Title insurance update: will economy, politics spell better 1996?

The strong close to business in 1995 seems to have carried over to this year in the title insurance industry. A mini-refinancing boom, sparked by a late-year drop in the interest rate, boosted orders during the normally slow first quarter and this, combined with industry executives' predictions that election year politics will keep the economy and the interest rate steady, could mean overall better numbers in 1996.

There is certainly more optimism than at this point last year.

"1995 turned out to be a pretty good year," says Allen Prince, senior executive vice president in charge of title operations with Chicago-based Chicago Title & Trust. "But that was due to a strong final two-thirds of the year."

He adds that, of Chicago Title's earnings last year, 92% occurred during the last eight months of the year, after the industry recovered from the delayed backlash of the refinancing boom of 1994.

Ironically, 1996's good start is the result of residential refinancing spurred by a late 1995 drop in interest rates.

"The drop in interest rates led to a lot more refinancing activity and new orders," says Stewart Morris Jr., president of Houston-based Stewart Title Guaranty Co.

Prince says Chicago Title's orders for January and February of 1996 increased to more than 9,600, up from 5,600 for the first two months of 1995.

"The refinancing business kicked in during the last quarter of 1995 and we have seen a lot of new refinancing orders so far this year," agrees Allen Fine, president of Chapel Hill, N.C.-based Investors Title Insurance Co.

Despite the great boost refinancing orders provided the title insurance business early in the year the business can evaporate quickly. Morris says jumps in the long-term interest rate in early March has slowed refinancing to a trickle.

"The high order counts so far this year have been heavily influenced by refinancing business," says Prince. That business, he says, is very tenuous. "You don't want to bet the farm on sustaining that kind of business," he adds.

A rise in interest rates can often trigger more business in the short term as customers rush into refinancing, before the rate can get any higher, but the rate moved up too quickly for many in the market.

"There are always those on the fence waiting to finance at the lowest rate possible," says Prince. "But the rate went up a full point very quickly and left them behind."

But the fragile refinancing business isn't being credited for all of the first quarter successes. The low interest rate and strong economy have also increased the industry's commercial business.

The commercial part of the title insurance industry is definitely growing," says Fine. "There are definitely more transactions than a year ago."

Morris agrees, believing that the economic timing for commercial transactions is ripe. "We are definitely seeing more commercial and retail orders in 1996.

"In the commercial business, if the interest rate drops more deals work," says Morris. "It seems the buying side has come to terms with the selling side, regarding lower prices, so we are seeing more transactions."

"Commercial business has been strong the last nine months, with the exception of new office construction," reports Prince, although he believes the overall health of the economy is more of a factor for commercial business than the interest rate.

"General economic health drives more of the commercial deals," agrees Charles Foster, chairman and chief executive officer of Richmond, Va.-based Lawyers Title Insurance Corp.

"Within reason interest rates don't have as quick an impact on commercial business as they do residential," explains Prince.

Foster says Lawyers Title is seeing a lot of activity with apartment buildings and strip center mall transactions.

The North American Free Trade Agreement (NAFTA) has had a great impact on the demand for existing industrial space and the construction of new space. Particularly in Texas, reports Morris.

"We have done a fair amount of business with industrial properties," he says, "It is the best segment of the non-residential market, and that has been the case since 1994. 1995 was a good year for industrial business."

Most observers feel 1996 will be a good year for the title insurance industry in general, with analysts predicting a repeat of 1995's results, if not a little better. And that would suit most industry executives.

"1996 could possibly be a little better than 1995, but hopefully as good," says Foster.

Optimism for economy

Most of the optimism is based on economic projections.

"There are three factors that dictate the state of the economy," explains Prince. "The cost of money, the availability of money and consumer confidence. And I believe all three are in place for a healthy economy."

Morris, who recently attended a meeting that included Federal Reserve chairman Alan Greenspan, says what he heard bodes well for the economy. "The federal reserve people are saying there is not a lot of pressure to raise interest rates," says Morris. "And in an presidential election year there is a lot of good news floating around and no one wants to hurt the economy, so I believe the health of the real estate market will continue."

Both Foster and Prince agree.

"The fact it is an election year will probably supply a base of support for the economy," says Foster.

