Assessing the effects of a contracting economy on total business volume in the title insurance industry is a tough call. After all, prospects vary not only from sector to sector, but also from city to city. But almost universally, title insurance professionals predict the industry's performance in 2002 will fare better than the nation's economy, even if it pales by comparison with 2001.
Historically, say observers, the title insurance industry reflects the economic climate, which at the moment is mired in recession. Despite the lagging economy, business in the title insurance sector has been booming this year, largely because lower interest rates have encouraged property owners to refinance mortgages. That, in turn, has boosted transaction volumes at title insurance companies because mortgage refinancing usually requires a property owner to obtain a new title policy.
However, the general consensus is that refinancing activity will eventually decline because there are only so many property owners interested in taking advantage of lower interest rates. When refinancing slows to more typical levels, the title insurance industry could be in trouble if the recession continues well into 2002.
“Right now, we have good business because of refinancing,” confirmed Dennie Rowland, executive vice president at Santa Ana, Calif.-based First American Title Insurance Co. “But eventually that's going to play out and then we're going to be back to our core business, which is handling sales, re-sales and the normal business we do.”
In October, First American closed 135,200 title orders compared with 81,600 in October 2000, a 66% jump in transaction volumes. October marked the biggest increase in transactions so far this year, but title orders have risen each month this year through October. Rowland is hopeful that transaction volumes will remain healthy in 2002, but he doesn't expect business to be as bountiful as this year.
“Our business is going to fall in concert with the rest of the market,” Rowland said. “If new home builders continue to do well, then that facet of our business will continue to do well because we have a favorable market share in that area.”
The 10-year prime mortgage rate has dipped below 7% after hovering above 8.5% last year. Erika Meinhardt, an executive vice president and division manager in the Atlanta office of Irvine, Calif.-based Fidelity National Financial, also noted that interest rates have been a boon to business. However, the economy is a concern to investors, she added. “I think you will see investors postponing deals to wait and see what will happen, or just pulling out entirely either because they are not getting enough financing or because they lack the investors they need to do the deal.”
Chuck Kovaleski, president of Orlando, Fla.-based Attorneys Title Insurance Fund, said transaction volumes vary from market to market. “Refinancing is still strong, but depending on the source, you hear about some deals being cancelled, some being put on hold for 60 to 90 days and some going forward anyway,” he said.
Other title insurance players note there has not been a significant decline in transaction volume, despite the down economy. “You would think it would have slowed down by now, but the commercial side is still staying relatively flat,” said Ed Burton, a vice president at Chicago Title and Trust. “There have not been any dips so far, although the fourth quarter is not as strong as it usually is. Customers are cautious, but still doing deals.”
Burton said Chicago Title currently is in the middle of its 2002 planning process, although it hasn't been finalized. “Generally, from talking to our customers, it's not going to be as strong as 2001 was,” he conceded. “But it will be a little better than 2000, which was still an excellent year. We're looking for volume about 15% below what we saw this year.”
Kovaleski echoed that 2002 should be a solid, if unspectacular, year in the title insurance industry. “We haven't seen anyone say 2002 will be gangbusters, but most clients seem to feel like it will be ‘steady as you go,’ maybe a 5% to 8% decline in the overall market,” he said.
But there is concern about the “joker” in the deck: the threat of another major terrorist attack. “I think at that point nobody knows what will happen,” Kovaleski said. “It doesn't necessarily mean we'll go in the tank, but given enough uncertainty, we wouldn't know which way to call it.”
As a result, many title firms are hedging their projection bets. Some have put together three or four different budgets, depending on which scenario pans out.
Rita Kennedy, a vice president at Omaha-based Nebraska Title Co., predicted the conservative approach investors have adopted during the economic downturn will result in a slight slowdown for title insurance businesses.
Breaking it down by property type
Upon examining the individual real estate sectors, the picture comes into sharper focus, according to Fidelity National's Meinhardt, who conducts business in the Southeast. “The hotel industry is very adversely affected right now, and will be impacted next year,” she said. “The multifamily sector may be hurt as well. Many people would think the economic slowdown presents an opportunity, that with people being laid off they may rent instead of buy. But they may also return home to live with their families.”
The office market has been adversely impacted by sublease space entering the market, which will discourage new development. As a result of these trends, Burton said commercial transaction levels are expected to drop slightly next year. “Commercial refinancing is fairly strong, and construction is very strong. The resale piece has trended down since about June, and we're not sure why,” Burton said. “For next year we're hoping that won't be the case; we'll focus on that and see if we missed the boat this year, or if things are just dry right now.”
On the other hand …
There's one expert, however, who sees the prospects for title insurance through a much different, and far brighter, prism. “It's amazing, but we are an industry that responds well to volatility,” said Ted C. Jones, senior vice president and chief economist for Stewart Title Guaranty Co. in Houston. “We define great times as those times when the dollars come in the door, and Fannie Mae is forecasting $1.6 trillion in transactions in 2002 for one- to four-family units. That's the second highest total in the history of our country — second only to this year.” That huge volume of transactions in the Washington, D.C.-based Fannie Mae housing program would translate into healthy business for the title industry.
“For Stewart, Fannie Mae speaks for the industry,” he said. “We can predict 75% of the title insurance industry performance just by knowing what Fannie Mae predicts. I see a very busy, very dynamic year for us.”
Jones added that the title insurance industry will benefit from low interest rates. “They cause sales to take place and the refinancing of equity to take place,” he said. “Since we are transaction-driven, both are good for our industry.”
Although some deals have been pulled from the table or delayed beyond the fourth quarter, he predicted those transactions eventually will go forward. “I recently talked with a very large commercial broker. He said a lot of deals have been delayed, but only one was postponed because the lender opted not to fund it, and even in that deal he told me he already has another buyer,” he said.
Jones said there are three key factors that directly influence the real estate industry: job growth, interest rates and individual markets. “The good news is that in most of the country we have not overbuilt — it's nothing like the 1980s,” Jones said. “The other good news is we have really low interest rates. The only bad news is low or negative job growth.”
In an unrelated trend, the aging baby boomer population is expected to benefit the title insurance industry for years to come. The parents of the oldest baby boomers are beginning to pass huge amounts of real estate holdings to their children. “We will see a significant increase in transaction volume, and that has just now started,” Jones said.
Gearing up for more business
Stewart Title is positioning itself to benefit from what it sees as continued strong demand. “In the last 24 months, we have aggressively gone into expanding our commercial participation in the market,” Jones said. “That area is definitely growing.”
In short, he predicts a very busy year for the title industry, although some commercial deals may slow.
Kovaleski also is optimistic, despite the decision-making delays caused by the stagnant economy. “There is nothing to indicate that [property owners] will walk away from refinancing. Purchases and acquisitions are being delayed, but if anything, refinancing has picked up. In 2002, assuming rates stay where they are and we don't run out of people who could potentially refinance, business should stay about the same.”
Steve Lewis is an Atlanta-based writer.