Title Insurance

Industry Snapshot

Typical title defects result from liens and encumbrances on a property related to unpaid taxes, land use and zoning restrictions, unsettled contractor disputes for work done on the property, and unrecorded deeds. Title insurance also protects the buyer and lender from fraud perpetrated by the seller. In the late 2000s, one in every three real estate transactions had a title issue that required resolution prior to sale.

Dominated by several national companies, with the remainder of players made up of regionally based enterprises, title insurers in the late 2000s were struggling. The economic recession had sent the housing and overall construction industry into a tailspin. The industry cut costs, constricted acquisitions, and waited for economic conditions to improve.

Background and Development

Title insurers must carefully analyze government records and legal documents to determine the risk of defects for a title on a given parcel of property. The insurer must then underwrite an insurance policy for the buyer that reflects the character of the property title under consideration. Although title searches and warranty deeds have been used to assure title validity in the past, title insurance grew in popularity during the 1980s and early 1990s because it was the most absolute form of protection.

The 1990s were a turbulent period for the industry, which experienced one of its worst years in 1991, when operating losses exceeded $190 million. Business stabilized in 1992 as demand for title insurance increased and many companies reported operating profits for the first time in many years. However, a large drop in refinancing in 1994 due to higher interest rates placed more financial pressure on companies that carried over into 1995. Large companies, such as Chicago Title and Trust Co. and Lawyers Title Insurance Corp., tried to reverse their decreased profits by instituting staff cutbacks and salary reductions.

To combat downward pressure on profits, title insurance companies tried to increase efficiency by automating, laying off employees, improving services, and increasing lines and regions of service through mergers and acquisitions of smaller companies. In addition, many companies were able to find work in the foreclosure industry, serving law firms and banks, and by offering new real estate services, such as loan servicing and appraisals. By the late 1990s, the industry had ridden out the serious financial hardship that occurred because of problems and rapid fluctuations in the real estate resale and new construction market.

Between 1986 and 1999 the number of companies providing title insurance in the United States fell from 85 to fewer than 70, and the market became increasingly controlled by several large companies. During this time, a number of title companies failed, and many of the companies that were left merged to pool resources and capital. In late 1999, Fidelity National Finance announced the purchase of number-one-ranked Chicago Title Corp. in a $1.2 billion merger. With combined 1998 revenues of $3.4 billion, this merger created the largest title insurance company in the United States.

The industry was using new developments in computer technology to aid in the underwriting process. Several companies were leading the way with artificial intelligence systems designed to predict the likelihood of default by a mortgage borrower and other automated services. PMI Mortgage Insurance Co. instituted an advanced system employing statistical predictive models to aid in the underwriting process. United Guaranty Residential Insurance Co. collaborated with IBM Corp. to develop an expert system that could render underwriting decisions in less than 10 seconds, and Stewart Title began a similar electronic document preparation service as well as a flood determination company.

Despite the use of computer technology, the title insurance industry found it much more difficult to streamline the records search process using computers and automation. Except for major metropolitan areas, most county governments charged with collecting title records were still maintaining them just as they did 100 years ago, according to Chicago Title. Although checking the ownership of a parcel of land was a straightforward process, to ensure the validity of title for a buyer, title insurance companies had to also track prior owners of the land and determine if the land had any easements, liens, or other encumbrances. Title insurance companies were limited in that they could be only as efficient as the county in which the records were kept. For most counties, there was only a limited amount of information maintained in a computerized database, and this information was typically indexed in only one way, usually either by seller or buyer. Rarely were property records indexed by legal description, address, or type of document. This significantly hampered the investigation required to underwrite a policy of title insurance.

