Foreclosures May Increase Title Claims

The biggest risk for title insurance underwriters in 2010 is an increase in foreclosures, because those could lead to lenders looking for ways to mitigate their own losses by making claims, according to a report by Keefe, Bruyette & Woods.

The report, written by Nathaniel Otis and William Clark, notes the analysts are comfortable with the current rates of the build up of loss reserving by title companies. They said it could take several quarters of increased foreclosure activity to have an effect on loan loss provisioning for title insurers.

KBW predicts that fee-per-file rates paid to title insurance agents will increase in 2010, primarily because of a projected decline in refinancings and a projected rise in the share of home purchase loans. “Second, fee-per-file rates will benefit from industrywide pricing increases put in place in second-half 2009. One wild card for fee-per-file levels is home price appreciation/depreciation. Further reductions in home prices as more foreclosure sales hit the market in 2010 could negatively impact fee-per-file levels, and although we are not factoring a material drop in home prices into our modeling, such an event is not out of the question,” said Messrs. Otis and Clark said.

Even though the projection for originations is down (KBW projects $2.1 trillion for 2009 and $1.6 trillion for 2010; the 2010 estimate is cut 18% from a previous KBW projection), the report notes that one area where the title companies “are ahead of the game” is in their expense management practices.

Although none of the companies are seeing double-digit margins, KBW noted they are in better shape in this area now when compared with the end of the first-half 2009.

In its report, KBW addressed three out of the four national title insurers. Its view of the largest, Fidelity National Financial, is that it is in a good position starting 2010.

“Operating expenses continue to track downward as the company implements further headcount and cost reduction measures, the purchase market continues to see a gradual strengthening and we believe the company is in a solid position from a reserving standpoint assuming the industry doesn’t experience a second wave of losses.

In addition, management appears committed to monetizing a number of its noncore assets,” the analysts said. But they also cut their earnings per share estimate for FNF in 2010 from $1.30 down to $1.15 because of the cut in projected mortgage origination volume for this year.

For the First American Corp., the split between the title and information services businesses expected to take place by April 1, 2010, should be a value creator for the company. While the earnings-per-share prediction for the title company has been cut from $2.21 to $1.92, KBW has raised its price target by $3 to $38 based on an increase in title book value.

KBW said it is concerned about Stewart Information Services Corp.’s higher-than-expected operating expenses. “While we believe that management is working to cut expenses, ... we prefer to take a wait-and-see approach,” Messrs. Otis and Clark said.