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The title insurance arms race heats up

Why M&A activity is surging

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The first time Lawyers Title of Arizona Sales Executive Sarah Perkins walked through an acquisition was 2006. The market was growing, people were excited and companies were scrapping to increase market share. Hope for the future was high. 

The story was dramatically different during her second acquisition rodeo, in 2008.

“The sky was falling,” Perkins, a 17-year veteran, told HousingWire. Companies were being acquired off the scrap heap, layoffs were rampant and bankruptcies were common. “There was a lot more fear involved than excitement,” she said. 

But today, the market has come full circle as mergers and acquisitions once again begin to pick up. Perkins said the environment is reminiscent of 2006, when spirits were high and the market was in growth mode. In fact, the feeding frenzy for title companies is just getting started.

In the past year alone, many smaller title companies began stepping up and increasing their footprint. Foundation Title & Escrow expanded its footprint in Alabama through its merger with Paulus Title. Knight Barry Title purchased Title One as it expanded its operations in Minnesota. Then there was National Title and Escrow, based in Dexter, Missouri, which acquired Mississippi County Abstract and Loan, based in Charleston, Missouri.

But smaller title companies aren’t the only ones upping their game this year. The title industry is made up of many different companies, but four stand above the rest. “The big four” of title include Fidelity National Financial, First American Finance Corp., Old Republic National Title and Stewart Title. Together, these giants make up more than 80% of the market share for the title industry. 

And they’re not getting left behind when it comes to acquisitions. Stewart Title strengthed its presence in Alaska this year with the acquisition of Yukon Title Team.

To understand what is driving this disruption and surge in M&A activity, HousingWire spoke to industry veterans and observers. What we discovered is a perfect storm of new technology and market conditions. These factors are driving dozens of industry veterans to hang up their hats, “the big four” to consolidate power and expand market share, and ambitious regional upstarts to push forward into new territories.

The best of times, the worst of times

The COVID-19 virus has exacerbated already growing economic inequality in America, and no place is it more pronounced than in the housing market. Though millions of Americans are struggling to put food on the table and 2.8 million homeowners are in forbearance, millions of others have seized the golden opportunity presented by historically low interest rates and the ability to work from anywhere.

Roughly $4 trillion in mortgages were originated in 2020, and though economists expect an overall slowdown, purchase volume is forecasted to rise in 2021. Because the title insurance business expands and contracts based on mortgage rates, the past 12 months has magnified the industry’s strengths and weaknesses and led to an arms race.

“If you’re a title agent and you’re supporting a mortgage origination client, you’ve had a great year. And you may try to leverage that great year into some sort of expansion,” said Tom Huddleston, senior vice president and managing director, head of Vylla Title Services.

“But the other side of the coin is if you’re a small title agent in a very limited geography – maybe you’re an attorney as well – and you made a majority of your revenue off of default, this is the worst of times because of the pandemic and the CARES Act, we were in a foreclosure moratorium. So therefore, if that was your primary business, you’re not getting a lot of orders, and you’ve had a tough year,” Huddleston said.

In this scenario, many title companies are looking to expand after a triumphant year, while others are looking to hang their hats up.

Mortgage title insurance premiums surged by 17.6% year-over-year in the third quarter of 2020 to $5.1 billion, according to the latest market share analysis from the American Land Title Association.

“Low interest rates, which just set the 14th record low of the year, continue to create high demand among consumers looking to buy as well as refinance,” ALTA CEO Diane Tomb at the time. “As title insurance premium volume depends on mortgage origination volume, the result of these record low interest rates is a third quarter with even higher volume than an already positive second quarter.”

Ending on a high note

Figuring out how to hire the next generation of mortgage industry professionals has been an issue for years.

The average age of a title agent or broker, according to industry statistics, was pushing 60 years old back in 2014.

