The Bubble Hits the Title Companies – Stewart Reports a loss

Stewart Title reported their third quarter results today, and posted a loss.  Here’s a footnote to the results:

    (a) The third quarter of 2007 includes pretax charges of $17.1 million ($11.1 million after taxes, or $0.61 per share) related to two large title claims totaling $6.0 million, a reserve adjustment of $7.5 million related to prior policy years and a $3.6 million reserve adjustment for the current policy year.  This quarter also includes a pretax gain on the sale of property of $5.6 million ($2.0 million after minority interests and taxes, or $0.11 per share).

Would have been really ugly without the gain…..

Professional Liability Carriers Taking a Stand

Independent contractors/Signing Agents are a tool typically used by out of state lenders and title insurance providers. It is my opinion that they are not the right tool for an insured transaction.

There is a limited market for the services of an independent contractor with extensive industry experience and their use should be limited to uninsured transactions. I do not question the time and effort expended by these contractors; however, the mere ability to complete a Notary Acknowledgment does not qualify someone to meet with the consumer.

And the E&O providers must have the same thought, after all, they are privy to the claims that you and I might otherwise never hear of. No longer interested in the risk, the E&O providers are raising the bar. We recently received our application for the renewal of our professional liability coverage (E & O), and we were offered the following options:

Signing Agent or Licensed Professional – You Decide

You never know what will unfold with each transaction. One year after the purchase of a property, the homeowner is now refinancing.  What started as an uncomplicated refinance resulted in the discovery of a gas lien filed by the Philadelphia Gas Works (“PGW”).  And, while investigating the lien, the HUD1 from the purchase transaction revealed total disregard for the rates and regulations as mandated by the Title Insurance Rating Bureau of Pennsylvania (“TIRBOP”). 

Guess who closed the purchase?  Bruce the Notary contracted by an out of state title insurance agency.  Bruce and I have never met.  He may be a nice enough guy.  He yields a pen, a stamp, and a notary commission.  Unfortunately, that is all that is required these days to conduct a real estate settlement in Pennsylvania. 

The fees below as shown on the HUD1 have absolutely no correlation to the filed rates and allowable charges:

Settlement Fee – $800
Notary Fee – $300
Courier Fee – $150
Recording Deed and Mortgage – $450
Release Fee – $300
Title Insurance Premium – $100 ($125,800 lender’s policy)
        $320 ($157,000 owner’s policy)

(See below for the applicable rates and charges)

Now, when I questioned a very nice woman at the title insurance agency in Colorado about the horrific (I did not use this word but surely wanted to) charges on the HUD1, she replied that these were the rates of her underwriter.  I explained to her TIRBOP, that her underwriter is a member of TIRBOP, and that a licensed title insurance agent in Pennsylvania must adhere to the rates mandated by TIRBOP.  In so many words, she replied: “We are a national company and these are our national rates and the rates of our underwriter.”  She also implied that Bruce was the one responsible for conducting the settlement, Bruce the Notary.

The lien is for more than $4,000 and is for gas usage prior to the purchase of the property.  And, even though the lien was filed after the Deed to the insured was recorded, our underwriter is not willing to insure a new first mortgage lien without PGW being paid in full.

The homeowner would like to move forward with the refinance. The nice lady in Colorado suggested that he pay PGW or he hire an attorney to review the policy issued by her office to determine if he is eligible to make a claim under the policy.
I found no exception for gas usage in the policy.

Local title insurance and real estate professionals are very much aware of the need to obtain a certification from PGW.  Bruce is not one of these professionals.

And maybe Bruce is an unfair target.  The real culprit here is the out-of-state title insurance agency with no local presence except for Bruce and signing agents like him.   I am guessing that Bruce has never met the people out West and further has limited understanding of local customs and practices. 

What should have been the charges on the HUD1? 

Settlement Fee – ZERO – unless settlement  is held after hours or at a location other than the agent’s office (it was a FSBO) and notice of the fee was given to the insured in advance of settlement, then maybe $150-$200. 
Notary Fee – $5.00 per acknowledgment.
Courier Fee – out of pocket expense only – $10-$20.
Recording a Deed and Mortgage in Philadelphia – $283.
Recording a Release – $124.50.
The Title Insurance Premium (basic) for an Owner and Lender’s Policy – $1,143.75.

In case you have yet to decide who should be sitting at your settlement table, let me summarize:

The price of doing business with an out of state title insurance agency and Bruce the Notary Signing Agent:  Approximately $600-800 in over charges and a lien.

Using a local, licensed title insurance professional:  Priceless.

No surprise – claims are increasing

From the LandAmerica 1st Quarter 2007 results discussion section:

The provision for policy and contract claims as a percentage of operating revenue was 6.5% in first quarter 2007 compared to 5.6% in first quarter 2006. The increase in the claims provision ratio was primarily due to an increase in the frequency of claims reported which resulted in upward development in policy years 2004 through 2006. Since the Company is subject to liability on claims for an extended time period, slight changes in claims experience for more recent policy years can have a significant effect on the amount of liability required for potential claims.

If you read this and other title insurance blogs, this shouldn’t come as a surprise – the industry is having pay the piper for the problems ignored in the past few years.   Claims have a long tail – it takes years for them to materialize.  Expect to see more reserves and claims going forward.

Also don’t be surprised to see that two of the culprits – sham ABAs and signing agents quickly fall from favor with title insurance underwriters.

Canary in a Coal Mine?

I’ve heard from numerous sources that title insuarnce E&O carriers are under pressure from claims.   I know E&O rates in PA shot up over 15% this year.  Word on the street is that two of the major sources of claims are independent contractors (signing agents) and newer ABAs.  No real data to back up the rumors yet.

 

I have also heard (multiple sources) that carriers are modifying their coverage to deal with these issues. 

My recent experience was that our carrier had little interest in covering us for limited use of signing agents (they proposed excluding independent contractors from our E&O coverage).

If there are major problems with claims the first place they will surface is with the E&O providers.  They are the proverbial canary in the coal mine for title issues.

Any additional insight out there?

The Problem with Claim Mitigation

Ed Rybczynski was directly on-target with his Title-opoly post.   Some underwriters have determined that claims are just another line item on the annual report that can be forecasted, managed and contained.  They should know better.

My guess is that the claims analyses were completed by a team of MBAs from the finest business schools, who have rigorously mapped out the title insurance and claims process without the slightest comprehension of why the system works.   Prior to entering title insurance, I saw this time and time again.  A bunch of bright people, completely focused on the task at hand, oblivious of how it fit into the greater machinery.

I am sure that their analysis is absolutely technically correct and numerically sound.  I am also as sure that it is hopelessly, fundamentally flawed.   The system of Title Insurance we have today works because it is based on a system of claim avoidance, not claim mitigation.   

Avoiding claims produces a clear or marketable title.  Mitigating claims produces a “land ownership lottery” where one purchases the option to a cash payout if an error in title is ever discovered.  Of course, the payout potential is severely limited by the terms of the policy.

I think Robert Franco’s Source of Title postings on search quality and Attorney’s Opinions get close to the point, but miss the economics that drive the industry.  Buyers of title insurance are interested in marketable title, not a cash payout when there is a problem.   The investment in real estate is just too important for Russian Roulette.

If the industry stays this path, buyers and regulators will soon realize the product is of little to no value to either the purchaser or to the land title system.    When that happens we are all in for a very rough time.