"I believe 1996 will be a good year," adds Prince. "I doubt interest rates will go much higher in a presidential election year.

Fine estimates that overall transactions in the market will increase 7.5% this year.

Looking for an edge

Even in a strong market the competition in the title insurance industry is driving companies to look for every edge they can get on their competitors. One of these areas is in the development of new profit centers, especially those dealing with real estate information services.

The reasons for this expansion are two-fold. First, the companies can diversify their income methods, so that all of their eggs are not in one basket, so to speak. Second, and potentially more important, each company can increase the number of real estate services it offers its clients - an increasingly more important aspect of the industry, with today's efficiency-seeking, one-stop-shopping mind-set.

"Much of our expansion is in the real estate information area," says Morris. "We have added document preparation, flood determination, environmental research and home owners insurance among other things to the services we provide. Our aim is to be of greater service to our clients."

"To be a national company in the real estate industry you have to provide a broad base of services," adds Foster.

However, Fine says title insurers should focus on their main area of expertise. "We use a company that acts as an intermediary in providing other services, but we feel we need to stick to title insurance because that is what we know best."

But when a company does add additional profit centers they don't have to be closely connected to title insurance. Santa Barbara, Calif.-based Fidelity National Title, a subsidiary of Fidelity National Financial, recently purchased the Carl Jr.'s hamburger chain.

But most new services do deal with real estate.

In April, Lawyers Title's holding company, Richmond, Va.-based Lawyers Title Corp., formed an equal joint venture partnership with General Motors Corp. (GM) to provide employee relocations services to GM and other corporate customers worldwide.

The company, to be based in Detroit, will be called Argonaut Relocation Services. Matthew P. Cullen, director of GM's worldwide real estate says, "[The joint venture] allows GM to maintain its outstanding customer satisfaction and low relocation program costs while providing Argonaut the opportunity to pursue new outside business."

As a former department within GM's real estate division, Argonaut handle the relocations of all the company' salaried and hourly employees. This included about 8,000 relocations per year, figures that placed it among the five largest relocation companies in the country.

"Lawyers Title continues to add to its portfolio of services related to transactions involving the transfer and recordation of interests in real estate," says Janet A. Alpert, Lawyers Title's president and chief operating officer.

Lawyers Title will offer Argonaut's services to Lawyers Title Insurance Corp.'s corporate customer base. Included will be a range of services including marketing assistance, departure and destination services, home sales assistance, transportation of household goods, mortgage and financial assistance and counseling services, policy support and development.

Also recently, Stewart Title Guaranty signed a three-year preferred vendor agreement with HFS Inc., the Parsippany N.J.-based franchisor of Century 21 ERA real estate brokerage offices, to provide HFS' franchised real estate broker with assistance in closing home sales quickly and efficiently.

The agreement will give Stewart Title access to HFS' network of real estate brokers and agents for promotional and sales purposes. Over time, brokers and agents will also gain access to Stewart's title systems and electronic commerce capabilities.

"Our automation products and services are developed around one principle - finding ways to serve our real estate industry customers better," Morris said at the time the agreement was announced. "What our customers are asking for most is an easier and faster way to complete real estate transactions."

Others hope to enter title business

In addition to title insurers expanding their business offerings, other types of firms are looking at getting into the title insurance business. Price says, banks, in particular, are interested in the industry, if they can get some laws changed to make it legal for them to move into the insurance business.

"If banks continue to get more power to operate in the insurance business, they may be in the market to acquire a title insurer," says Price. And he predicts they will eventually gain that power.

At the very least he expects banks will want to set up "partnering" relationships with title insurers, where the banks would give all of their title insurance business to a particular company and that title insurer would give the bank and its clients discount prices on their services.

"Banks often like to set up these of partnership relationships with service providers," says Prince.

"If banks do get into the title insurance business it will probably be as a huge national agent, not as a title insurer." says Foster.

While management continually looks at the advantages of these and similar opportunities for growth, another source for debate in the title insurance industry involves the best and most efficient approach to garnering orders, using direct operators or independent agents.

Direct operators vs. independent agents

Direct operators are company employed agents, while independent agents are just that, and receive commissions based on the number of orders they bring to the title insurer.

The debate is about which is the most efficient method for title insurance company's to get business.