“I think the owners of title agencies are an aging population so we might be at the height of the market on the one side and this could be a good time to sell,” Huddleston said. “Somewhat analogous to what we’re seeing with the independent mortgage bankers who’ve gone public – they’ve had a great run the last maybe 24 months and this is a good time for them to cash in.”

An agency that has seen great success over the past couple years may look at now as a good time to exit and head into retirement, he explained.

A piece of the pie

In 2019, Fidelity, by far the largest title insurance provider in the U.S. with 33.4% of market share, tried to merge with Stewart Title, which holds 9.1% of the market share. The merger was valued at $1.2 billion.

But the Federal Trade Commission shot that down due to antitrust concerns, saying that turning the big four into the big three and giving one company an estimated 43% of the market share would “substantially reduce competition” and be harmful to consumers. 

Despite this blow, Fidelity has not given up its plans for growth, and hired a new regional leader as it expanded its presence into the state of Georgia.

But one of the biggest challengers to the market share held by the big four could come from outside the title industry entirely. 

Rocket Companies, which went public in August and currently sports a market cap of $39.8 billion, disclosed to investors that it retains servicing rights on the vast majority of mortgages it originates in the U.S. 

Many companies in the housing space are realizing that in order to ensure their consumers are receiving the best possible experience, and boost their own market share, they must control more aspects of the mortgage process, thus leading to an increase in M&A, and an existential threat to the current power yielded by the big four.

Rocket, the biggest mortgage lender in America by a good distance, was able to utilize its subsidiary Amrock, a title and escrow company, to help it close 90% of all digital closings in the first three quarters of 2020. In just the first nine months of 2020, Rocket Mortgage and Amrock more than doubled the number of digital closings they completed in all of 2019.

“As we talk to some of these originators, where they haven’t been in the title business before, they haven’t had a subsidiary or an affiliate that can handle their title production,” said Jim Potter, Vylla Title senior vice president of title and escrow. “I think a few of them now, just given the sheer volume, are looking at the potential of maybe adding that title company to their corporate kind of array of services to capture the revenue and the income associated with that.” 

There has been rising interest from CEOs in the origination space that are now looking to add title and escrow to their portfolios, he explained.

“We’ll probably have another year of some strong activity and refinance market, and you may see some of those companies kind of wanting to also participate in the title revenue,” Potter said.

The king of disruption

It is impossible to talk about disruption without addressing how dramatically technology has contributed to the M&A environment.

What’s been a small trickle of tweaks and small tech stack additions gave way to wholesale transformation over the past year. It happened practically overnight. Adoption of remote online notarization soared 547% in 2020, according to a recent survey by ALTA of major vendors working in the RON space.

“Absolutely, technology continues to be a driving force behind acquisitions,” Huddleston said. “And quite frankly, the smaller shops… they don’t have the benefit of making those investments, so therefore, they come under pressure. The cost of producing that final product, getting that loan close filed and distributing funds becomes more costly if you don’t have technology. And so therefore, I would say, that is one of the major factors that folks are acquiring other firms who might have technology.”

And as technology continues to develop, this has allowed more national title companies to move in on localized territories.

“Title insurance has long been kind of a very different process based on state, based on even county,” Potter said. “There [are] local customs, there [are] local ways of getting title evidence that really varies, so for the for the longest time, the local title agent has been kind of the one-stop-shop for purchase transactions, which can be a little more complicated as well. The national title companies have handled refinance transactions. And closings were done locally, they were done in person.

“I think that there’s a movement afoot where the national title companies become well versed on local customs,” he continued. “And our technology helps us manage and track all the different nuances that need to occur to close and manage transactions in different parts of the country.”

Eventually, this trend could kill off local title companies and lead to increased levels of consolidation.

“You may see long-term a movement away from the local title rep,” Potter said. “They’re very important, but I do think in the future, you’ll have these services, all services, effectively, being able to be managed by the larger multi-state, national companies who maybe are embracing technology a little bit faster than the small guys.”

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