title underwriters

RESPA – On Again, Off Again… Another Lawsuit Filed

According to Builder Online, HUD has delayed the implementation of RESPA that was to go into effect on Jan. 16th by 90 days. HUD agreed to the delay to assemble info it needs to defend against another lawsuit , this one brought  on by he National Association of Home Builders (NAHB) and other plaintiffs, including 13 large builders and their affiliated lenders and title companies.

HUD’s published final rule eliminates builders from offering home buyers incentives if the buyers are linked into using an affiliated title company, mortgage company, or other affiliated service provider. The NAHB suggests that dismantling these affiliations will not help the consumer and will additionally lead to job losses.  

HUD is also dealing with a lawsuit filed by the Mortgage Brokers Association (MBA) in December that is trying to block a rule requiring lenders and mortgage brokers to provide buyers with a “good faith estimate” that discloses loan terms and yield-spread premiums on the HUD-1 settlement statement.

Surprisingly, at this time, there seems to be no interest by the American Land Title Association (ALTA) to commence a lawsuit against the very unpopular required disclosure on the HUD-1 of the premium split between title agencies (that receive the vast majority of the premium) and title underwriters (who receive very little.) HUD has required the disclosure based on recommendations from the Government Accountability Office that has been critical of the industry practice.

Title Professionals – Are You Sleeping at Night

I was at the Louisiana Land Title Association conference yesterday.  There was a common theme among dozens of title insurance, abstracters and title attorneys I talked to.  The business has changed.  The standard of thorough title searching and fixing title problems before closing so that there are few claims is gone. One abstractor in particular told me he was getting out of the abstracting business.  It was no longer the kind of work he wanted to do.  He told me that over a period of 20 years he was proud to have had only one claim.  Someone in his office had missed a Federal tax Lien.  Yes, it was bound to happen, as he had done a significant volume of business over many years.  When the tax Lien was brought to his attention, he dealt with a like a man, and paid it.  He contacted the Sellers who owed the money.  The Sellers acknowledged that they did in fact owe the money.  He worked out a deal with the Sellers to make monthly payments until it was paid in full.  The abstractor never submitted a claim for that, or for anything else.  He was proud of his thorough search work and the way he did his business.  “But no one wants that kind of search any more” he sadly commented.

 For 100 years, title insurance and abstracting has been a proud business.  Title Insurers and abstracters have been proud of their record.  They thoroughly searched title, fixed problems, and had few claims.  But somewhere, in the recent past, when times were booming, houses were going up in value every day, and credit was easy to get, everybody wanted a piece of the action.  And the title business changed.  The traditional ways of doing business were no longer.  The care and attention given to detail went by the wayside.  Somehow, it became more important to do a large volume of business.  Be the biggest, not the best.  Everybody wanted market share.  Every title underwriter was looking for a title agent who could bring in more business.  And due to the volume of refis and sales, business, everybody flourished.  And suddenly everybody wanted to get into the title business.  Title insurance suddenly was seen as a lucrative sideline for real estate agents, mortgage companies, and even builders.  After all, if you could control the business, why not make an easy buck on the side.  You could pull down 80% or more of the premium, and lots of miscellaneous fees.  And the underwriters saw these new agents as an increase in market share, and thought it was good.

Now the majority of this premium had always gone to the old title agents who did the exacting, grunt, search and exam work- the detail guys, after all, they were the ones who identify the problems, solve the problems, and kept the title clean and the claims low.  They had been with their underwriters for years.  These were the long-term mom and pop shops.  Professionals with a long-term stake in the business.  Often second and third generation.  Professionals who were committed to doing an excellent job for people in their community.  Professionals who believed in the quality of their work, and the product they produced.  Giving a thorough title search helped them sleep at night, after all, these were their families and their neighbors, and they owed them the best they could possibly do.  Nobody was going to lose a house on their watch. If an agent had a claim, he might just pay the claim, he might put in a claim under his E and O, or if a huge authentic claim (being one totally outside their control, like a forged document) they might submit a claim to their underwriter.  Too many claims and they knew they would lose their underwriter.

