Insurance industry, hurt by slump in home sales, struggles with foreclosure woes
July 01, 2011
By Catherine Curan
Late one Thursday afternoon last month, title insurance agent Rafael Castellanos got an urgent call from an attorney whose client needed a title search on a Brooklyn home that was selling three days later in a foreclosure auction.
Title insurance agents -- who work with underwriters to provide insurance for buyers to protect against unforeseen problems on the titles of their new homes -- typically conduct extensive research to ensure that there are no troubles with a title. The goal is to ferret out and resolve any "clouds," such as outstanding liens on the title or defects in the chain of ownership, so they don't come back to haunt the buyer later.
Title insurance gets a bad rap among consumers for the high cost and the fact that lenders typically require buyers to take out policies. But even cash buyers are advised to protect themselves from challenges to their ownership down the line by paying for title insurance from the get-go.
Castellanos, a managing partner at Expert Title Insurance Agency in Manhattan, got cracking on the search first thing the next morning. Like many title insurance agents in New York and elsewhere in the country, he's seen revenue decline in recent years, and he was keen to convert this potential client into an actual, premium-paying client. (Title insurers collect their one-time fee only after a policy is sold, and the housing slump's lower volume of home sales means fewer policies written.)
In New York, the nation's third-largest state for title insurance, premiums barely eked out a 1 percent gain to $165 million in the first quarter. Nationwide, operating losses widened last year to $206 million, while insurance premiums written were essentially flat at $9.61 billion after four straight years of declines, according to industry trade group American Land Title Association.
"People were hoping this spring was going to be heavier volume, a rebound," said Brian Tormey, executive vice president of TitleVest. "[But instead] volume of transactions is dropping off, both of refinancing and new purchases."
For Castellanos's part, the Monday after he received that urgent call, his research had already uncovered a property file in complete disarray. Among other flaws, the property's tax lot and block were misindexed, and the prior owner had not been personally served with a notice of foreclosure.
Given these facts, Castellanos rated the property uninsurable -- a conclusion he's reaching all too often these days.
"Right now, 60 to 70 percent of the foreclosures have problems," said Castellanos, who does just over 30 percent of his business in Manhattan and nearly 25 percent of his business in the city's other boroughs. "We find all these problems, and we have to tell the client, 'I'm sorry, we can't insure this.'"
Heading into the second half of 2011, Castellanos and other title insurance executives can add intensifying foreclosure-related woes to a lengthy and growing list of challenges in their industry. Those challenges range from increasing financial losses to widespread consolidation through the industry -- there were just 54 operating underwriters nationally last year, a 43 percent drop from 2008. That has a direct impact on both how many title insurance agents the industry can support, and how the remaining agents have to split up the pie of available business.
Industry sources estimated that there are about 950 title insurance agents in New York State, but they are not licensed, so it's hard to get exact figures.
The industry also has a tainted reputation because of the common practice of real estate brokers steering unwitting consumers to a preferred title agent without disclosing that the broker and agent share a corporate parent. In late May, the New York State Insurance Department issued an opinion aimed at addressing this practice, making it illegal for real estate firms to place attorneys on an "approved" or "recommended" list in exchange for referring clients to the firm's affiliated title agent.
As The Real Deal has reported, April's abrupt closure of Woodbury, N.Y.-based Titleserv and the laying off of an estimated 160 employees, followed by a raid on the firm by the FBI, marked another black eye for the industry locally.
Now, local industry insiders are bracing for more foreclosure fallout, since foreclosures are a growing part of the business -- for Castellanos's company they now make up about one quarter of the business, compared to nothing a few years ago. Title insurers must also deal with another troubled legacy of the housing boom: letters of indemnity.
Such letters were often issued in New York during the boom and remain common. For example, if the seller's title insurance company couldn't produce a necessary document in time for a closing date, it would issue a letter taking responsibility for legal claims that might arise from omitting that document, so the new title insurance policy for the buyer could be issued without delay. The practice helped deals get done.
Now, however, it's unclear how many of these letters were issued, and how many of those cases actually had legal issues that are still not cleared up.
"There's a web of indemnity out there, and some of it will shake out, and create a financial impact on some title agents and, more specifically, the underwriters," said Tormey.
Despite the tough business climate, Tormey said his firm, which does not often deal with foreclosed properties, is performing well. He credited Titleserv's closure for some of the bump, noting his company has gained market share and staff.
TitleVest has hired four former Titleserv senior staffers, including two top sales executives.
Castellanos is hopeful that the increased attention to this once-sleepy corner of the mortgage world will lead to one of his cherished goals: licensure for title insurance agents. The idea, which proponents say will add credibility to the industry, has been kicked around for years, but recently Albany lawmakers have given it serious attention.
A bill that would have mandated licensing of title insurance agents, and levied fines for violations of state insurance law, made it to committee in the state Senate in the last session, but did not pass. Industry insiders are hopeful it will gain traction next year.
Still, Castellanos is worried that other proposed legislation intended to help homeowners avoid wrongful foreclosure will backfire, leading to widespread ownership challenges on purchases of foreclosed homes in New York. That, in turn, would lead to huge costs for underwriters and even greater difficulties writing new title insurance policies than Castellanos is seeing now.