03.20.08
Posted in Education, Industry News, Licensing, Money and Finance, Mortgage and title Fraud at 2:11 pm by Jeanne
Last month the Minnesota Department of Commerce announced it had taken action against another kickback scheme in which a title insurance agent set up sham affiliated businesses with real estate agents, mortgage originators and developers in order to get around state and federal laws prohibiting direct payments for referrals. The Department shut down six more sham affiliated business by revoking their title insurance licenses. Licenses revoked included: 1st Title, St Louis Park, MN; Timberland Title, Arden Hills, MN; Royal Title, Minneapolis, MN; St. Cloud Title & Abstract, St Cloud, MN and Foundation Title, Brooklyn Center, MN. The final company, Desert Sun Title, did not even have an address or any referral partners. It also fined Premier Title Insurance Agency $175,000 for the kickback scheme.
According to the MN Dept of Commerce enforcement web site, Premier Title Insurance “created and controlled sham Affiliated Business Arrangements (ABAs), employed or contracted with parties not licensed to sell insurance, ABAs sold Fidelity National Title’s policies, unlicensed people were paid commissions, and failed as a supervising agent to ensure that ABA relationships were disclosed..” They also “paid kickbacks or other things of value to its referral partners for the referral of title insurance business and real estate closings.”
Last year, the MN Department of Commerce fined First American Title Insurance Company of Santa Ana, California, $500,000 and shut down 35 of their sham affiliated businesses.
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03.19.08
Posted in Education at 6:52 pm by Jeanne
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.
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03.10.08
Posted in Education at 2:31 pm by Jeanne
While the NY Times states “Unlike most American consumers, whose failure to save has exasperated economists for years, the typical American corporation has increased its savings so sharply that it probably has enough cash on hand to completely pay off its debts,” the U.S. Title Insurance Underwriters are moving in an opposite mode and are paying the price for being gluttons in order to obtain market share. While, historically, it has been rare for title insurers to incur net losses, 4 out of 5 publicly-traded national title underwriters that were examined in Fitch’s latest report, showed losses in 2007. The losses are due both to declining revenues, and unprecedented claims losses.
From a title consultant’s perspective, these poor results point to the fact that Underwriters have been signing up anyone who could fog a mirror if they promised to bring in business. There was little regard as to the proficiency of these agents in a highly-complex industry. This has been especially true when signing agents who could bring in business through an affiliated business arrangement - such as a lenders, mortgage brokers, builders or real estate agencies that could promise the related title business.
Real Estate Agents, Lenders and Mortgage Brokers own Title Companies
As the real estate sales and refinance market dropped in 2006-8, many Real Estate Agents and Mortgage Brokers that owned Title Insurance companies proved to be a poor risk. Skill levels were an issue. Ethics were an issue. Absconding of funds, not paying title premiums and leaving title underwriters holding the bag with a myriad of problems such as refinanced mortgages not being paid off, new mortgages and deeds being left unrecorded, etc. became daily news. Title Underwriters are still cleaning up after the mess.
Builders owning Title Companies
In other cases, builder title agents were particularly hazardous. As any knowledgeable title person knows, builder business is often high-risk business, because liens against new construction properties, in many states, give legal priority to sub-contractors and materialmen before they record any notice of their interest in the public record. This makes it impossible at the time of closing, to track who has a legal lien for material or labor, unless you take the word of the builder. (Builder… oh, yes, might that also be the title agent?) Also, in an effort to seize business, Title Underwriters devised a plan for the builders to keep a large portion of the premium dollar in exchange for “reinsuring” the property, i.e. transferring a portion of potential risk back to the builder. This cut into Underwriter dollars in order to buy the title business, ceding off a minor risk to the builder. In any case, the Feds, under RESPA, have determined the arrangement to be illegal (looking bad for the title underwriters.)
So, with poor quality of work, and clean-up from a number of bad title agents, statistics show that the Title Insurers are drawing down their reserves. As Gerald Glombicki, Director of Fitch’s Insurance Rating Group said “There is some concern that these reserve deficiencies coupled with operating losses will affect capital adequacy within the title industry.” A scary thought for the industry.
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