It’s in the title

Christopher Taylor, CEO London and European, explains the wide ranging benefits of title insurance and how it can help lenders with the security, simplicity and speed of property transactions

Many of today’s most useful everyday products were adopted during periods of extreme duress in history. Take penicillin or barbed wire for instance, it’s inconceivable to be without them now, but it took the bloodshed of the First World War to prompt their development.

When it comes to total war on the financial front, could we see practices and products which had previously been atypical, being brought into the mainstream? Measures adopted in austerity, could well prove their benefits long beyond the duration of the downturn. Title insurance could be a prime example. Will we look back in a hundred years time when every single property is title insured at the point of purchase, and see this recession as the turning point in its story?

History
In the United States, the use of title insurance is on a different trajectory, it first started in the late 1800s and is now mandatory. Its implementation has been largely because of the relative inadequacy of US land records laws, but in the UK the situation is very different. Here we’ve had the need to prove land ownership throughout history. The Romans first introduced a system of land registry to England and Wales with its ownership and productivity recorded by census. And as early as 1086, the Domesday Book, heralded as a triumph of Anglo Saxon administration, provided a close to comprehensive survey of land ownership. Up until this point the main reason for recording land ownership was taxation but from then on, the main motivation for land registry has always been to improve the system of conveyancing.

Nonetheless, when it comes to registering titles, it took over five centuries for a system to be implemented! It wasn’t until the Royal Commission of Registration of Title in 1857 that the idea really gained momentum and the Land Registry itself was founded five years later. The system has continued to evolve since then, and although some may argue that lately its evolution (particularly with regard to technological development) has stagnated, it is now inconceivable to be without it.

Title defects
However, simply having a system of title registration is not enough. We know that a fifth of all property has a defect on its title which could make it unsalable. For leasehold property this can increase to close to one in three when you take into account factors such as missing landlords or ground rent arrears. (Issues with leases are particularly pertinent now, with the exposures of lending on the boom-led splurge of new build flats). And although the Land Registry is now older and wiser, it is not yet infallible; we see a number of claims where they have made an error, such as a clear search which wasn’t clear. As a lender in this challenging economic climate it is certainly no time to be cavalier and leave your assets exposed to additional risk.

The point at which the lender tries to enforce its security over a property is when most title insurance claims are discovered. So it stands to reason that in the current climate, the likelihood of discovering title defects is increased. Over the past two years, London & European alone has received almost four thousand notifications of potential title issues. Approximately half of these have evolved into a full blown claim. If a lender is unable to enforce their charge, they cannot then repossess and sell the property and they could face a loss totalling the unpaid principle balance of the loan plus accrued but unpaid interest and costs.

Types of claims
However, it isn’t just title defects that can present lenders with a problem. There are approximately 25 different types of claims that can be made against a title insurance policy, including adverse possession, Land Registry error, a charge not registered or a charge registered in the incorrect priority, missing documents and identity theft. Fraud and forgery by a borrower or solicitor, and negligence on the part of the solicitor are increasingly being identified – yet few realise that title insurance also covers these major risk categories. In times gone by lenders have often neglected the true ‘downstream’ benefits of title insurance (in terms of mortgage security) and have only focused on its ability to accelerate the conveyancing process.

Over recent years as the economy has become more and more strained, we have seen an assertion of three principle risk factors: repossessions, mortgage fraud and solicitor negligence. And sadly, none of these show any signs of abating, quite the contrary in fact; the situation could well be getting worse.

Unemployment
With government cuts of at least 25 per cent (possibly as much as 40 per cent) forecast across all departments, we are facing the likelihood of public sector job losses on a massive scale. According to the Office for Budget Responsibility, over 600,000 people employed by the state could be made redundant by 2016. I don’t need to reiterate the ramifications this will have across the whole of the economy; the number of interrelated private businesses which will suffer, as well as the pressure on the wider private sector to mop up a superfluous public sector workforce of well over half a million. This will be a sheer impossibility at a time when the private sector continues to be hit hard itself. In fact, alleged Treasury figures leaked by The Guardian newspaper suggest that as many as 140,000 private sector jobs could go each year for the next five years. That will mean total unemployment increasing by over 1.3 million.

