With the housing market slowing down from its pandemic-fueled frenzy, wire fraud threats, regulatory challenges and the perennial challenge of an aging workforce, the title insurance industry will have a lot to juggle in the new year. At HousingWire, we decided to break down the challenges the title insurance industry will be up against in 2023.
It was too darn hot: the housing market slows down
Many in the title insurance industry reported record years in 2021, but while experts were predicting things to slow down in 2022, the suddenness at which the market cooled was unexpected, or as Jodi Ketchersid, a Destin, Florida-based Corcoran Group agent said: “It was like, ‘Holy cow! What happened to the market?’”
At many title firms, the slowdown in homebuyer demand, due to rising mortgage rates and higher home prices, meant a decrease in order volumes. At “Big Four” title insurer First American, the number of closed title orders in the third quarter of 2022 fell to 160,500 compared to 252,700 a year ago, while the number of purchase orders closed per day at Fidelity dropped 23% year over year in the third quarter.
On top of slowing purchase order volume, rising mortgage rates also decimated refinance orders. First American executives noted that refinance revenue had declined 68% compared to a year ago, on the firm’s third quarter earnings call with investors, while Old Republic International Corp.’s president and CEO Craig Smiddy told investors on his firm’s Q2 2022 earnings call that refinance activity had “dried up.”
As a result, many title firms have found revenue coming from different sources, including stronger than expected commercial revenue and other mortgage products such as home equity lines of credit (HELOCs).
A report by TransUnion showed that the number of HELOC originations nationwide, based on the credit bureau’s analysis, jumped from 207,422 for second-quarter 2021 to 291,736 for the second quarter of this year — a 41% increase. In addition, nearly $69 billion in HELOC credit limits and $27 billion in closed-end home-equity loans were originated over the first five months of 2021. That compares with $101 billion in HELOC volume and $38 billion in closed-end home-equity originations over the same period this year, according to a recent report by the Urban Institute’s Housing Finance Policy Center.
“I would say starting back in the spring we started seeing a lot of lenders switch to HELOCs,” Regina Braga, the president of RES/Title, said. “Currently, I would say the majority of our volume is some type of HELOC product.”
Prior to the recent rise in HELOC volume, Braga said her firm typically saw HELOCs as part of simultaneous closings where buyers would do a first mortgage and a HELOC at the same time. Product specific HELOCs, such as those for solar panels, were also common.
“HELOCs were definitely out there, but what is happening now is that you are seeing lenders that hadn’t really been pushing it as a main product line before and now all of a sudden you go to their website and it is the first thing you see,” she said. “They have always been there, but now they are at the actual forefront of the marketing lenders are doing.”
Braga anticipates that the market will slow down even further in 2023.
“The market has cooled way down, but I don’t even think we are necessarily there yet of what we are going to see,” Braga said. “The holidays and early part of the winter are always slow for the industry, but then as the spring comes, you will start to see a little bit more movement on the purchase side. We have already started to see sellers start to lower their prices to adjust to what is acceptable in this market, so that might drive more buyers in and then you will always have that steady level of purchase demand for people who need a home due to life events.”
For the title insurance industry, she feels this will result in a thinning of the herd.
“People that rode the wave of the boom might not be able to sustain it,” Braga said. “But I do think that companies that are diversifying, companies that have already been around for the long haul, they will be OK because I think diversification is the key and it we have learned anything in the title industry over the last year, it is that you cannot dedicate all of your business to one particular market.”
A thoroughly modern threat: Wire fraud
Although the title industry has dealt with its share of market slowdowns, shifts, recessions, and depressions, one challenge the industry will face in 2023, is decidedly 21st century.
As consumers demand more of a seamless and digital home-buying process, more of the closing process has migrated online, making home-buying transactions ripe for things like hacking, ransomware attacks and wire fraud.
In mid-November, the Federal Bureau of Investigations released its 2022 Congressional report on business email compromise (BEC) and real estate wire fraud. According to the report, in 2021, the Internet Crime Complaint Center (IC3) received BEC-related complaints with claimed losses exceeding $2.4 billion, far higher than the $360 million in claimed losses recorded in 2016. In comparison, the second highest dollar loss category reported to the IC3 in 2021 was investment fraud, with losses of approximately $1.45 billion.
In addition, ALTA expects the annual number of BECs to more than double in the next two years.
For the past several years, the FBI says BEC has consistently been the largest dollar loss by victims’ crime typology reported to the IC3, as “criminals have been refining their exploitation of technology, especially the internet, to carry out financial crimes.” According to a 2022 survey by ALTA, of all the reported wire fraud incidents that occur each year, only 17% of victims successfully recovered all of their funds, but 94% of respondents reported some amount of recovery.