But the new agents were not familiar with the exacting, grunt, search and exam work.  They did not sign up for this.  They were in the business to build houses, lend money, and sell real estate.  And they wanted a quick turnaround time.  Rationalizing that everyone was putting on a second and third mortgage at the time, that most houses were sold every seven years, and that the titles were examined regularly, it was determined a complete search would not be necessary.  Now who made this determination is unclear.  But along came the short search.  Just looking back a deed or two.  The short search allowed a quicker turnaround time, allowing more business with less staff, making it cheaper to produce.  And the underwriter saw only the increase in premium and increase in market share and thought it was good.

With so many new agents promising to bring in large amounts of business, title underwriters began to compete for that business based on larger premiums splits.  If 80% wasn’t good enough said a big potential agent, premiums went to 85%.  If 85% was a good enough said another, the premium when to 90% for the agent and 10% for the underwriter, and so it went.  And the agents signed with many underwriters.  After all, if one underwriter didn’t work out, switch to another.  Dime a dozen.  And the underwriters greedily ate up any builders, lenders, real estate agents or anyone else who could bring in business. Its a REALLY good deal when you get all that money and don’t even have to do the work!

And the old time title agents saw how fast these new agents were putting out title work.  They saw that they needed to speed up the process to compete.  The short search sounded pretty good.  And the title underwriters, in order to keep everyone happy, agreed.  And so now everyone was doing a short search.  And so the concept of thoroughly searching title, fixing problems and few claims went out the window.  And claims were born.

 

Now, somehow the thought that insurance being written by these new agents as a sideline, when the business was self serving wasn’t acknowledged.  Now you ask, “How could that be?  Does it make sense that builders should be insuring their own titles and guaranteeing over their own mechanics liens?” I don’t have an answer to that.  But, everyone moved the higher risk to the title underwriters.  And the underwriters, in order to compete, allowed it to happen The lenders were happy to control the money and the title.  The builders had a profitable, new sideline and so did the real estate agents.  Title insurance was seen as a profitable sideline, and a convenient one of that, as you could control both the speed of the transaction and handle the massive amounts of money involved in closing the transaction.  Now I’m not saying this is true for every builder, lender or real estate agent, but it happened- a lot.

 However, Title actuaries seemed to be left out of the loop on this, they went on as usual and continued collecting the same title premiums, with the lower title splits, and attempted to shrewdly invest the remaining premium for that rare occasion it might be needed to pay a claim.  Somehow it seems no one was thinking about the ramifications of the new way of doing business – the significant increase in risk because title problems were not being thoroughly researched, let alone fixed, or that more dollars might be needed in reserves to pay more claims.  Title premiums charged to the consumer remained about the same, having had few changes from year to year, or in some cases from decade to decade.  And so here we are today.  High claims and low reserves.  We’re in a fix.  Will the pendulum swing?  In order to be solvent do we need to go back to the traditional ways of doing business –thoroughly searching title, fixing problems, and having few claims?  Or more importantly, in order to sleep at night, do we, as ethical title professionals need to be more thorough in our work, so that none of our friends, family, or clients lose their house on our watch.

 

 

Fitch to Review FNF for Possible Downgrade

A couple of important new articles regarding FNF

From CNN – see full article here

Fidelity National currently carries an issuer default rating of “BBB,” which is just two notches above junk status. Fidelity National’s title insurance operating subsidiaries currently carry financial strength ratings of “A-,” which are also considered investment grade.

See also WSJ MarketWatch Article here

At the close of the third quarter of 2008, debt-to-total capital at FNF was 32%, which currently exceeds FNF’s long-term target debt-to-total capital of 20%-25%. Financial leverage and general flexibility remain key rating issues for FNF and the title insurance industry during the current stressed market

FNF 3rd Qtr Earnings Report gives Picture of Title Insurance Industry

The third quarter transcript of Fidelity National Financial, Inc. (FNF) gave us a clear picture into what is happening with all Title Insurance Underwriters.  To give you an overview of what is happening at FNF, here is a recap.  The entire transcript can be found at http://seekingalpha.com/article/101536-fidelity-national-financial-inc-q3-2008-earnings-call-transcript?page=1

Regarding expense reductions

  • FNF eliminated 1000 positions in the third quarter (800 frontline staff and 200 agency and corporate positions) 
  • It instituted a 10% company-wide pay reduction, most likely to be continued through the first quarter of 2009
  • It is asking board members to take a similar cut in pay
  • Its fourth-quarter dividend was reduced 50% .. from the previous  quarter
  • The company continued to close offices…more than 115 offices

The current situation The largest decline in revenues came in agency premiums as they fell by 24% and 40% versus the third quarter of 2007. Actual title claims paid in the third quarter were $85 million versus $79 million in the third quarter of 2007.

