whatever reason, were not revealed during the initial search.
Other countries don’t do it this way. Under the very common Torrens title system, the government maintains a record of who owns the property, and validates transfers of titles. The government’s determination of ownership is more or less final and binding, with a few exceptions, and parties are compensated by the government in the rare event of an error in the recording under the system. Wikipedia’s 3 principles summarize it well:
The Torrens system works on three principles:
- Mirror principle – the register (Certificate of Title) reflects (mirrors) accurately and completely the current facts about a person’s title. This means that, if a person sells an estate, the new title has to be identical to the old one in terms of description of lands, except for the owner’s name.
- Curtain principle – one does not need to go behind the Certificate of Title as it contains all the information about the title. This means that ownership need not be proved by long complicated documents that are kept by the owner, as in the Private Conveyancing system. All of the necessary information regarding ownership is on the Certificate of Title.
- Insurance principle – provides for compensation of loss if there are errors made by the Registrar of Titles.
Essentially, the title insurance system is nationalized under the Torrens system, but the system itself mitigates the risk of future claims arising by maintaining standardized and, importantly, authoritative records of ownership.
Doing a comprehensive analysis of the pros and cons of each system is a little out of my league, but I’ll just point out one similar system in the U.S. (at least, in principle): vehicle titles. I realize it’s folly to hold up anything the DMV does as an example of the government doing something right, but however much you may dislike the service you get at the DMV, I don’t think anyone seriously argues that the vehicle title system itself is broken. The title serves as the official proof of ownership, and transfers of title have to be registered with the DMV. Simple enough. The important thing here is that, like the Torrens system, the government makes the official determination of vehicle ownership at the time of transfer, so there’s no need for title insurance for a car. As evidence that the system achieves its basic purpose, just look at the industry that has cropped up of granting car title loans. The fact that these loans are nearly always ridiculous rip-offs is beside the point; the fact that lenders are willing to accept the titles as collateral for their loans shows that the basic idea of having an official determination of ownership works well enough for the title to serve its underlying purpose. (On the other hand, try getting a payday loan on your house sometime…)
So, to me, the Torrens system makes more sense as a way of maintaining property ownership records. Enforcing property rights is one of the most basic things a government ought to do (remember the Declaration of Independence?), and to that end, the government ought to know who officially owns what property even if there’s no lawsuit to contest it. But then again, what do I know? I’m not a lawyer. Anyone know of legal comparisons between the systems?