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.