The operating structures of the nation’s title insurance underwriters are better equipped today to handle the expected decline in mortgage origination volume between 2010 and 2011 than in years past, a report from Keefe, Bruyette & Woods said.
This is because these companies have been engaged in right-sizing their expenses over recent years.
Furthermore, most (if not all) of the decline in volume will come from the refinance business, noted analysts Nathaniel Otis and William Clark.
Meanwhile, a report from A.M. Best said what happens in the title industry in 2011 will be influenced by what happens regarding employment. Uncertainty in this area could affect the purchase market.
According to the KBW report, the industry faces two questions for 2011: How long can rates remain low and to what extent will the purchase market strengthen?
Rates will remain low at the start of the year as the federal government looks to incubate economic growth, they said. And the purchase market should gradually strengthen.
Otis and Clark predict that “more efficient management of expenses given the relatively stable environment of 2010 combined with a higher fee per file from the greater mix of purchase business should help improve profitability and offset the anticipated reduction in volumes. In addition, loss provisioning should remain low assuming no further material retrenchment in home prices, with the commercial business offering some additional positive momentum.”
Title orders for purchases, they noted, have twice the premium level than an order for a refi. In addition, if one believes home price values have hit bottom during 2010, premiums per file will increase because they are partly based on the transaction value.
But on the opposite end of that, they said, is if foreclosure sales make up much of the purchase volume. These transactions have below-market prices that will negatively affect premiums.
The KBW analysts did revise their open order estimates for 2011 to show a larger drop-off from 2010, a decline of 13% to 15% compared with their previous range of between 7% and 9%.
Regarding provisioning for potential claims, Otis and Clark said the industry is now past the peak years for claims relating to the 2005 through 2007 books of business.
“In addition, while the title insurers could see a very slight increase in expenses in conjunction with increased legal activity involving foreclosures, we believe it will be limited in nature and have no real impact on the bottom line. With respect to actual claims arising from the enhanced scrutiny around the foreclosure process, the title insurers have been clear in their belief that any issues involving the lenders will not result in claims for the industry,” the KBW analysts said.
The Best report, authored by analysts Michael Russo and Neil DasGupta (with Michelle Korsmo of the American Land Title Association listed as a contributing author), notes sustaining the improved operating and capitalization trends of recent months for title underwriters will depend largely on the length and depth of the problems with the economy and employment during 2011.
“Loss activity stemming from agent-, consumer- and bank-related fraud activity still remains a concern. Such activity typically goes up during periods of reduced cash flow and generally involves embezzlement of funds held in escrow, potentially resulting in severe losses,” the Best report said.
As for managing expenses, Best notes it is equally difficult for companies to reduce costs during a downturn as it is to rehire trained staff when business improves.
