Articles of Interest
End of Boom fort Housing Hits Title Firms
Recent Jump in Claims, Drop in New Business Pressures the Insurers
By Liam Pleven
Monday, September 10, 2007; C1
Problems confronting title insurers may offer fresh clues about economic stress points in the nation's housing market.
Title insurers issue policies that essentially guarantee a homebuyer is the rightful owner of a property. The industry's fortunes are closely tied to the health of the real-estate industry -- and some major firms are seeing claims rise sharply, particularly on policies issued during recent boom years.
One of the nation's largest title insurers, First American Corp., recently said paid claims jumped 52% in the second quarter, compared with the same period last year.
Rising title claims are significant because they can be a broader sign of economic pain than foreclosures. Claims are often filed even in the absence of a foreclosure. And they can be triggered not only by homebuyers, but also by complaints from another party, such as a subcontractor who has filed a lien for unpaid work on a house. Claims data also can include commercial properties.
"In times of economic loss, title claims go up," says Theodore L. Chandler Jr., chief executive of LandAmerica Financial Group Inc., another big title insurer based in Richmond, Va. There was a severe spike in claims, for instance, during the recession in the early 1990s.
Moreover, some title insurers are reporting a drop in new business. While that might not sound particularly surprising, given the real-estate slowdown, it could be a glimpse of more trouble ahead: Title-search orders usually come at least several weeks before a buyer takes out a mortgage.
"If you want to know what's going on with mortgage activity, you look at title orders," says Nik Fisken, an insurance-industry analyst at Stephens Inc.
First American says average daily title orders were down 6% in July from June and that preliminary results indicate another 9.3% drop from July to August. Fidelity National Financial, a major title insurer based in Jacksonville, Fla., says there was a nearly 8% decline between April and June.
Fidelity National hasn't disclosed additional data about more recent months. But Chief Financial Officer Anthony Park says, "It's slowed down considerably, particularly in the month of August."
By comparison, the Mortgage Bankers Association has forecast a 20% drop in the value of mortgage originations in the third quarter.
People in the industry are quick to caution that, in terms of capturing what's going on in the housing market, data on title claims and orders can't replace widely watched indicators such as the foreclosure rate or the number of housing starts.
Moreover, title-insurance claims and orders aren't disclosed weekly or monthly on an industry-wide basis, unlike some other key indicators.
But title data can flesh out the picture of a market in trouble. The housing market is plagued by rising delinquencies and foreclosures, particularly in home loans made to borrowers with subprime credit ratings. Housing sales also have been falling recently, and prices are dropping in much of the country.
In discussing the claims they are getting, for instance, First American and LandAmerica both pointed particularly to claims on policies issued between 2004 and 2006. In those years, investors and homebuyers were gobbling up houses and lenders were shoveling out loans, in some cases to buyers who provided little or no documentation of their assets or ability to pay.
"It appears that many of these claims involve fraud, forgery and other factors often seen where loans are made to borrowers in financial distress," First American's CEO, Parker Kennedy, told investors last month.
Title-insurance claims generally arise when there is a challenge or a question about the owner's right to a property. Claims are much lower than for other types of insurers, because title insurers try to identify any problems during the title search, before issuing a policy.
Claims can occur for a number of reasons. For instance, when the housing market is booming, a growing number of transactions often need to get done in a short period of time, which can increase the potential for mistakes during the title-search process.
Any title problems are more likely to come to light when the real-estate market is weak. Title problems can turn up during a foreclosure, so if foreclosures are rising, claims can follow. Many title-insurance policies are held by lenders, and they sometimes file claims during the foreclosure process.
But claims can also turn up in the absence of a foreclosure. The costs associated with claims can rise if title-insurance agents -- who are generally independent -- are under economic stress and don't pass along premium payments properly, because the insurer still must honor the policies.
And even in the absence of a foreclosure, people facing financial difficulty may have an incentive to look for problems with the title.
"Everybody looks for the deep pocket to get them out of a bad deal," says Jim Maher, of the American Land Title Association, a trade group. Many of those claims are legitimate, he says, but might not have been pursued if home values were shooting up.
The headwinds facing title insurers have had a significant impact on some of the industry's largest players, including, in some cases, steep drops in earnings, deep staff cuts, and double-digit declines in their stock prices.
First American, for instance, swung to a loss of $66 million in the second quarter, after recording net income of $25.5 million in the same period last year. The Santa Ana, Calif., firm last week said it will cut 1,300 jobs this quarter, after shedding 600 in the second quarter.
Shares in LandAmerica have fallen by more than 57% since hitting a recent closing high in June, while shares in Fidelity National are down about 40% and First American's are down more than 28%.
Write to Liam Pleven at liam.pleven@wsj.com
