Title companies recovering from subprime mortgage crash
Title agencies didn't just witness the crash of the subprime mortgage business. They were more like a passenger sitting in the front seat between the real estate and the financial industries.
While there are more agents licensed in Michigan today than a year ago, the title industry is still limping. One title agency owner, Jeff Basil, said, "It may be a year, or a little over a year, before we're out of the woods."
Basil, president of Safe Title Inc., said his company is not hurting as bad as some of its competitors, some of which have closed or severely downsized.
"The problem is it's not just a banking crisis; it's a real estate crisis. Those are the two primary sources of business for title companies, so if they are in a world of hurt, then we're joining them."
Basil founded Safe Title four years ago in Grand Haven. The independent title agency has branch offices in Holland and Muskegon, and just established a wholly owned subsidiary in the Grand Rapids area, Standale Escrow LLC.
The three main things that title agencies do is: sell insurance policies for lenders, sell insurance polices for the property buyers, and provide escrow services to close a real estate transaction.
In the typical real estate contract in Michigan, the seller of a piece of property agrees to pay for insurance that will be owned by the buyer. It insures that the title to the property is clear; the agency also does research (or contracts for research) of deeds on file in the local courthouse to back up that insurance. The title agency also sells insurance to the bank or other financial institution that holds the mortgage, and that policy ensures that the bank's lien on the property comes before any others, in case of a default.
Basil said revenues of Safe Title are up a little more than 60 percent, comparing this year to the same period last year. However, its expenses are also up about 60 percent, because of its expansion in Holland and Standale in the past year.
"That's positive growth obviously, at a time when other (title agencies) are not growing," he said.
Thomas W. Cronkright II, who owns Sun Title in Grand Rapids with Lawrence R. Duthler, said the problems in the title industry started last year with the subprime meltdown. He said after the crisis began, the financial industry did "almost a complete reversal" on its approach to second mortgages, called "re-fi" in the trade. It stopped offering loans that were up to 100 percent of value — in effect, no money down required of the borrower. At the same time, said Cronkright, rates on the loans that banks were willing to make "continued to go up. That stalled out the refinance business — just stalled it."
Cronkright said that when the subprime mortgage crisis became evident in the summer and fall of 2007, many title agencies put in weeks of work on transactions that ultimately were canceled — work done for nothing on the agents' part.
Some of the agencies that have gone under since then were owned or controlled by the underwriters that provided the title insurance. A few months ago, LandAmerica Financial Group of Virginia — which reported serious losses this year — sold its West Michigan agencies to a group of its former executives.
The drop in the number of real estate transactions has hurt underwriters across the country. First American Corp., one of the nation's largest title insurers, lost $8.3 million in the third quarter because of declining sales of title insurance and rising costs related to the housing foreclosure crisis.
Cronkright said the overall volume of transactions at Sun Title is probably down about 10 percent compared to last year, but the company's profitability is up by at least that much.
"We've become very efficient," he said, through use of technology and with "mobile closing offices" contained in specially equipped vehicles.
Both Basil and Cronkright said part of the problem now in the mortgage industry is the fact that banks are very reluctant to make any loans — even short-term loans to each other.
Cronkright said he has heard from people in the banking industry that "fear and lack of trust started to take hold, and now banks didn't want to lend to one another because they weren't sure if they would ever get the money back."
Basil compared the mortgage situation to "the perfect storm," a combination of a serious credit crunch and a large number of home foreclosures that have caused a glut of unsold homes on the market.
He mentioned the bailout money loaned to the financial industry by the government.
"My understanding is, a lot of these banks are just holding on to it. Everyone wants to hold on to their cash," said Basil.
U.S. Sen. Chris Dodd, who chairs the Senate banking committee, said in late November that the actual extent of losses suffered by banks in the subprime meltdown still has not been fully revealed, which is why investors are shying away from financial stocks.
Basil, who is also an attorney, said, "The bottom line is, there are some people out there who should not have been loaned money to buy a house. (The banks) loosened up the requirements. … The oversight wasn't where it probably should have been."
He added he has been told that cases of fraud were "rampant" in southeast Michigan. In one that he is personally familiar with, a home with a state equalized value of about $800,000 (generally assumed to be about one-half the actual value) was sold and resold several times within two years, eventually selling for more than $4 million in 2006.
"The bank just got snowed" on the actual value of the house, said Basil.
A situation like that, he said, is blatant fraud. “A title company should catch that — not that it’s their job necessarily to catch it, but there is no way a deal like that is going to close at our office."
"A lot of times, there wasn't even intent to do anything wrong," said Basil. But he said that in many real estate transactions, "everyone's trying to make everyone happy. And so the appraisal may be a little more than it probably should have been, and so you end up with a loan in excess of what the property might actually have been worth."
But that was in 2006, and "it wouldn't happen today," he said.
It may be the title business in Michigan is already recovering. The state Office of Financial and Insurance Regulation, which licenses title insurance agencies in Michigan, reported that in 2007, there were 785 "resident" title agencies, meaning they are based in Michigan, plus 422 non-resident agencies. As of late November, those numbers were 834 and 498, respectively.