“In times of economic loss, title claims go up”

From the Wall Street Journal:

End of Boom For Housing Hits Title Firms
Recent Jump in Claims, Drop in New Business Pressures the Insurers
September 10, 2007; Page C1

Problems confronting title insurers may offer fresh clues about economic stress points in the nation’s housing market.

Title insurers issue policies that essentially guarantee a homebuyer is the rightful owner of a property. The industry’s fortunes are closely tied to the health of the real-estate industry — and some major firms are seeing claims rise sharply, particularly on policies issued during recent boom years.

One of the nation’s largest title insurers, First American Corp., recently said paid claims jumped 52% in the second quarter, compared with the same period last year.

Rising title claims are significant because they can be a broader sign of economic pain than foreclosures. Claims are often filed even in the absence of a foreclosure. And they can be triggered not only by homebuyers, but also by complaints from another party, such as a subcontractor who has filed a lien for unpaid work on a house. Claims data also can include commercial properties.

“In times of economic loss, title claims go up,” says Theodore L. Chandler Jr., chief executive of LandAmerica Financial Group Inc., another big title insurer based in Richmond, Va. There was a severe spike in claims, for instance, during the recession in the early 1990s.

Moreover, some title insurers are reporting a drop in new business. While that might not sound particularly surprising, given the real-estate slowdown, it could be a glimpse of more trouble ahead: Title-search orders usually come at least several weeks before a buyer takes out a mortgage.

“If you want to know what’s going on with mortgage activity, you look at title orders,” says Nik Fisken, an insurance-industry analyst at Stephens Inc.

First American says average daily title orders were down 6% in July from June and that preliminary results indicate another 9.3% drop from July to August. Fidelity National Financial, a major title insurer based in Jacksonville, Fla., says there was a nearly 8% decline between April and June.

Fidelity National hasn’t disclosed additional data about more recent months. But Chief Financial Officer Anthony Park says, “It’s slowed down considerably, particularly in the month of August.”

In discussing the claims they are getting, for instance, First American and LandAmerica both pointed particularly to claims on policies issued between 2004 and 2006. In those years, investors and homebuyers were gobbling up houses and lenders were shoveling out loans, in some cases to buyers who provided little or no documentation of their assets or ability to pay.

“It appears that many of these claims involve fraud, forgery and other factors often seen where loans are made to borrowers in financial distress,” First American’s CEO, Parker Kennedy, told investors last month.

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