Housing market collapse has hit title insurance industry hard
By Katie Adams, Inside Business
Originally posted 5/27/2011
A recent announcement that new housing starts for April were at
their lowest level since the late 1960s was another bump in a long,
hard road for the title insurance industry.
The housing market collapse has hit the industry hard. While the
American Land Title Association's 2010 Year-end and Fourth-Quarter
Market Share Analysis reported that title insurance premiums were
up for the first time in four years, total operating income fell
for a fifth consecutive year and loss and loss adjustment expenses
increased 9 percent in 2010.
Overall the industry recorded an operating loss of more than
$206 million in 2010 compared to an operating loss of $134 million
in 2009. Between 2008 and 2010, 41 of the 95 national operating
title underwriting companies closed.
This year portends additional change for the industry as the
mortgage market shows anemic signs of recovery, Congress weighs the
fate of Fannie Mae and Freddie Mac, and the newly formed Consumer
Financial Protection Bureau proposes new mortgage market
regulations.
A March Fitch Ratings' title insurance industry report does not
paint a rosy outlook. While the report noted steady year-over-year
profit improvement, it anticipates revenue decline in 2011. It
cited "expense management" as a critical industry topic. Expenses
include claim payouts and costs related to settling cases of
mortgage and title fraud and defalcation - the misappropriation of
entrusted funds.
"When the housing market was booming, orders were getting pushed
through and some agents and offices weren't paying close enough
attention to critical details; unfortunately there were also a very
few who took advantage of an opportunity to unscrupulously turn a
profit," said Heather Meahl, vice president and in-house licensed
underwriter of the Virginia Beach-based American Home Title.
"Title searches were done too quickly, underwriting was sloppy,
and necessary due diligence wasn't being done. Good title agents
trust their instincts and investigate when something raises a red
flag."
Oversights and, in some cases, intentional crime, have led to
big financial consequences. Fidelity National Financial's title
insurance underwriter Chicago Title was found liable for a $30
million fraud-related scam last year.
A May 2011 LexisNexis Mortgage Asset Research Institute survey
found that Virginia ranked seventh in the country for mortgage
fraud in 2010, even as the rate of mortgage fraud fell nationwide
by 41 percent. The survey found, however, that Mortgage Fraud
Suspicious Activity Reports rose by nearly 5 percent between 2009
and 2010, and misrepresentation on loan applications, verifications
of deposit, along with appraisal and valuation issues were the most
commonly cited problems.
Meahl is a member of the Virginia Land Title Association's
education committee.
"The vast majority of people in our industry run good, solid and
honest businesses," Meahl said. "That's why the VLTA has placed a
major emphasis on educating members about identifying and
preventing fraud and defalcation."
Defalcation is possible because settlement agents - authorized
and licensed attorneys, title insurance companies and agents, real
estate brokers and financial institutions - have access to large
sums of money in clients' escrow accounts.
Without strict oversight, agents can disburse those funds for
other reasons or to other parties rather than sending them to the
appropriate lender upon a real estate transaction closing.
Virginia Beach lawyer Troy Titus was recently sentenced to 30
years in federal prison for numerous crimes including
defalcation.
In addition to Meahl's work with the VLTA to educate and train
title agents, two local businessmen have created software tools to
help title companies tighten their financial controls and detect
cases of potential fraud and defalcation.
Reliant Title president and founder Dick Reass created
RhynohLive, a web-based software product, as a financial
"stop-loss" mechanism. A former director of management systems in
the Navy, Reass applied his process improvement and software
construction skills after a costly company experience.
"We overnighted a package to the IRS, but without an automatic
nightly reconciliation system, it was weeks before we discovered
that the check had not cleared," Reass said.
What ensued was a perfect storm of sorts.
"The check was lost, the seller had moved and couldn't be
located, and the IRS wouldn't talk to us because we weren't the
debtor," Reass said.
The incident cost Reass' firm nearly a year in time and $30,000
and "we hadn't done anything wrong," he said. "If we had been
reconciling on a daily basis we could have avoided the problem and
saved the firm a lot of money."
Currently, title companies in 39 states representing
approximately $5 billion in monthly assets use RhynoLive to manage,
reconcile and continuously audit their escrow account
operations.
In addition, local attorney Daniel Morris is founder and CEO of
require, which provides a web-based release tracking and reporting
service for the title industry. The software helps agents ensure
that lenders meet the legal requirement to submit the required
certification of satisfaction or release to the appropriate
courthouse within 90 days. More than 1,000 settlement agents in all
50 states use the service to more quickly close files and reduce
the cost of title remittance follow-up work with lenders.
While the financial analysis firm Demotech Inc. projects that
"continued elevated losses within the title insurance industry will
overshadow operating revenue" and the industry will "struggle to
sustain profitability," Meahl counters that on-the-ground work is
being done to improve that outlook.
By taking advantage of industry educational opportunities, using
tools like Reass' and Morris' to increase accountability and reduce
cost, and "only taking on as much business as they're able to do
well," good firms can ride out the current storm, Meahl said.
"As an industry we're still working our way through the market
downturn," she said, "but solid, stable firms are doing everything
necessary to ensure long-term viability and profitability."
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