When asked about claims by type and percentage of claims, FNF responded the “primary three, I would say, are search and exam errors… That’s about roughly 30% of our claims experience. Fraud and forgery,.. moved to number two in the last three years or so …running somewhere close to 20% currently. Then in closing-related errors and underwritten risk, are kind of three and four, (and) make up about two-thirds of our total losses.”

Regarding claims, it was noted “…given the pattern we had seen where our actual claims results continued to exceed our forecasted results; we realized that the current model needed to be adjusted. So we really stepped back from the current model and said… We’re going to disregard all prior reported claims experience other than the last three years, those years being 2006 through 2008. (IBNR will now be reserved at an increased 8.5%)

To increase revenue

  • FNF is renegotiating agents splits
  • Is increasing filed rates …generally 15% – 20% or more across the country.

No surprises given the state of affairs in the real estate market, and this bloggers expectation is that the four remaining major title underwriters are or will be doing exactly the same thing. Increases will happen across the board for all costs related to title insurance and closings.

Title Underwriters Sue Widow to Recoup Money from Fraudulent Mortgages

A Connecticut Judge has thrown out claims that Hayley Kissel assisted her deceased husband, Andrew Kissel, a wealthy real estate developer, in fraudulently obtaining mortgage money according to a new WTHN news and a Hartford Paper article. 

Mr. Kissel was murdered in 2006, leaving an estate that owed more than $20,000,000 to several banks, based on the fraudulent mortgages.  Kissel initially took out legitimate mortgages on properties, but then created and recorded fraudulent releases.  He would then go to another bank to borrow money, and repeat the process.  The lawsuit claims Mrs. Kissel was aware that her husband was forging and recording bogus releases to obtain more funds, but kept quiet to maintain her lifestyle. And, because she did not speak up, Kissel was able to repeat the scam, causing losses to the title companies.

Both Chicago Title and Fidelity National Title Insurance companies, which insured title for the lender’s, are suing Mrs. Kissel. They allege that because she was aware of her husband’s conduct, she was complicit in the activity by not reporting it.  The judge disagreed.  A jury will now have to decide if Mrs. Kissel, who has significant assets, has been unjustly enriched by her husband’s theft and is therefore responsible for some of the losses incurred by the title underwriters.

Author comment:  Granted, I have not seen the documentation, but this appears to have all the red flags signs of  perpetrated fraud.  Honestly, when is the last time the title person legitimately saw a large mortgage paid off  PRIOR to a mortgage closing, as it appears to have been in this case.  

Fitch Ratings studies Title Underwriters Risk Capital

Fitch Ratings completed a study on the U.S. title insurance industry’s risk-adjusted capital position at year-end 2007. The study showed a significant decrease in the risk-adjusted capital (RAC) for the title insurer world. The title industry’s risk-adjusted capital ratio is the lowest since Fitch began calculating the RAC Model in 1997.

For a copy of the report ‘Title Insurers’ Risk-Adjusted Capital Adequacy at Year-End 2007′, dated July 7, 2008, interested parties should visit the Fitch Ratings Website and click on the “Financial Institutions” tab, then the “insurance” tab and lastly, the “Special Reports” tab.

A Foggy Look into the Future of Title Agents

As is typical of our industry, we are always engrossed in something. Currently the talk is potential RESPA changes, Fraud, and the Woes of a Weak Market (along with that age old fist-fight about the fairness of aba’s of course.) And these issues certainly do affecting our day to day business lives. But the relationship between the non-affiliated agent and his or her underwriter is a much bigger long-term issue for the agent. Independent agents, who think they can not be replaced by national REI plants, captive agencies or your Underwriter, beware.

