Once the domain of non-standard lenders, title insurance is becoming more of a necessity than a luxury. So how has the credit crunch affected title insurance companies’ standing in the market and has it been necessary for them to reposition themselves to survive?
In the UK the main players are London & European, First Title and Stewart Title. First Title and Stewart Title have US parent companies – First American and Stewart Title US – while London & European is part of the April group.
Title insurance is used to protect lenders against any problems that may arise with regard to the legal ownership of property. A problem with the title of a property can cause complications with transactions, especially remortgages, and result in lengthy delays. If the title is not legally protected, the lender’s assets are at risk.
According to London & European, problems that can arise regarding title include lack of evidence of planning permission, breaches of restrictive contract and disputed ownership.
Lenders have traditionally opted for title insurance to avoid such problems and therefore speed up the process of remortgaging – something that will obviously attract customers.
However, as with most areas of financial services, the current situation is new territory for title insurance companies. Lenders are not looking for so much custom because liquidity is in short supply. Title insurance may seem to be a luxury they do not need, so how have title insurers positioned themselves to face these challenging times?
Bryan Chrystal is an industry consultant and former employee of First Title UK. He says UK title insurance companies are suffering, but not as badly as their US counterparts.
“All providers have been affected by the slowdown in the volume of business,” he says. “They depend on how many transactions take place – a drop in the number of transactions means a drop in their business.
“And US firms are suffering more. The big problem there is the fixed costs involved, which are enormous. If the market slows it’s difficult to do anything to lower fixed costs.”
Chrystal says the extortionate costs title insurance companies have to pay in the US mean that as soon as business volumes fall, they make losses.
“Imagine they take a dollar premium,” he explains. “Around six cents of that dollar go towards dealing with the case but their fixed costs add up to 92 cents. If fixed costs go up even slightly, they are soon paying more than a dollar.
“First American’s costs went up 11% so it was making a loss – it’s like turning round an oil tanker. In the US, there have been huge layoffs. All the companies there are doing it, but quietly. There is a different market structure over there compared with a few years ago.”
Chrystal says the reason firms in the US pay higher costs is the lack of an easily accessible land registry system. In the UK it’s easy to get access to public records but across the pond this is not the case. Operating a network of title information like the UK’s Land Registry is costly.
“The difference between the UK and the US is cost,” he says. It’s the difference between buying a pint of milk and buying a cow – if you don’t want milk the next day, you still have to buy the cow.”
Christopher Taylor, chief executive officer at London & European, agrees that the credit crunch is having a detrimental effect on title insurance companies but he believes these trying times can also provide opportunities for lenders, as the uncertainty facing many of them has left them more risk-aware. “These are challenging times but they also provide opportunities for title insurance,” says Taylor. “The reduction in sales has an impact on volumes but title insurance covers remortgages as well as sales and purchases, and also first and second charge mortgages.
“It was previously seen as the domain of non-standard lenders but this is changing as lenders’ focus switches to risk rather than market share. Title insurance is being seen as essential risk management tool. We are seeing a big increase in enquiries from building societies and are working with some prime lenders”
Taylor says lenders are becoming more aware of the security benefits of title insurance and his firm is seeing interest from lenders across the board.
According to Taylor, one big area of opportunity for title insurance companies comes from the rise in repossessions. Figures from the Council of Mortgage Lenders show the number of properties repossessed by lenders has risen by 48% in the past year. There were 18,900 repossessions in the six months to June – up from 12,800 in the same period last year. Taylor says this has made lenders more aware of the need to protect their assets.
“The speed and simplicity of title insurance is a bonus,” he says. “Right now it’s all about security. Most title defects arise when properties are repossessed. Lenders simply can’t afford not to recoup their investments.”
Of course, it is not just repossessions and the unstable economy that have dominated headlines recently. Fraud has also been an issue, with the Financial Services Authority cracking down. Taylor says this is another reason for lenders to be cautious and take out title insurance.
“Title insurance also covers borrower and solicitor fraud,” he says. “Fraud-related claims represent a significant percentage of what we manage and fraudulent activity is expected to rise as times get tougher.”
But Chrystal is uncertain about the effect the rise in fraud and repossessions will have on lenders’ desire for title insurance. He claims not enough time has passed since the start of the credit crunch to encourage lenders to opt for it for the reasons given by Taylor.
“Market conditions have only been this bad for about a year,” he says. “It takes a lot longer for lenders to refocus their business due to the number of repossessions. I don’t think more repossessions is a significant reason to buy title insurance.”
Chrystal believes it is more likely that lenders that are taking out title insurance are doing so for the reasons they always have done – to make transactions run more smoothly. He says the credit crunch is unlikely to have changed this but it may have made it less of a main concern.
Traditionally, the main reason lenders buy title insurance is to make the process of remortgaging faster and more efficient. If a customer approaches a lender for a remortgage and it can make it happen in weeks rather than months – as would be the case if the client took the traditional route of going to a solicitor to change the title deed – the customer is more likely to choose that lender.
But Chrystal says the lack of liquidity in the market means this is no longer a priority for lenders.
“That worked when lenders were stuffed with money,” he says. “Now they are more choosy about their customers.”
However, opportunities do exist in exploring other territories, according to Chrystal. Since there has been a drop in property transactions in the UK, many title insurance companies have been looking further afield for business, as well as exploring different market sectors.
“There is less residential mortgage business being done so many companies are opting more for commercial business,” he says. “They are also looking at different territories – most notably central and eastern Europe.”
This has certainly been the case with First Title, which began conducting business in Turkey through local insurance companies in December last year.
Michael Schuh, managing director of First Title in Europe, said at the time: “With UK investors in particular increasingly spreading their investment wings eastward, Turkey is becoming a hive of property development activity.”
First Title is not alone in extending its activities further afield. While its parent company April is headquartered in Lyons and has operations in Germany, Spain, Italy, Hungary, Canada, Portugal and Poland, London & European is also exploring new territory. It has recently opened a subsidiary in Dublin.
Catherine O’Sullivan is managing director of First Title Ireland and says that since the launch of the subsidiary business has been going well.
“Our business model involves a small central overhead and a focus on the use of technology, which allows us to manage our costs in slow times,” says O’Sullivan. This is an advantage we have over the other operators in this market.
“We launched our service this year and are happy to have signed up a number of mortgage lenders. The summer was quiet but we are seeing business picking up now.”
As if to prove the point, while other companies are in the process of making redundancies L&E Ireland is hiring a business development manager.
Earlier this year Stewart Title was also recruiting, with the appointment of Jonathan Woodcraft as head of sales and marketing in the UK.
L&E has looked at other areas of business, although this initiative was not necessarily prompted by the credit crunch. Taylor says the company expanded its offerings several years ago.
“Title insurance is core to our proposition but we have developed a number of services and solutions, all with the aim of increasing the speed, simplicity and security of property transactions,” he says. “For example, our web-based Complete Conveyancing panel management system offers solutions for lenders and brokers.”
But while title insurance companies may be employing innovative tactics in an attempt to combat the effects of the credit crunch, everyone is looking forward to better times.
“Things will pick up,” says Taylor. “But if I could give a specific answer as to when, I’d be a rich man. Certainly, the next 12 months will be challenging but hopefully we’ve seen the decline in propLSerty transactions bottom out.”