The real property recording system is designed to protect purchasers and mortgagees against defects in title. Navigating that system is beyond the capacity of most laymen; historically, purchasers hired lawyers and other professionals to identify and eliminate title risks. Institutional lenders, however, sought more protection than a lawyer’s opinion could provide, leading to the development of title insurance.

Title insurance, unlike most other insurance, is focused not on risk spreading but on risk elimination. By examining title before issuing a policy, a title insurer minimizes the likelihood of a successful claim. Evidence establishes, however, that the price of title insurance exceeds the total cost of producing it, even accounting for the insurer’s ex ante search costs. Concentration in the industry is a contributing factor. But the principal problem is that the industry’s customers are largely insensitive to price. Lenders require home purchaser to buy title insurance, but those purchasers are one-shot customers for who have little incentive to spend time and money comparison shopping.

Moreover, in many jurisdictions, purchasers who did engage in comparison shopping would soon learn that the prices charged by “competing” title insurers are nearly identical – due in part to well-meaning but ineffective state regulation of the industry. That regulation often erects barriers to entry that make it difficult for startups to introduce more cost-effective title insurance models based on modern technology. Federal regulation has been no more effective in protecting consumers against excessive title insurance cost.

Regulation would be more effective if it focused less on title insurers and instead required lenders to bear more of the cost of title insurance. As repeat players with significant resources, institutional lenders have leverage with title insurers that home purchasers do not, and also have the capacity to influence legislators to remove barriers facing startups seeking to disrupt the industry.