Opening Titles and Closing Remarks

For the next few days, I'll be posting about 2009 changes to the Real Estate Closing and Title Insurance business.

Have you seen your friendly neighborhood title guy lately? Possibly not. Many of us are buried under a sudden avalanche of refinance title insurance orders.

New Title Orders Explode

After October and November, two of the slowest months I've experienced since 1981, refinance title orders in many locations are off the charts. In 35 years I've never seen order counts turn around this quickly. I went home at Thanksgiving preoccupied with how I was going to get through the winter with my current staff. I did an interview the first week of December for WTIU-TV talking about how title companies cope with severe downturns in the real estate market. Today, that seems farther in the past than when Republicans were fiscally sound.

As a result of various governmental stimuli directed at lowering interest rates and improving liquidity in the mortgage market, refinance order counts are the best in four or five years. Many of my colleagues around the country are reporting similar trends. How long this will last is anyone's guess, but I'm thinking for a few months at the minimum.

Gulp!

The big question here is "Are we ready?" The title industry shed tens of thousands of jobs the last two years. Many companies, particularly those that chased sub-prime business, went away completely. During the last few years, some companies off shored significant parts of their process. These off shore groups didn't exist during the last boom. How will their service levels hold up now? The same concerns are there for other participants in the closing process as well. Appraisers. Underwriters. Will they hold up?

Be alert.

As a client of the title business, now is the time to pay closer attention until you're sure about your chosen company. My crew is already in "warp speed" mode. I'm confident we'll continue to meet and exceed our client's expectations. Many other companies will as well, some better than others. Recognition on your part that the environment is changing will help you and your client avoid the craziness that comes with last minute deals.

I'll be back later tomorrow with specific recommendations to help you avoid any unexpected craziness.

The holidays are over, the visiting relatives safely on their way and the Indianapolis Colts . . . well, let's just say I won't be distracted too much by football the next eight months. So, I am back at it.

Over the next few days, I'll be posting about recent and expected changes in the real estate closing and title insurance world. Today, let's wrap up the most significant industry consolidation in the history of title insurance.

Lawyers Title & Commonwealth Title sold to Fidelity

Just before Christmas, Fidelity completed their acquisition of Lawyers Title and Commonwealth Title from the bankrupt LandAmerica. Matt Carter at Inman Real Estate News wrote several great articles if you want gory details. I come away with two lasting impressions of this debacle.

The failure of LandAmerica underscores the importance of carefully managing OPM (other people's money). LandAmerica's 1031 Tax Deferred business invested client assets in high yielding auction rate securities. When that market collapsed early last year, LandAmerica lost access to their client's money and eventually lost control of their company. The desire to skim a little extra income off OPM, led to the near bankruptcy of two of the oldest title insurers in the country. The irony here is that title underwriters, and many state regulators, rightfully require title agents to apply a higher standard of care to OPM than to the agent's own money. LandAmerica stupidly refused to accept that same standard themselves and paid the ultimate price.

The resulting concentration of 75 percent of the national title distribution system in just two companies, Fidelity and First American, bears close scrutiny as the consolidation plays out. Will these two companies, both sharing the goal of improving profitability, be able to dictate pricing and service levels to their clients without fear of a competitive environment? How will these companies use this market position to leverage new regulatory rules to their advantage? If this business combination becomes abusive, I will not be surprised to see the FTC revisit the situation in a few years.

All in all, a sorry situation that did not need to happen.

Stop back in a couple of days to learn about how falling interest rates and the resulting dramatic increase in title orders may affect your next closing.

Happy New Year and best wishes for a successful 2009!

The bankruptcy induced fire sale of the LandAmerica title insurance underwriters to Fidelity National is becoming more complicated. Matt Carter at Inman News updated the story Friday. You can read the entire article here.

The unsecured creditors of LandAmerica are raising questions about the valuation given the title underwriters in the deal with Fidelity. Don't be surprised by that development. Once Fidelity cancelled the original deal, LandAmerica's status as a going concern became tenuous at best. Fidelity jumped on that opportunity to pick up the plum assets with few of the liabilities. The bankruptcy of LandAmerica probably makes the deal easier for the Federal Trade Commission to approve, as well.

Another development is that Stewart Title reportedly made an offer for the underwriting companies with the Nebraska Insurance Department that is the first regulator that must approve any deal. I personally favor a Stewart acquisition. Having about 85 percent of the national title insurance distribution system split roughly equally between three companies is preferable to having two companies control 75 percent of the market. Three large companies create more competition for good title agents and their clients. Three large companies also make it less likely that Fidelity and First American (two companies that mostly hate each other but now have common business objectives) could impose their will on the market place unchallenged.

Its being widely reported this morning that a condition of Fidelity's offer is that the acquisition of Lawyers Title and Commonwealth Title must be approved by December 22^nd. So the coming week is potentially the most important week in the history of title insurance.