I started in the title business in 1976. We believed then that abstracts of title were doomed and could be replaced at any moment with title insurance, or something else. We were right – it just took about 20 years longer than we thought. (Things changed a lot slower then.) In those days, the insurer insured the policies and the agent brought in the business and sold the policies. Today, with technology, things are changing at warp speed. The Underwriter is completely in the driver’s seat and there is no choice, title agents, so get used to it.

Insurers have changed the way business is done. The public wanted title work faster and cheaper. The insurers accommodated the public. Experienced, long-term agents with high quality standards were forced to undermine their standards in order to compete. The thorough, thoughtful search of the past is gone, replaced by a quick and dirty rendition put out with a cursory title search, i.e. risk underwriting.

The independent agent that was once the cornerstone of the title industry is disappearing, partially due to the surge in affiliated businesses that shepherded the business away; partially due to a very poor market; and also because Underwriters have been growing by gobbling up agencies and turning them into branches. Underwriters today are no longer dependent on local agents. The days of title underwriters worrying about quirks in each county are gone, again, risk underwriting. And in the future they will be even less dependent, as technology and electronic recordings allow information to be recorded and made available within minutes, perhaps even with little human intervention. Moreover, due to high agency defalcations and the claims in the last few years, it makes sense. Underwriters can have more control over day to day operations. Plus, by replacing an agent’s traditional title plant with the underwriter’s superior Real Estate Information (REI) technology, adding flood information, tax information, assessor information, maps and more it becomes salable as many products instead of one.

Yes, I believe the days of the independent, non-affiliated title agent are limited. But then again, I thought abstracts would be gone overnight, and it took 20 years.

Title Insurers Insure Closings

In the midst writing the 2nd edition of Title Insurance for Real Estate Professionals, I recognize how things have changed in the last couple of years for the title insurance industry. At the moment, I am working on closings.

Title Underwriters have been forced by demands from the market to begin insuring the closing process, a dangerous and expensive endeavor in today’s market. This was never part of title insurance. It is not something that was accrued for in planning and reserving money for claims. And where does closing liability end? Will closers and title companies be sued because someone claims they didn’t understand their loan documents – or worse yet, say the lender was in cahoots with the title company and closed the loan for the title premium and fees? Similar to the recent lawsuit by a buyer that they paid too much for their house because they were advised to do so by their real estate agent.

And the liability becomes worse – over the past years, closings have become more and more complicated. New types of loans—variable-rate, adjustable-rate, balloon mortgages, growing equity mortgages, interest-only loans, construction financing, reverse-annuity mortgages, and others—have moved into the market. These complex documents must be explained to the borrowers, a very difficult task, particularly evident is the lack of understanding of these documents in the real world, where foreclosures have run rampant the last years and the reality of the documents hits home.

Complications of closing also include dealing with heavy legislation pertaining to Federal Laws such as the Patriot Act, Truth in Lending (TIL) laws, the Real Estate Settlement Procedures Act (RESPA) and the Gramm-Leach Bliley Act (GLBA) dealing with privacy rules and closing. New local and federal legislation related to the sub-prime market and poor quality loans are making, and will continue to make, closings even more difficult by requiring additional documentation.

Independent “signing agents,” which are a fairly new phenomenon in the U.S., are unknowns in closing. Signing agents typically have no relationship with a title underwriter. They go to a home, bringing the documents with them for closing (frequently used in re-finance transactions.) Some signing agents see themselves strictly as notaries public, who witness signatures with no responsibility other than verifying the identity of the signers. Other signing agents are very knowledgeable about the documents and may thoroughly explain them – but do they have errors and omissions coverage? What if an error is made, who is responsible?

Is it appropriate for title companies to give a Closing Protection Letter, in effect insuring the closing? The State of New York says NO. It has specifically prohibited the practice in NY, citing the fact that the practice is a form of insurance, and potential claims are not being accrued for. What do you think?

Info On Home Closing

Home Closing 101: An Educational Initiative of the American Land Title Association