Title Insurance Industry Draws Down its Reserves

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.