TheMReport — News and strategies for the evolving mortgage marketplace.
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feature Quint. The more stringent FHA requirements are pushing some previous FHA candidates to private mortgage insurance. With the mortgage industry insisting on more complete financial records and better credit scores, the mortgage insurers are also seeing more financially sound borrowers. Yet some borrowers will be accepted with credit scores deep into the 600s, as little as 5 percent down, and loan-to-debt ratios above 40 percent. Yet those numbers are still too high for many otherwise potential homebuyers. "It all starts with the consumer and the economy," Zimmerman said. "The recovery isn't very robust, and there aren't a lot of jobs being created." The 150,000 jobs added in each of the last few months just stays even with the number of new people entering the workforce, hence an unemployment rate that remains stubbornly just below 8 percent, Zimmerman explained. Additionally, a growing economy also means increasing home prices, Zimmerman added. The more that home prices increase, there is less chance of a loss. As a result, there is less chance of a mortgage insurance claim. Though the number of home purchasers is down and there is a Title Holders Ensuring the safety of today's homeowners, title insurers are to borrowers what private mortgage insurers are to lenders, and the nation's leading companies are speaking out on strategies stimulating success in an unpredictable marketplace. T he performance of the title insurance industry over the last few years has closely mirrored that of the mortgage insurance industry, according to Jason Nadeau, group president, mortgage and title services, for Houston-headquartered Stewart, the nation's fourth largest title insurer. The largest three title insurers are Fidelity, First American, and Old Republic. "In the title insurance industry, much like in the mortgage insurance industry, there was an accumulation of laxity in underwriting process during the peak times," Nadeau said. "Then there was such an increase in loan defaults that it drove claims ratios higher over the last five years." Title claims tend to lag mortgage industry performance by about three years, so the claims now are for mortgages written around 2010 as the real estate industry bottomed and then started to crawl back, Nadeau explained. Just as with the mortgage insurance industry, some title insurers who were in business at the peak of the market 28 | The M Report didn't survive the downturn. Those title insurers, like Stewart, that did weather the storm and have come out on the other side are on much sounder financial footing today than even when real estate prices were rising sharply, mortgages were very easy to get, and title insurers were pressured to quicken the process. In an effort to meet lender demands for faster turnaround times, some title insurers and some of their agents cut corners in approving titles, according to Nadeau. Sometimes small issues with the title were overlooked and other times the title search only went back to the most recent loan rather than examining a title's history over a much longer period of time. If a home continues to increase in value or if the home is sold again in a few years, small items like these don't become an issue. But most come into play when the borrower defaults on a loan, hence the financial woes of title insurers that coincided with other mortgage-related industries. "In the last few years, we've tightened up our procedures," Nadeau said. higher percentage of cash sales, a higher percentage of the remaining home purchasers need private mortgage insurance, Zimmerman said. About 30 percent of home sales today are cash deals, up strongly from the traditional rate of 5 percent, due to a higher percentage of investors in the market. Of owner-occupiers, about 30 percent need private mortgage insurance, compared with the historical norm of 20 percent. Though the industry is moving forward again, there is some uncertainty about how mortgage insurers might be impacted as more of the Dodd-Frank rules become defined, particularly the rules surrounding qualified residential mortgages. If the government plays less of a role in mortgages, it could mean expansion for mortgage insurers. The new rules could be a boon or a damper on the mortgage market, depending on how they are finalized, according to Quint. He admits that despite all of the concern about the rules among many in the mortgage industry, the final rules may have little or no impact on mortgage insurers. Regardless of the final rules, mortgage insurers are confident in their future. "Private mortgage insurance is a strong component of the mortgage industry," Quint said. "We've become more disciplined up front and have become more prudent about the risks that we are willing to take. We've increased our standards and our quality. There's a greater degree of auditing." Stewart and other title insurers have moved to more centralized underwriting, Nadeau explained. The centralized underwriting is more efficient and provides better assurance that the underwriting guidelines adhere to corporate standards. Yet Nadeau admitted there are drawbacks from too much centralization— there can be regional differences in title work. So the company works with regional offices for underwriting, rather than a single, centralized office. By going to regional offices, Stewart has been able to reduce the workforce, training, and education costs as well. Weekly updates and bulletins were much more cumbersome to disseminate before the centralization effort. Stewart and other title companies further strengthened themselves by cutting back on the number of agents (practitioners who perform the title work), according to Nadeau. "We have a much higher quality group of agents," he said. Scott Penner, a Milford, Connecticutbased attorney, who operates two title agencies and does work for Stewart and for First American, said consolidation in the industry has meant that lawyers and other agents who did title work as one of many services, rather than focusing on it, have left the business. "You really have to know what you are doing," Penner said. "HUD has changed a lot of the regulations in the last few years, and they are likely to change them again." Rafael Castellanos, head of Expert Title in New York, agreed. Castellanos, who does work as an agent for Fidelity and First American, said that a lot of title insurance agents who were in the industry during the boom times were in the business for an additional source of income and didn't have a full understanding of the industry. As a result of the centralization and quality control efforts, Stewart has been able to cut its costs, while its revenues are starting to return to more normalized levels, Nadeau said, pointing to the company's stock price, which has rebounded from a low from around $11 to around $27 as of the end of January. According to the American Land Title Association, the title industry trade group, the industry's income was up 22 percent in the third quarter of 2012 (the last period for which full figures are available), compared with the third quarter of 2011, while loss expense was down 27 percent. The industry's net operating gain was $114 million, compared with a loss of $16 million in the third quarter of 2011. "Ours and the other title companies that have weathered the storm are strong now," Nadeau said. "The challenge will be managing the transition from a refinance to a purchase-centric market." Though the larger percentage of Stewart's business is with new home purchases, most other title insurers have a much higher percentage of refinancerelated work. But the mortgage industry itself will shift sharply from refinance to new mortgages over the next few years, according to Nadeau.