Fitch Ratings will not return the title insurance industry's outlook to stable until it sees evidence of a return to sustainable profitability and surplus growth.
And that is unlikely to happen for some time, the ratings agency said in a report, because there needs to be a period of greater macroeconomic and political stabilization.
For all of 2010, the industry saw a decline of 15% in the number of open orders. However, fourth quarter 2010 orders increased by a modest 3% over the prior year quarter. But Fitch said it believes it is not a sustainable trend.
This is because the forecast from economists around the industry is for mortgage originations to decline to $1 trillion or below this year, and thus title insurers’ operating revenues will be strained in 2011.
In its report, Fitch noted "The low interest rate environment for the past several years has helped increase mortgage originations; however, current macroeconomic and political factors may lead to a rise in interest rates, which further pressures mortgage originations and home sales."
The rating agency is taking notice of an increase in lender claims, which will cause continued reserve volatility, particularly for the books of business written in 2007 and 2008.
"These forecasts and trends coupled with recent increases in mortgage interest rates point to another year of declining revenue for title insurers in 2011. As such, profit margins will continue to be constrained vs. past market peak levels, and expense management will continue as a prevailing theme for companies to report operating profits," Fitch concluded.
