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Slade Smith's Blog

The Title Industry: The Ethical Rock in the Cesspool of Mortgage Finance?
by Slade Smith | 2012/12/28 |

Last year, a senior vice president at First American made the following claim:

In my opinion, during the boom years leading up to the real estate crash, government regulators, lending institutions, appraisers and ratings agencies, loosened their risk management criteria or relaxed their standards of ethical business conduct. The title insurance industry did not.

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The claim was made by S.H. Spencer Compton, senior vice president and special counsel at First American Title Insurance Company, New York division.  The claim was made in an article published in the New York State Bar Real Property Law Journal, entitled Underwater Underwriting: Title Insurance in the Post-Lehman Era.  Compton went on to say:

That said, as in every period of economic decline, there was an increase in embezzlements by title insurance agents and even a bankruptcy filing by the holding company of one of the largest title insurers arising out of the misuse and loss of funds entrusted to its 1031 Exchange division. Nonetheless, the crucible of trust created by the due diligence and subsequent issuance of title insurance products backed by the deep reserves of Fortune 500 insurance companies remains unbroken and largely unblemished.

Compton characterized "Wall Street and its related service industries" as "drunks facing their families after an all-night bender."  So he had no trouble seeing failings and excesses in the housing and financial meltdown. 

He just could not find failings and and relaxed standards in his own industry.

The only relaxed standards in the title industry that this First American executive could cite were things that happened at another title underwriter (LandAmerica) that is no longer in existence, and the bad acts of agents.  In other words, in all the excesses of the housing bubble, First American and the other remaining "Fortune 500" title underwriters-- the only ones that apparently matter!-- did nothing to damage the "crucible of trust created by the due diligence" of those big underwriters.

To be sure, the four remaining large title insurers should be congratulated for making it through the housing meltdown intact.  But I have to question whether this "crucible of trust" remains intact-- if it ever existed in the first place.  

I wonder, for instance, how Compton would argue that "due diligence" was not relaxed during the boom years, when Compton's own company, along with its competitors, began issuing title insurance with no title search at all!  The title search is the cornerstone of due diligence in the title insurance industry.  How is eliminating title examinations from title underwriting not a loosening of risk management criteria?  Does Compton really believe that the due diligence for title insurance is not weakened when underwriting consists of credit reports and statements made by the borrower?  [See Bank of America Sues First American for Over $500 Million, Source of TItle, 3/17/2010]

Then, there's the small matter that Compton didn't even acknowledge that banks were suing his own company for hundreds of millions of dollars over denied claims on those no-search title policies, as was the case at First American as Compton wrote this article.  I've read the complaints of Bank of America and KeyBank in their multimillion dollar suits against First American, and while an argument can and has been made that First American was legally justified in denying the claims, it's hard to reconcile headings in KeyBank's complaint such as "FIRST AMERICAN'S BAD FAITH SETTLEMENT PRACTICES" with "crucible of trust".  [See First American Still Haunted by No-Search Title Policies, Source of Title, 11/15/2012]

And this is not the only time where I've seen "bad faith" and a title insurer's name closely linked recently.  Perhaps motivated by the passage of tort reform laws which limit their potential liability from punitive damages in many jurisdictions, title insurers appear to be increasingly aggressive in denying claims, to the point where courts are not only finding that the title insurers improperly denied claims, but that they failed to operate in good faith in doing so.  A Wisconsin appeals court, for example, recently upheld a $1M award of punitive damages against First American for denying a claim despite knowing it had no reasonable basis to do so.  [See How to Turn a $40k Loss into a $1M Loss, Source of Title, 10/16/2012]

Perhaps a more blatant example of bad faith in resolving a claim came earlier this year courtesy of Old Republic subsidiary Mississippi Valley Title, which had the bright idea of resolving claims arising from a title fraud by subdividing a tract in violation of local law and conveying to its bank policyholders unsellable lots.  This aggressive strategy, which was crafted to technically fulfill the insurer's duty under the policy at minimum cost, provided no benefit whatsoever to the policyholders and was roundly batted down by the courts and ruled not to have been in good faith.  [See Too Clever by Half, Source of Title, 12/17/2012]

None of these things are compatible with Mr. Compton's claims about the high underwriting and ethical standards of the major title insurers, including the one that employs him.   It appears to me that the title insurance industry has a ways to go to live up to the high praise that Compton gives it. 


1287 words | 8766 views | 4 comments | log in or register to post a comment

First American
Oh yeah, let's not forget the rush to offshoring that First American led the way on.   
by sharon tornes | 2013/01/02 | log in or register to post a reply

Ethical Comparison?

I think it may be a little like making the proverbial apples to oranges comparison. And undoubtedly there are a few bad apples in both barrels, even whichever one you want to stipulate as being full of oranges.

But I'd have to question the nature of what are being referred to as "Title Losses" in these days of the economic/financial/banking crisis. From what I've seen of this mess so far, probably 90% of it has nothing to do with Land Title matters at all. Robo-signing, securitization of Mortgage paper  into derivatives,unrecorded/privatized/unlocateable note chains via MERS, questions as to the validity or invalidity of foreclosures by reason of the lending contract/note itself, mass action/class action law suits alleging contractual fraud on the part of lenders, technically are all matters of personal property (paper), not real property, so they wouldn't be covered by the policy anyway.

The Title Insurance INDUSTRY, on the other hand, isn't in the business of selling and marketing money (that IS a Banks product) and/or Bank paper, and wasn't implicated in what many have called a lending frenzy,. That is it's main claim to fame in this comparison.

That's gotta make it more...ethical.

Doesn't it?




by Donald Petersen | 2013/01/07 | log in or register to post a reply

Sure, most of the relaxed standards that led to the financial crisis had nothing to do with the title industry.  But the title insurance business is a tiiny fraction of the size of the mortgage finance business, much less finance in general.  Just seems to me that the title insurance industry has had its share of relaxed standards and ethical shortcomings, or at least enough to warrant some self-reflection. 
by Slade Smith | 2013/01/09 | log in or register to post a reply

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Slade Smith's Blog

I'm the web developer for Source of Title.  Due to this role, I have become an interested observer of the title insurance industry and the broader issues arising out of real estate and finance.   I have also blogged extensively about politics under the pseudonym "skymutt" at the partisan Democratic blog Daily Kos and the non-partisan community Swords Crossed






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