Housing Slump Makes For An Unhappy Title Insurance Market

The title insurance industry has been hit hard by the housing market slump, particularly in local markets, according to industry professionals and a rating service.

Fitch Ratings, in its report on the sector yesterday, said title insurers' operating results were continuing to deteriorate at the close of the third quarter, showing no near-term relief from the current market downturn.

Title insurance revenue, for the universe of six publicly-traded firms Fitch studies, for the first nine months of 2007 fell 9 percent from the same period in 2006, but the rating firm said the decline was more pronounced comparing third-quarter revenue from 2007 to 2006.

Jim Maher, a consultant to the American Land Title Association, an industry trade group, said that 9 percent, "while it doesn't sound like much, it's very significant." To see anything comparable, he added, one has to have to go back to the early 1980s, "when interest rates were in double digits."

Currently, he said, "local markets are more numerically extreme--down some 60 percent."

Rafael Castellanos, managing partner at Title Insurance Agency in Manhattan, can attest to that. "We're seeing a huge downward slowdown in the level of closings," which are off by 50 percent compared to last year, which translates to a 50 percent cut in revenues, he noted.

The big title insurers, he said, were not hurt, but independent title agents are.

Fitch said it is expecting a moderate 3-to-5 percent deterioration in title insurance revenues for 2008. An improvement in results for the big traded firms, Fitch predicted, won't happen until the beginning of 2009.

Title insurance operating earnings for the first nine months of 2007 fell by more than two-thirds to $295 million for the six publicly-traded title underwriters, representing a weak operating margin of 2.3 percent, Fitch reported.

Two underwriters actually reported pretax losses for its title insurance segments during the period, while a third was essentially break-even, Fitch said.

The firm said operating margins have fallen precipitously in 2007, but added that this level of earnings during a down-cycle is to be expected.

In fact, one only has to revisit 2000 to find a similar industry operating margin of 2.4 percent. Fitch is expecting operating margins in a range between 2 percent and 4 percent during 2008.

Mr. Maher said that title firms need to maintain highly-trained professionals, so they cannot do a cutback as a factory might, thus "management of that fixed cost is tricky."

However, he said that today's market is more adept at managing cycles in the $17 billion industry, and the workforce is more accepting of change, realizing that in such periods, "you have to do something else."

Mr. Castellanos commented that "we know this is cyclical--six months if we're lucky. We plan for it, live modestly and save for a rainy day."

"We are weathering the storm going forward and hoping the downturn doesn't last," said Michael P. Miglino, president of the New York State Land Title Association.

Mr. Miglino said the downturn has been magnified because the recent housing boom had meant some "very, very busy years."

Fitch said expense initiatives are expected to gain traction during 2008, resulting in a slight improvement in operating margins. For the foreseeable future, however, Fitch predicts margins will not approach levels seen in the favorable market of 2003-to-2005.

The rating firm said the fortunes of the title insurance industry remain tied to mortgage and real estate markets, both of which will continue to deteriorate in 2008. The housing market, Fitch noted, has a greater than 10 month inventory glut.

Title underwriters have taken reserve charges during the year as current estimates of losses for previous policy years are exceeding originally reported loss ratios. Average combined ratios for the six publicly traded underwriters worsened by 350 basis points to 101.8 as of Sept. 30, said Fitch.

Only one underwriter out of the six reported improvement in expense ratios, and consequently, a better combined ratio relative to 2006, according to Fitch.