Title Insurance as an Indicator of Housing Stress

The Wall Street Journal has an informative story today that discusses how title insurance can, in some respects, be a more accurate indicator of housing market stress than other measures.

The first element is somewhat obvious. The purchase of title insurance is a good predictor of sales. Title searches usually come late in the purchase process, when the prospective buyer is fairly certain he can and will close on the property. According to the Journal:

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.

The shortcoming, however, is that there is no nation-wide compilation of title policy issuances, so reports by various insurers give only a fragmented view.

More interesting is that title insurance claims rise in weak housing markets:

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….

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.

The collateral damage of a housing recession is wide indeed.

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