"I think when business is good you make more money with direct operations," says Morris.

"We can supervise our people and process the business at a much cheaper rate than the cost of the commissions we would have to pay an independent agent," says Fine.

Of course the most efficient method may be to use both direct operators and independent agents.

"Companies are looking for the way to make the most money and that is going to be whatever works best in each particular market," says Prince. "What works best in Denver may not be what works best in Houston."

Fine says Investors Title likes to keep a mix of direct operators and independent agents. "Right now there is more reason to have direct operators and currently about 65% of our business is direct business," he adds. "But depending on the state and the commission structure it will vary. However, when business is not at its best the profit margins on a direct operation may not be as much."

"Sometimes it makes better sense to use an agent," says Foster. "In Texas, for example, there are a lot of small towns and great distances between those towns. Independent agents are going to know those markets better than a direct operator ever could because there is just too much ground to cover. And the areas are too small and spread out to justify the expense of opening an office."

But direct operations do offer some other advantages. Morris cites that direct operations are more efficient when working with national clients because the client can deal directly with a company official.

In addition, Foster says direct operation offers the title insurer control over the real estate closing, which helps prevent defalcations (the theft of escrow money by agents). "An in-house agent that knows he is subject to audits is less likely attempt such a thing," he says.

The debate over direct operations vs. independent agents is likely to continue, but one industry trend where there is no question of the advantages it offers, is computerization.

Technology is the answer

"Technology is one of the forces at work improving everyone's business," says Foster. "The question becomes, how can you operate as efficiently as you can to keep costs down? Technology is the answer."

"Moving as much of our business as possible to computers is a very productive operation," says Fine. "We are continually finding ways to speed up transactions. And we know it has cut our costs."

Foster says that historically title insurance has been a very paper-intensive business. But computer data interchange which allows the company and the client to exchange information by computer reduces that paper trail and speeds up the transaction process.

"When computers are involved, the whole process gets more efficient," says Morris. "There are fewer mistakes, the process takes less time and the deal closes for less money."

The capabilities of the technology are constantly improving and what is impossible today, is possible tomorrow. Keeping up technologically costs money, and the companies that can't afford to do so could be absorbed by those that can.

"I think there will be more consolidation over time," says Prince. "I don't know if all of the title insurers operating right now can make the capital investment to compete."

"Consolidation is inevitable," agrees Foster. "There are a lot of market pressures to do things quicker, better and cheaper. And part of the answer lies in the economies of scale that consolidation offers."

Consider this when choosing a title insurer

Making a wise decision when you choose a title insurance company is yet another factor that can help determine the success or failure of your real estate transaction. To find our exactly what characteristics define a good title insurer, the editors asked Thomas H. Brown, a partner in the Boston law firm of Pearbody & Brown, for advice on choosing a title insurance company.

"It depends on whether you're dealing with transactions in or out of state," Brown noted. "Some of the criteria is the same, but some companies are better nationally than others.

"First, look at the competence of attorneys and other people at the company," he said. "Look at the service level provided and how willing they are to be creative in solving underwriting problems."

Brown said to check out the company's rating and financial ability, as well.

"When the real estate market was down, people began to worry," he said, "and Fannie Mae decided [title insurers] need to be rated."

For large transactions, be sure the title company has a solid rating from an agency like Standard & Poor's or Demotech.

For interstate transactions, Brown said, look at the national capabilities of the company. "Does it have a good national division? Some are only regional or work mainly on the East or West Coast," he said.

Finally, in those states where rates aren't established by an insurance commissioner, he said, look for the ability to negotiate to get a good rate.

"A lot of companies have good people," Brown noted, "but there are some companies that are better than others."

Ask these questions the nest time you choose a title insurance company:

* How competent are they?

* Are they willing to be creative

* What level of service do they provide?

* Do they have a solid rating?

* What is their financial ability?

* Do they have a good national division?

Transamerica changes name

Transamerica Title Insurance Co., a Philadelphia-based subsidiary of Reliance group Holdings Inc. and an affiliate of Commonwealth Land Title, has changed its name to Transnation Title Insurance Co. The new name "conveys the fact that we have a national presence and are anywhere our customers need to be," says chairman and CEO Herbert Wender.

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