DEC 26, 2013 5:28pm ET

Title Firms’ Work to Shrink, but Become More Lucrative

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Title agents and underwriters will see less business in 2014 as application activity continues to decline, but the business they will get will bring in more money.

The title agency business could consolidate in 2014 because lenders are likely to demand this industry follow the American Land Title Association’s best practices statement.

Add to that, at least in New York State, the probability of title agent licensing coming to pass. Both moves, designed to highlight industry ethical standards, should result in people leaving the business, says Rafael Castellanos, managing partner of Expert Title in New York.

Everybody at the closing table right now is licensed, except for the title agent. If this becomes law it will bring most people up to the same level at the same time ridding the business of those who cannot meet the qualifications, he says. Lenders requiring agents to meet the ALTA standards will likely have the same effect.

Title insurer revenues should decline in 2014 as mortgage origination activity has slowed this year, reducing open orders now and premiums underwritten in the first half of next year, Fitch Ratings says.

The expected increase in home purchases next year should help title companies because policies for purchase transactions earn higher fees than those for refinancings. The higher amounts of revenue per policy plus leaner cost structures adopted during the housing crash should mitigate the loss in revenue and keep profitability near current levels.

Title underwriters generated $3.4 billion in premiums in 3Q13, up 1.4% from 3Q12’s $3 billion, ALTA says.

The strength and stability of business continues to improve as the housing recovery maintains a steady pace, says Michelle Korsmo, ALTA CEO. There were 45 states which had an increase in written premiums in the third quarter. However, because there is a lag factor between when an order is opened (typically at loan application) and when it is closed and the premium recorded, much of the growth actually took place before the rate rise in last spring. Total open order counts were down in the third quarter, although orders for purchases were up.

Another good sign for title companies is the growth in commercial title transactions, which create higher levels of revenue as well. Growth in this line is expected to continue in 2014, says Fitch analyst Gerald Glombicki.

Meanwhile, the implementation of new rules from the Consumer Financial Protection Bureau should have a negative effect in the short term on mortgage originations as lenders adapt to the environment and some people might find it difficult to obtain financing.

But overall, rising interest rates should offset favorable trends in the housing market, Fitch says.

The decline in earnings for title companies should be less severe than they are for mortgage lenders, says Keefe, Bruyette & Woods analyst Bose George. Gross margins should remain stable given the limited amount of competition in the title sector.

All-cash home sales transactions also benefit the title insurance sector because buyers are looking to mitigate the risk of an unclear title from keeping them from taking possession of the property, KBW notes. Cash sales typically involve distressed properties and those properties are where most title properties.

Home sales in primary neighborhoods have remained strong, Expert Title’s Castellanos points out. It is in secondary neighborhoods where there is a slowdown in sales.

One of the items which have gotten the title industry in an uproar regarding the proposed disclosure forms from the Consumer Financial Protection Bureau is the lack of a requirement for an owner’s title policy.

In New York, where attorneys do the closings, such a policy is typically required. But even so, the cost for an owner’s policy is so cheap compared to the risk being taken that Castellanos can’t foresee many buyers electing not to obtain one.

The adoption of the new disclosure forms will not affect how title agents in New York do business anyway. They provide the borrower with a list of fees and charges once the order is received. Agents in other states may have to change software to provide the information, he says.

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