During the first half of the 2000s, the title industry prospered from historically low interest rates, which resulted in a surge in the number of refinanced mortgages. However, during 2004 and 2005, the Federal Reserve began to raise the interest rate slowly, which cooled the refinancing market. According to the American Land Title Association, the title industry reported a net income of $1 billion in 2006 and net title premiums equaled $16.6 billion. Although business remained healthy, the increased number of titles covered during the 2004 through 2006 years were expected to eventually lead to more claim losses. This is due to the fact that problems are more likely to occur in a weak real estate market. In addition, title insurance claims can signal an economic slowdown. With home foreclosures at record levels in mid-2007, several of the top title insurance companies experienced double digit losses in stock prices, large declines in earnings, and the layoffs of hundreds of workers. According to The Wall Street Journal, First American, the largest title insurance company, reported a loss of $66 million in second quarter of 2007, after having a net income of $25.5 million in the same period the preceding year.

Current Conditions

The title industry was under significant regulatory scrutiny during the mid-2000s. The U.S. Department of Housing and Urban Development tripled the number of staff who investigated title fraud and mismanagement. Title issuers are not allowed to provide referral fees or kickbacks to lenders. The title industry, which is regulated under the Real Estate Settlement Procedures Act as well as numerous state statutes, agreed that clarity, if not reform, was needed to help define exactly what relationships between title issuers and lenders are acceptable.

In 2008, the U.S. economy fell into recession, pushed there by a banking crisis that led to shrinking available credit and a collapse of the housing industry. The title industry felt the full effects of the drying up of new housing starts. In its 2008 year summary, the American Land Title Association reported, "The continued slowing of real estate sales and refinances, a continuing reduction of title insurance transactions and revenues, and a continuing rise in loss and loss adjustment expenses have taken a significant toll on the title insurance industry during 2008."

Strong industry efforts aimed at reducing costs during 2008 led to a 24 percent decline in operating expenses. In addition, loss expenses increased just 1.4 percent during the year. However, the industry experienced the largest drop in total operating revenues in 40 years. Total operating revenues fell by nearly 26 percent and was the third year in a row that the industry revenues declined. Operating losses totaled $87.8 million in 2007 and $711.2 million in 2008. Despite the industry's economic woes, the American Land Title Association insisted that the industry remained on firm ground with some $9 billion, which included $7 billion cash and invested assets.

As the title industry waited for President Barack Obama's stimulus package and other economic incentives to jump start the badly sagging economy, the industry continued to report declining revenues during the first quarter of 2009--making it the twelfth consecutive quarter of quarterly declines compared with the previous year's same quarter. By regional basis, of the four largest states according to premiums, revenues in Texas, Florida, and New York declined 32 percent, 40 percent, and 39 percent, respectively. Revenues for leader California were down just 8 percent.

On a company basis, the balance sheet of First American Corporation, owner of the largest single U.S. title company, First American Title Insurance Company, provides a telling story. According to its annual report, the company's overall revenues were $8.1 billion, $8.5 billion, and $8.2 billion in 2005, 2006, and 2007, respectively. In 2008, revenues declined to $6.2 billion. Net income fell from a four-year high of $480 million set in 2005 to a loss of $26 million in 2008. During the same period, average return on investors' equity fell from 17.5 percent to -0.9 percent. Losses were recorded despite strategic cost-cutting measures that included eliminating over 8,500 jobs between 2006 and 2008. The company also postponed its intended spinoff of its information and outsourcing solutions business sector from its title insurance businesses until economic conditions improved.

Industry Leaders

In the late 2000s, the industry continued to be dominated by large companies that operated through a variety of business segments and subsidiaries. In 2008, Fidelity National Finance owned and operated the largest title operation in the United States, holding a 45 percent market share and generating over $5.1 billion in total revenues. Particularly strong within the Fidelity portfolio of 15 companies was Chicago Title Insurance Company, Lawyers Title Insurance Corporation, and Fidelity National Title Insurance Company, which controlled over one-third of the overall industry. The First American Corporation family of over 22 title companies combined to hold nearly 29 percent of the market, with combined revenues of over $3.3 billion. The majority of revenues ($2.6 billion) was generated by namesake First American Title Insurance Company, making it the largest single title company in the United States. Stuart Title, with over 10 title entities within its organization, had total title revenues of $1.3 billion and a 13 percent market share. Rounding out the top four was Old Republic National Title with $621 million in revenues and 5.5 percent of the market. Other players within the industry operated on a regional level but no one company accounted for more than 2 percent of overall market share.