Examining Title Insurance, Settlement Services, and Life-of-Loan Costs

According to new research by First American Financial Corporation, the fees associated with title insurance and settlement services are so low when factored out over the life of the loan, that they end up being statistically insignificant. 

First American, in a research paper entitled, “Missing the Forest for Fees—An Analysis of the Regressivity and Closing Cost Significance of Title and Settlement Fees,” the research points out the inaccurate conclusion drawn from Fannie Mae’s 2021 study of borrower life-of-loan costs and details the more accurate differences in various costs over the life of a mortgage from Fannie Mae’s own updated research in 2022. Title and settlement fees are less than 1% of the borrower’s total life-of-loan costs. 

According to Author Mark Fleming, Chief Economist at First American, based on the original 2021 analysis, one conclusion that may be drawn is that title and settlement fees are regressive – higher as a percentage of the sale price, the lower the borrower’s income. However, the difference in title and settlement fees (as categorized in this study) is a small fraction of a percent of the sale price, from 0.7% for all buyers to 0.75% for first-time buyers and 0.84% for low-income first-time home buyers. 

He continued by saying, however, this analysis failed to account for an important distinction between different fees. Some fees are fixed (not set as a percentage of loan balance or sale price), while others are variable (determined expressly as a percentage of loan balance or sale price). Because of this, it is expected that overall closing costs will increase as a percentage share of the sale price or loan balance as the sale price or loan balance decreases. 

Specifically for title and settlement fees, the lender and owner policy premiums are variable fees that are generally set as a percentage of the loan balance or sale price respectively. That is fundamentally different from the fixed settlement fees for the services provided to close the transaction – services directly benefitting the lender and home buyer. Therefore, any analysis of the alleged regressive nature of title and settlement fees should consider the fundamentally different nature of the title insurance product fees and the settlement service fees. 

“With affordability at historic lows and the prospect of homeownership seemingly out of reach for low- and moderate-income families, it’s critical to evaluate the borrower’s total life-of-loan costs,” said Fleming. “Importantly, Fannie Mae’s own research finds that title and settlement fees are neither regressive nor a significant component.” 

Click here to view the research in its entirety.