03.19.08
Quality of Title Policies Worst Ever
I spotted thought provoking blogs once again on Source of Title, one of my favorite places for news for the industry. This time it was on the new Fitch report. so I took a look.
No surprise here, the recent Fitch Rating Report on the 5 publicly traded national title underwriters confirms the widely-held belief of independent abstractors and small title agents that the quality of title insurance is at its worst level ever.
The Report totaled over $550 million in reserve losses for 2007.
Average loss ratios increased from 6.7% to 10.4% overall in 2007. Fitch predicts that claims over the next several years will continue to rise with the current underwriting practices. Worst case losses were experienced at First American with 12.9%. Fitch attributes the increase in claims to “greatly diminished underwriting quality” during peak years of operation. First American described this as an “unprecedented claims environment.”
To those of us in the industry prior to the 2000 – 2006 run on real estate, the reasons for the unprecedented claims environment are obvious:
• Underwriters not only authorized, but encouraged shortcuts to get the work out fast. Speed over quality ruled.
• Underwriters were egregiously greedy in signing any warm body who claimed they could bring in business. Regardless of not having a knowledgeable staff.
• Underwriters were so busy getting new title agent business in the door, that there was obviously no oversight of the process these agents performed. No training on due diligence, what was expected, or required.
• There was no thought as to agent (or employee) competency, let alone any requirement for appropriate training. What was the criteria for signing an Agent?
• What about closing the transaction – there is a lot to know. I have seen it reported that a closer sent in mortgage documents with the word “deceased” on the signature line. Ooops- I think that closer needs some work.
• Customary audits, no longer SOP, went out the window, as is proved by the hundreds of national defalcations (theft of funds) by title agents. And now that the damage is done, the underwriters are canceling many of these bad agents. A bit late now- you think! First American has announced that approximately 60% of their claims are coming from agents saying:
o ‘”We ( First American) are currently performing a profitability analysis on all agents which will examine the agents split, claims experience, profitability, and other factors. If the agent does not meet our required thresholds, we will renegotiate the agency split, cancel the agreement or take other appropriate actions. Many agency relationships have already been terminated and we are specially focused on our agency business the western states which have a relatively unfavorable agency split.”
• Fitch shows that title-only revenues fell 12% in 2007 and they forecast an additional 20% decline in 2008. Not good news for title abstractors, agents or the public.
As I have always said – “Education is expensive, but so is ignorance!” I hope the underwriters will learn from, and not ignore, the expensive education they have just received.