Finally, I can't resist quoting Ted Chandler, Chairman and CEO of LandAmerica when announcing the bankruptcy filing and sale to Fidelity. "I am deeply disappointed over the need to file for bankruptcy protection . . . However, this sale . . . to Fidelity National . . . offers our stakeholders the best result available in this brutal real estate, credit and capital market environment."

As part of this deal, Fidelity reportedly agreed to assume the liability of $45 million in deferred compensation owed the management of LandAmerica.

Way to look out for your "stakeholders", Ted.

Don't forget to wish your employees "Happy Holidays."

Update November 26^th: The Wall Street Journal is reporting this morning that Fidelity will buy Lawyers Title and Commonwealth Title. Also, LandAmerica and its 1031 Exchange Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. (thanks to Dave Wirshing)

In the short term, this is a good thing. Yesterday when national lenders reportedly stopped accepting LandAmerica policies, they were essentially dead in the water. Financial stability should no longer be a concern. Although there appeared little chance that LandAmerica's title underwriters would end up in regulatory reorganization, removing the specter of doubt about their financial condition benefits the entire title industry.

Long term, there are many uncertainties for title agents and their customers. I raised some of those questions in an earlier post which you can read here.

I am not surprised that Fidelity called off its acquisition of LandAmerica last Friday. Whether the continued deterioration of the market, undisclosed skeletons in the closet (under reserved claims) or just part of a Bill Foley master plan to permanently weaken a major competitor and cherry pick the leftovers, there were just too many possible problems for this merger to succeed.

LandAmerica's insurance company subsidiaries, Lawyers Title, Commonwealth Title and the others will probably remain in business as a result of the close regulatory environment in which they operate. But they will be smaller.

The holding company has financing and cash flow problems. According to reports it may well end up in bankruptcy. A bankruptcy proceeding would offer Fidelity, First American and others the opportunity to acquire the good assets without any or few of the corresponding liabilities. Acquiring bits and pieces may please insurance regulators and garner less Federal Trade Commission attention as well.

I am paying attention to what happens with LandAmerica's commercial business. Reports are that it is unable to access $290 million of invested assets relating to its 1031 exchange business and is exiting that line. Exchange business is closely tied to the still profitable commercial title business. I have to wonder whether this development essentially eliminates LandAmerica as a player in the big deals. The reinsurance market is also likely to be affected.

What the effect of the failed merger will be on title agents is also uncertain. Those agents that only represent LandAmerica companies may have a problem finding another underwriter in the current environment. Long term, not having two companies control 75 percent of the distribution channel for title insurance, will benefit title agents and their clients.

In the short term the title business is going to be further stressed as regulators, rating agencies and customers evaluate the situation and its effect on the title business.

Sorry short sellers, not GM, Ford and Chrysler. No, I'm talking about title insurance. 

LandAmerica, the nation's 3^rd largest title insurance group (Lawyers Title, Commonwealth Title and lesser titles) agreed last Friday to be acquired by Fidelity, the nation's 2^nd largest title insurance group (Fidelity National, Chicago Title and other titles). Over the next couple of weeks Fidelity will complete its due diligence and then complete the deal next year. 

Title Insurance is sold through a two-part distribution system. Underwriter owned offices sell about 40 percent of all title insurance and 60 percent is sold by independently owned title agencies (agents) under a contract with one or more underwriters. 

The Fidelity group will control about 45 percent of the combined national title insurance distribution system after the merger, as measured by 2007 American Land Title Association (ALTA) compiled statistics. The First American group controls 30 percent of the national distribution system. 

The whopping combined 75 percent share of control by just two industry players is worrisome. I hope that other title agents and title underwriters share my concern. Will customers of title industry take a long hard look at this Vegas wedding, too? Title insurance is too important to the free and efficient sale and mortgaging of real estate for them not to. 

Underwriters can exert significant control over an agent's business through the agency contract. The ability of agents to move business to another underwriter balances the relationship. Over the last 20 years underwriter consolidation reduced the choices for agents and the agent's clients. 

Underwriters are now less accommodating to agents on a variety of levels. Underwriters are unilaterally changing premium rates and splits, minimum remittances, underwriting coverage and territory. Bad agents are finally being cancelled because of poor performance. Good agents are being cancelled because they don't fit into some recently concocted metric. 

This merger will significantly affect what title agents can do to help their customers. Going forward, pricing, underwriting and service will be subject to less competitive pressures. Fidelity already announced plans to increase its rates nationwide. Won't that be easier now? 

This merger is probably a good thing for current LandAmerica policyholders. But with fewer choices, less competition and a narrowing distribution channel, will title agents and their customers benefit from this merger in the long run? 

The Federal Trade Commission and various state insurance regulators will review the merger. The effect of this merger on the national title insurance distribution system is unprecedented. Will this effect be considered if approval is granted? Ownership of property records databases, the historic concern of the FTC, should not be their only concern this time. The business objectives of the Big Two are identical today - cut costs and improve profits. Will this common objective lead to similar (albeit independent) market strategies limiting choices for agents and their customers.?

One thing is certain. The landscape of the title business is now irrevocably changed. Will it be a change for the better? Let me know what you think.