You Ain't Seen Nothin' Yet

The subprime lending market is all over the news lately. Stories abound of the "instant millionaires" who rode the subprime wave of risky loans to the top and then bailed out with huge paydays. All the while, their borrowers, mostly poor with bad credit, are left with foreclosure looming over their heads. How fast we forget the headlines a couple of years ago about how these "new loan products" were responsible for the highest rate of home ownership in history.

Its not going to take long for the effects of irresponsible lending to filter through to the title industry. We have two events that will lead to a certain crisis: (1) the incredibly loose underwriting standards of the lenders that have placed more homeowners in loans that they cannot possibly afford; and, (2) the worst title search standards for title insurance that the industry has ever seen. Neither would be cause for panic alone, but together its an explosive combination.

If the lenders had stuck to their long history of "only loaning money to those who don't need it" there would be little risk to the title industry because title insurance only has to pay out if there is a loss caused by a title defect. So long as the borrowers continue to make their payments, there is little risk of a claim.

On the other hand, if the title standards had remained where they once were, defects would have been cured before the closing - reducing the industry's exposure to claims. The old mantra of the title insurance industry was "if you can get title insurance, you probably don't need it."

The past few years, lending standards have been reduced from the traditional 20% down and a credit score of 700+, to 100 percent financing, interest-only, variable rate loans, and a minimum credit score in the high 500's. One article I read stated simply that to qualify for a loan, the borrower only needed a job and heartbeat. At the same time, the title industry that once required a 40-year title search conducted by a professional title examiner, or attorney, has been replaced with a current owner search prepared by anyone with a pen and fax machine; or worse yet, by a computer with incomplete data. Neither of these changes has ever been tested in a down market... until now, that is.

As foreclosure rates continue to rise attorneys will be scrutinizing the titles and looking for ways to lay the losses off on the title companies. You can bet that they will be conducting a more thorough title search than the title company did before issuing the policy. This will turn up many claims that in a strong market would likely have never been detected.

The title companies have tried to protect themselves from this doomsday scenario by including blanket exceptions in their policies and by requiring their abstractors to carry errors and omissions insurance. Only time will tell how effective this will be, but you can be certain that it will leave people asking "what is the value of title insurance?"

The title industry has often justified their premiums, and the corresponding percentage used to pay claims, by claiming the majority of the expense related to issuing title insurance is in reviewing the title and clearing defects.

In a "Letter to Steve Forbes" James R. Maher, executive vice president of The American Land Title Association, wrote:

Title insurance protects lenders and consumers in two very important ways—by providing the assurance that the title is clear before a sale occurs, and protection in the event that a previously undiscovered title issue should arise after the transaction has been completed.

As Mr. Woolley points out, the latter is rare, but that is precisely the intent of the product. Title insurance is much more than an insurance policy—it is the very extensive process that occurs before the policy is issued to ensure, to the extent that it can, that the title to a specific property is free and clear of defects.

When the fallout settles, that will clearly be exposed as a myth. It will become evident that the title industry has abandoned this age-old practice in favor of higher profits found in a cheaper title search and reduced underwriting standards; profits that many say are diverted to pay illegal kickbacks in the form of referral fees.

Maybe this is what the industry needs: a wake-up call; a reminder of what title insurance used to be and why we need to get back to our roots. We desperately need to improve our standards and once again provide the peace of mind that once accompanied a title policy.

I could be wrong... but in my opinion, you ain't seen nothin' yet.

Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com

Source of Title Blog ::

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Categories: Land Title Associations, Subprime Lending, Title Industry, Title Standards

1155 words | 2187 views | 6 comments | log in or register to post a comment

	What does this mean for people in t...
	What does this mean for people in the Title Insurance business? Will they suffer too? I recently got my NJ Title license and want to enterthe business but now I am having second thoughts.
	by Greg \| 2007/03/05 \| log in or register to post a reply

	"As foreclosure rates continue to r...
	"As foreclosure rates continue to rise attorneys will be scrutinizing the titles and looking for ways to lay the losses off on the title companies. You can bet that they will be conducting a more thorough title search than the title company did before issuing the policy. This will turn up many claims that in a strong market would likely have never been detected." You better believe it. I'll wager the types of problems that surface won't be the types easily resolved by indemnity letters.
	by Diane Cipa, General Manager, The Closing Specialists® \| 2007/03/05 \| log in or register to post a reply

	I'm inclined to agree, Rob, especia...
	I'm inclined to agree, Rob, especially in light of the news that the Fed is tightening credit standards for sub-prime borrowers. I usually try to keep a positive outlook, but with all those sub-prime ARMs out there, I have a feeling it's going to get a lot worse before it gets better.
	by Scott Perry \| 2007/03/05 \| log in or register to post a reply

	Greg: It is tough to predict the e...
	Greg: It is tough to predict the effects of this on any particular individual or company. My comments are meant to direct the attention of the industry at the hazards that we may face due to the declining standards and rising foreclosure rates. For now, title insurance is required and those of us in the business need to cautiously ensure that we are doing our best to provide the consumers with the best possible service. We need to take greater care to find and cure defects so that we don't get caught in the trap that the industry has created. Diane: I hope you are right about the indemnities. A couple of years ago, I attended a conference with a group of default attorneys and I spoke with many of them about the effects of the declining title standards on their foreclosures. Most were uninterested. They plainly said that they just get an indemnity and proceed to sale on the property. I have heard from a couple of attorneys since then that some of their clients are demanding that the defects get cured. That is truly the only meaningful solution to the problem. Of course, we all know that correcting the defects before it gets to foreclosure is even better.
	by Robert Franco \| 2007/03/05 \| log in or register to post a reply

	As I posted on "Title-O-Poly":
	As I posted on "Title-O-Poly": All these blogs I've been reading on so many of the sites.....and I read them all every day. I have plenty of time on my hands since I'm an unemployed Title Officer with almost 30 years of experience behind me. Not to mention also having been a real estate salesperson. Without going into a long, drawn out blog about how the integrity and quality of the industry has deteriorated....and how I became to be unemployed (besides refusing to "look the other way" and "just omit it from the title so we can close on time")......the only logical answer at this point is the inevitable one. Make title isurance a casualty product. It's becoming that way anyway. Clearing title problems (when they're found) is just a nuisance and lenders (especially the affiliated ones) don't like when you find them, especially if it means delaying a closing. And they have the borrowers convinced it's the title company's fault anyway. Many title problems may also never actually come to light; and there are many that will. So let the borrower (most of whom don't even understand what title insurance is anyway) go to their hazard insurance company and buy title insurance. Especially if automated searches are going to become the proof of ownership and existing liens. And as far as the issue of high real estate commissions and whether or not they're worth it? Well, all I can say is that a seller or buyer isn't forced to use a realtor, though both know the commission is "built into" the selling price anyway. They have a choice here, but they don't have a choice about title insurance if they're going for an institutional mortgage. Borrowers also don't have a choice about homeowners insurance if a lender is involved. Can you tell how disgusted I've become with all of this? After 30 years of working hard, learning, continuing ed, consulting with legal counsel, weighing risks, taking risks, arguing with lenders, taking that extra step.....all down the toilet. Now what do I do for a job? Make title insurance a casualty product and all of this can go away. OK....I'm ready for the rebuttals.
	by anonymous \| 2007/10/26 \| log in or register to post a reply

	I feel like a stalker....
	I feel like a stalker.
	by Diane Cipa \| 2007/10/26 \| log in or register to post a reply

Source of Title Blog

Robert A. Franco The focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

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