Sorry short sellers, not GM, Ford and Chrysler. No, I'm talking about title insurance.
LandAmerica, the nation's 3rd largest title insurance group (Lawyers Title, Commonwealth Title and lesser titles) agreed last Friday to be acquired by Fidelity, the nation's 2nd 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.
John... No kidding! Our approved underwriters just all became one thanks to this merger! Makes us want to go out and sign up with Old Republic to have an unrelated option! By the way... a 40/60 split would be great! Ours is 30/70!
ps.... I still haven't tried the Bolognese, but thank you very much for sharing your secret recipe!
Melissa; I mean that Agents do 60% of all title policies and directs do 40%. I'm not referring to the contract split. I just reworded that and reposted. Sorry for the confusion. Enjoy the Bolognese. :)
I don't like the idea at all, but my reasons are probably different than yours in the industry.
In 2007 I owned and operated a small home building business. Many of our buyers were first time buyers, using FHA down payment assistance or sub-prime loans to buy their American Dream. To this day we are not aware of a single one of them going into foreclosure.
When the heat started to come down on title companies to "crack down" and be the "mortgage police" it is my firm belief that they over-reacted and hurt legitimate deals. Sub-prime loans weren't illegal, and down payment assistance was totally FHA approved. But the title companies, worried that the insurance regulators would be upset, began to make these loans much more difficult to close. We actually lost a few buyers due to title companies getting in the way. Sorry, that's not what buyer or seller are paying the closer to do.
Could be isolated to Indiana, but I'm guessing not. I'm guessing that we've put too much power in the hands of closers who work for companies that insure title for lenders. I would be a big proponent of closings and title insurance being separated and I feel this huge merger would severely limit the ability of real estate professionals, home builders, and home buyers to choose. Plus, I can only imagine what will happen to title insurance premiums with an oligopoly.
In our states, Title companies have been slapped hard by the state insurance commish...too many freebies, respa violations, etc. etc. Title insurance in my opinion is one, wacked out, fear driven industry that needs some serious revamping.
Steve: Thank you for your comment. You raise many interesting questions that deserve comment so I'll work on a post or two for later this month. Please stop back and thanks for the inspiration!
I will offer two immediate observations formed from 35 years in the title business:
First - If a title company was "getting in the way" of closing legitimate deals, which I'm sure yours were, then I suggest you should look for another title company. Our business is no different from most others in one respect. There are companies at both ends of the customer service model and many in between. Find one that works with you, not against you. They are out there. I don't cover your territory but there are several Active Rainers who do. Check them out in the Title Agent listing on the home page. A couple of them are my Associates so you can look there, too.
Second - Mortgage regulators are always trying to make title companies the traffic cop because of our unique position in the transaction. We resist it. It's not our job. What is our job is to take three sets of instructions, the Purchase Agreement, (8 - 10 pages) the Lender's Closing Instructions (40+ pages) and the Title Insurance Commitment Requirements (1 or 2 pages) and make sure none of them conflict with the other two. If they do, we need to resolve that conflict before we can close. Our customers make this task easy or hard. The more we communicate with each other, the easier it is. Not a revolutionary concept, is it? Too bad more folks don't get it.
Rich: Unfortunately you describe a problem that is all too common in my business. The regulations and laws have been on the books for decades but until recently rarely enforced. The only thing worse that no regulation is unenforced regulation. Then only the law abiding are penalized because there's always someone weaseling the system. In the last few years enforcement is better has begun so you're seeing a raft of situations come to light. There are still many weaselers out there though. Always will be. It would be easier to ensure compliance if there were corresponding penalties on the receivers of these excess gifts, etc., but in most states that's not the case.
Thanks for commenting!
John, this is not a good thing nor is it a bad thing. It is just a thing. LandAm mismanaged themselves into this situation. The insuance Commisioners did not want a failur nad drove this fire sale. Maybe it is a wakeup call to the underwriters to stop shooting themselves in the foot! While this leaves FNF and FAF as the big players, it is also a tremendous opportunity for the regional players to pick up market share! It is all about service! Furthermore, if the big guys only concentrate on the top national lenders, there is a huge local market to play in. This should be looked at as an opportunity.
Peter: I agree with you on at least on point. Yes the underwriters got themselves into this mess. They spent years signing up anyone with a pulse and a connection. Many, not all, of agents cut corners, didn't understand the subtleties of the business and were "experts" in 50 states. Now the claims rate is unprecedented. Market share was king. Long term interest of the companies took a back seat. They just couldn't say "no."
It may very well be an opportunity. I'll reserve judgment on that until I see how the Big Two conduct themselves once the market starts to return to normal.
Thanks for stopping by.
The FTC will not stop the merger (my opinion). Let's look at what happens if the merger doesn't happen. According to LandAm's Ted Chandler LFG will fail and cannot operate anymore on its own. It is safe to assume that little good can come of that. This would leave the Govt to bailout LandAm the way it has done with AIG and others in the financial world. Or the Govt could just let LandAm go away and leave millions of insureds with worthless policies. Does anyone really see either of those options happening? I don't. Instead, I think the LandAm gets bailed out by this merger which keeps that Govt $ out of it and keeps insureds insured.
Craig: I agree with you that the merger will and should be approved. The precarious condition of LFG guarantees that. However, the FTC often grants conditional approvals to mergers and requires some actions on the part of the company to ensure competition. Past title mergers, for example, were approved conditioned upon a company divesting certain operations where either their market share or ownership of property records would result in an anti-competitive situation. This merger will result in FNF having a 50% or greater market share in 18 states. Add in the share of FAF and there will clearly be some large markets with little competition in the distribution channel. I am certain this combination will reduce the ability of title agents to bargain for fair contracts and underwriting considerations. It will also reduce the ability of smaller underwriters to bargain for reinsurance.
Late breaking news on this one, John. Due diligence period for FNF ended at 5pm on 11/21 and they opted out of the deal. What's next for Land Am?
Bill: I put up another post this afternoon talking about some of the ramifications.
Yes, it is a concern however, there is still FATCO (First American Title Co.) and Stewart. Both of which are pretty big themselves. However Fidelity and LandAm were probably the 2 biggest of the bunch. We are a fee-atty. office with an independent agent who is an agent of both LandAm & Fidelity we also have Ticor. But LandAm was our #1 UW. Great group of people over there. I don't know how many of them will be absorbed into Fidelity.
Our office is located in Las Colinas which ironically is down the street from Fidelity National Title offices. And I used to live down the street from LandAm offices when I still lived in Dallas. There are a lot of great, personable people over at LandAm. I already know of one UW that got laid off last week. I only wish them all well.