“You have minutes to hours to act once you have knowledge that either your company sent money where it wasn’t supposed to go or you’ve got a buyer out there hanging because they sent $50,000 to a fraudster,” Matt McBride, the vice president of risk management and compliance at Shaddock National Holdings, told attendees at the 2022 ALTA One conference. “If it goes to 24 hours, your likelihood of recovery is 15%. If it goes to 48 hours, you are in the 2% range. If it goes to 72 hours, then it is gone. There is nothing anybody can do at that point.”
But even as the title industry improves its awareness and preparedness to deal with wire fraud attacks, the fraudsters are hard at work refining their tactics.
“The fraudsters keep getting more sophisticated and the frequency of attacks continues to go up,” Tyler Adams the co-founder and CEO of SaaS company, CertifID, said. “Fraud doesn’t sleep and even though transaction volume has gone down, the amount of fraud we are seeing hasn’t gone down, so your likelihood of getting hit with an attack is higher.”
As the industry looks to combat this problem, education about wire fraud and prevention is paramount.
“It starts with education because you can’t expect the consumer to educate themselves on this problem,” Matt Kilmartin, the vice president of sales at CertifID, said. “Also, a lot of business comes from referrals, so strengthening those relationships and making sure everyone is aware of the risks, the better. Title is at the middle of the transaction, but that doesn’t mean it should bear all of the responsibility.”
Kilmartin also added that clearly communicating when and how the closing will be conducted, as well as using things like two factor authentication to ensure you are sending the funds to the right place can also help prevent people from becoming victims of wire fraud.
What’s old is new again: the resurgence of attorney opinion letters
In early April, Fannie Mae sent shock waves through the title insurance industry when it announced that it would be accepting written opinion letters from an attorney in lieu of a title insurance policy “in limited circumstances. The announcement meant that Fannie Mae joined the other GSE, Freddie Mac, in accepting AOLs.
Prior to the advent of title insurance, before taking title to a property, the buyer required that the title be free of any rights, interests, liens of encumbrances of others for which the buyer would be responsible for. A title search would be conducted and then a conveyancer would issue an opinion on the title, incredibly similar to the attorney opinion letter option now available through the GSEs.
Since Fannie Mae’s announcement, the title insurance trade group American Land Title Association has taken a strong stance against AOLs and other title insurance alternatives.
“Since Fannie’s announcement earlier this year, ALTA has been out front opposing the irresponsible use of title insurance alternatives that provide less coverage and introduce more risk for the lenders and the consumers,” Diane Tomb, the CEO of ALTA, told ALTA ONE conference attendees in mid-October. “This is a top priority for ALTA.”
Over the summer of 2022, Tomb said the impact of this policy change was expanded when the Federal Housing Finance Agency approved the GSEs’ release of their Equitable Housing Finance Plans.
“The intent was to promote affordable and sustainable housing opportunities for more households nationwide,” Tomb said. “One of the goals they outlined in those plans is a push to reduce closing costs, especially for low-income borrowers. Based on those plans, both GSEs are pushing pilot programs promoting the use of attorney opinion letters, reportedly as an alternative to reduce closing costs.”
So far, a handful of firms have begun offering AOL products including Voxtur Analytics, SingleSource Property Solutions, and United Wholesale Mortgage, whose CEO Mat Ishbia announced that the firm is hiring attorneys to review title and closing documents, AOLs and the risks associated with them. All three firms claim that the savings generated by using an AOL product instead of a traditional title insurance policy could save consumers up to an “entire mortgage payment.”
“The use of Attorney Opinion Letters as an alternative to title insurance is an established practice that provides security and coverage to the lender and borrower comparable to that of title insurance,” Voxtur’s CEO Jim Albertelli told HousingWire earlier this year. “As this alternative continues to grow in popularity, we anticipate that misinformation will continue to be released, particularly by those that see an alternative product as a competitive threat. The reality is that innovation like this leads to more efficient processes and lower costs that benefit homeowners, and that is exactly what we should all be striving to achieve.”
ALTA, on the other hand, said it has not noted considerable savings in using AOLs versus a traditional title policy. Instead, ALTA warns that due to the risks posed by AOL coverage, using an AOL may cost a consumer more in the long run.
“These products that are going into the market — it is confusing because they are giving people who need it the most, less coverage,” Tomb said. “We haven’t seen any real data based on the conversation that it is going to save money. In some ways it could cost them more. They might actually lose their home.”
In mid-October, the AOL debate caught the attention of U.S. Congressman Blaine Luetkemeyer (MO-3) a top Republican on the Subcommittee on Consumer Protection, and Financial Institutions and Congressman Brad Sherman (CA-30), a top Democrat on the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets. Together, the congressmen sent a letter to FHFA Director Sandra Thompson, sharing their concerns about the broadening use of attorney opinion letters.
