Variation in Title Charges
Residential real estate transactions entail substantial costs to homebuyers and sellers for the services of settlement agents, title insurance, and attorneys. These expenses are often called title charges and include a title search to establish that a seller legally owns the property, the preparation of a title insurance binder, the premium for insurance against title defects, settlement agent or attorney fees, and other related expenses. HUD works to both ensure that the nation’s consumers have adequate information about the actual costs of settling a mortgage and to protect consumers from unnecessarily high charges. Accordingly, HUD’s Office of Policy Development and Research contracted with the Urban Institute to investigate the variation in title charges (costs for title insurance and title services) across different housing markets. The results were recently released in “What Explains Variation in Title Charges? a study of five large markets.”
Examining five different metropolitan housing markets — Broward County, Florida; Cook County, Illinois; Maricopa County, Arizona; Philadelphia County, Pennsylvania; and Sacramento County, California — the study explored how title charges vary across and within these housing markets. The research objectives were to learn the magnitude of variation, identify factors contributing to differences, and determine the amount of variance in title charges that could not be explained.
The study began with an effort to surmount a lack of good data for determining variation in title charges. To correct this deficit, HUD and the Urban Institute created two databases:
- A nationally representative database of 7,600 HUD-1 settlements for Federal Housing Administration (FHA)-insured, fixed-rate, 30-year mortgage loans that closed between May 21 and June 30, 2001; and
- A metropolitan database that included 2,839 HUD-1 settlements for the same type of loan closed during the same period within the five study sites.
Demographic data collected for FHA-insured loans about the borrowers, house prices, housing characteristics, and census tracts were incorporated into these databases, and supplementary information about turnover in housing and the average age, education, and income levels of residents of the census block group were obtained from 2000 census data. Information about settlement agents was extracted from the HUD-1 forms. Combined, these data sources provided a basis for identifying and explaining variations in title charges.
Wide Variation, Over Half Unexplained
The five markets differed markedly in demographics and economic conditions, in characteristics of the housing stock, and in their regulatory environments. Accordingly, the median totals of title charges varied widely across the examined metropolitan areas, ranging from $914 in Philadelphia County to $1,867 in Broward County. Within their areas, Philadelphia and Cook counties had the greatest variation in title charges, whereas Sacramento and Maricopa counties had the least. Philadelphia County’s higher variation was attributed to greater differences in home prices than in other markets.
In general, consumers paid higher title charges for more expensive homes. Some characteristics of the house and the neighborhood seemed to be related to title charges; for example, newer housing units with simpler title searches tended to have lower total costs and net service fees. 1 In addition, foreclosure risk was also associated with title charges, although the factors involved varied across markets. Price discrimination against minorities and less-educated homebuyers was found in some, but not all, areas. The total amounts charged varied substantially among settlement agents within each of the five markets, suggesting that the agents may be serving different segments within a market.
In summary, the study reports that despite examining a number of characteristics about the buyers, the housing units, the neighborhoods, and the identities of the top title companies, more than 50 percent of the variation in total title charges remains unexplained in each of the five markets. The size of the unexplained variation in title charges suggests further research in this area could prove very useful.
Implications for Consumers, Regulators, Future Research
This study has implications for consumers who may want to comparison shop to get the best price for title services. For example, buyers who shop around can save $326 in title charges in Sacramento County and $528 in Broward County. These advantages may be based on housing characteristics; in Maricopa and Philadelphia counties, for example, title costs are lower if the home being purchased was built within the past five years. Consumers should also be aware of the likelihood that these variations in title charges originate in relationships and referrals between realtors and settlement agents.
Local regulators have the leverage with which to reduce variation in settlement costs, if they choose. That opportunity is apparent in Philadelphia County, where variance in title charges was greater and a significant portion of the variation could be attributed to rate setting according to house price. This leads to cross-subsidizing lower-priced homes with the premiums paid on higher-priced homes. Regulators should also be alert to the findings that some title charges were higher for minority homebuyers in two counties — Cook and Broward.
The fact that more than 50 percent of title charge variation that remains unexplainedindicates a need for further study. The study’s researchers suggest that geography-related factors that affect title charges deserve scrutiny and that policymakers should conduct an investigation of the extent to which settlement or title agents’ charges vary for homes of similar value.
Source: Table 7 in Feinberg et al., “What Explains Variation in Title Charges: a study of five large markets,” U.S. Department of Housing and Urban Development, Office of Policy Development and Research (2012), 21.