I used to work at a company that did mortgage paperwork for banks. Title search was a huge part of our business.

For anyone who's never done it ...

Before underwriting a loan, banks want to make sure who actually owns it. They would pay us to do a title search. We contracted out to local vendors in the relevant jurisdictions. The systems that maintained a list of what "relevant jurisdictions" were for a given address, and who was licensed to do a search there, were a significant competitive advantage for us. It's harder than you might think. Does the property have state taxes assessed? City? Regional? School District? Other?

"Clean title" meant that after searching all relevant jurisdictions, the only documents found were the ones that listed the current owner and current mortgage holder. If we found anything else, banks could pay us extra to provide clean title, which meant contacting the parties on any other documentation found and asking if they could provide an update saying the issue was resolved. Frequently they could, which means lots of activities happened without the resolution ever being recorded like it should.

After we provided the results, the bank decided if it wanted to write the loan. If they did, when the loan closed we would file the paperwork with the recorder. At this point no one verified that the documents were correct, that was up to the parties -- the bank and the borrower. As Box said, the recorder just recorded that the documents had been provided.

Every step of this showed up as a line-item on the closing documents. The buyer paid all costs, but it was the bank that ordered all the work. (If the deal didn't close, the bank ate the cost.) Banks could save money, and close more loans, by skipping any part of this work, unless it was a HUD or other government-backed loan.

The incentive to do the search anyway is that they don't give somebody lots of money to pay for a house that the recipient doesn't actually own. But as long as the courts are willing to give those houses to the bank anyway, that's not much of a disincentive any more.