“The plans aim to lower closing costs and make homeownership more accessible for low- to moderate- income and minority homebuyers. However, these initiatives appear to risk exposing these consumers to harm by not providing the same consumer protections as title insurance. They also raise concerns about the safety and soundness of the Enterprises, increase taxpayer risk which FHFA must consider as the GSEs’ regulator and conservator,” the letter stated.
“Given these issues, it is critical for Congress and other policymakers to understand how attorney opinion letters will be promoted to consumers and what representations will be made to encourage their use of this product,” it continued. “For example, Freddie Mac indicates its pilots will involve ‘targeted marketing and outreach’ through ‘lenders and community organizations.’ Many legal practitioners and respected legal scholars have argued that not requiring homeowners to purchase title insurance (absent an extensive written disclaimer explaining the risks to the consumer) should itself be considered legal malpractice. This raises concerns that the ‘targeted marketing’ of the closing cost pilots may fail to adequately convey these risks to consumers, misleadingly suggest to homebuyers that attorney title opinions have been endorsed by the Enterprises or the federal government, and even potentially cross the line into the unauthorized practice of law.”
ALTA said it was pleased to have the support of the two congressmen.
“We certainly think that the fact that it was a bipartisan letter means that it is going to get a lot more attention over at FHFA,” Steve Gottheim, ALTA’s general counsel said. “We hope that means that they really do take the concerns much more seriously seeing as they come from senior members of both house financial services and house small business committee, that they are able to really realize that this is not just an industry group coming to them with these concerns.”
ALTA hopes that this letter, as well as continued pressure from the trade organization and industry experts will encourage the FHFA to reexamine AOLs and press pause of the rollout of AOL products.
“So much of this hasn’t really been thought through in terms of how it is really going to play out in the marketplace and are we really providing a product or a load a moderate first-time homebuyer that has less coverage the potentially might need the same if not more in some cases,” Tomb said. “Then on the other side, from a capital markets standpoint, what is this going to look like in the market? Is it really costing less? We feel that these things should really be discussed further before this gets out into the marketplace and it doesn’t play out the way they expect.”
With regulatory focus honing in on closing costs and specifically the cost of title insurance, ALTA and others in the industry are looking for ways to lower costs.
Steve Berneman, the co-founder and CEO of Blueprint Title, whose self-proclaimed goal is to “shrink the title insurance business from an $18 billion business to a $10 billion business,” fully supports this goal.
“We believe that title insurance premiums are significantly too high and that if underwriters and agents were more efficient and took a different approach to the market, they wouldn’t have to charge as much,” Berneman said. “The more these companies can invest in technology and streamlining the process and reducing frictions within acquiring a title policy, the more they will be able to reduce costs.”
Gottheim added: “Over the last 10 years, rates have gone down 6% across the industry and that is important for homeowners and it’s because of the investment the industry has put into things around automation and using machine learning and AI to search title and come to a faster decision about the title,” Gottheim said. “These technologies come with a cost at the front end, but over time, they bring that efficiency and bring the price down.”
Before the parade passes by: title insurance’s aging workforce
As the title insurance industry looks to work through these three challenges in 2023, the final hurdle facing the industry is not a new one.
“Every year since I have been in this role and even before that, attracting and retaining talent has been one of our top strategic priorities,” Tomb told attendees listening to PropLogix’s State of the Title Industry report webinar in early December. “We do have an aging workforce and it is something that we think about a lot. One of the things that we are currently working on is a new consumer facing website that is focused solely on bringing talent into the title insurance field.”
As of 2014 the average age of title insurance agents and brokers was around 60 years old, and the situation has not improved much, if at all.
The report, which was distributed in August 2022, found that 67% of respondents were over the age of 45, with the largest age brackets being 45-54 and 55-64 at 28% each. The second largest age bracket was 35-44 at 19%.
In addition to improving consumer outreach, David Townsend, the president and CEO of Agent’s National Title, told webinar attendees that he is also working at the college level to recruit younger people into the industry and has written courses for the University of Missouri law school.
“What we are seeing now with a lot of title agents, it is not the traditional search and exam that it used to be where you would go over to a dusty title plant and get in the card file,” Townsend said. “Now we are a data industry and a lot of what we do, the search, exam and commitments are provided by the underwriter or a third party. So, you are having to make sure that you understand where the data is coming from and more and more. I think you are going to see the jobs in our industry be data driven and technology driven and I think that is critical for us and that will skew younger to a certain degree.”
In addition, title firms big and small across the country have started offering internship programs, which have led to the cultivation and retention of new, younger talent.
“We were recently looking for a role replacement and ended up calling up someone from the internship program to see if they were interesting in coming back for a full-time job,” Ryan Swed, Stewart’s head of U.S. national commercial services, told HousingWire last November. “It has been a great way to expand our potential talent pool.”