It is a sad inevitability that many of those people will be unable to keep up payments on their homes and will face the reality of repossession.

Mortgage validity
In these circumstances, when faced with the loss of their home, borrowers will resort to just about any tactic to delay or postpone the action. Our past claims information shows that they will lie about their state of mind when they originally took out the mortgage or claim that signatures were forged. There are so many ways in which the validity of a mortgage can be challenged.

A recent example we saw was regarding a property held jointly by a husband and wife. It had been subject to a remortgage, ostensibly for home improvements but the money was apparently spent by the husband on paying off credit card debt. Credit cards are deemed to be the responsibility of the individual cardholder and therefore, when it came to repossessing the property, the wife had a case to say that she didn’t benefit from the loan and therefore wouldn’t be moving. It’s these types of circumstances which can become extremely protracted and costly. And quite apart from examples like this, even an accidental error on behalf of the borrower in completing paperwork can lead to problems and ultimately a valid claim under a title insurance policy.

A further issue which is causing concern in the current climate is that of premium property. Many lenders we speak to are concerned that their ability to sell on possessed houses in the million pound plus bracket will be severely restricted. Now more than ever before, lenders cannot afford to be involved in protracted wrangling, properties need to be sold on as fast as possible to clear the debt from the balance sheet. Our six month pay or cure guarantee comes into its own here, ensuring that a claim is paid within six months and therefore acting as a crucial cash flow tool in helping lenders to turn properties.

Solicitor negligence
Another significant contributor to the claims book is solicitor negligence. The first port of call for any solicitor acting for a repossession is to try and challenge the conveyancing and as possessions increase, we could well experience a rise in this type of claim whether a case of genuine sloppy conveyancing or not. As anyone who has had even a cursory look at the insurance press lately will tell you, the renewals season for solicitors’ professional indemnity (PI) insurance is going to be tougher than rawhide this year.

The number of solicitors entering the assigned risk pool last year doubled as firms were unable to secure affordable PI insurance. This year that pool is expected to grow even deeper with the smaller firms and those considered high risk (conveyancers in particular) set to struggle. A number of insurers are pulling out of the market including Quinn and not least the widely respected Hiscox, which tells you something about their perception of the level of risk in the sector. It means that some solicitors will be forced to take PI insurance wherever they can get it; irrespective of the calibre of the paper sitting behind it and so seeking redress/making a successful claim could be problematic. In this case, title insurance would assign the risk. I would argue that with a specialist understanding of the sector insurers could profitably serve many competent practices, but that’s another subject. It just serves to illustrate the vulnerabilities of solicitors when times are tough and says something about the propensity for solicitor negligence which clearly shows itself on our claims book.

Risk
In addition to these three key risk factors that I’ve highlighted; repossessions, mortgage fraud and solicitor negligence, all of which have been constant concerns over the last few years, the pressure is heightened even more by the need to fulfil capital adequacy criteria. It is incumbent upon all of us to manage the regulatory landscape without stifling lending and title insurance is well suited as a risk assignment tool as organisations moved to comply with Basel II rules. Adding a further layer of security to riskier tranches of business through the application of title insurance can assist in reducing the level of capital that must be set aside. This can help a building society to maximise its efficiency of capital utilisation and thus generate greater returns in terms of performance.

Speed
When it comes to general benefits, away from the anxieties of the current climate, title insurance allows lenders to accelerate the traditional conveyancing process and deliver “superfast” mortgage completions. Naturally the benefits of a speedier turnaround for the borrower are clear but for the lender, mortgage intermediary and solicitor, title insurance has also introduced improved efficiency and profitability. With speedier transactions the intermediary receives its commission faster, lenders see reduced rate of drop-outs, increasing earnings, and borrower satisfaction. In addition to all its other attributes, title insurance can act as a safety net in the case of inadequate searches during conveyancing…I knew we never needed HIPS all along!

To go back to my opening statement, it often takes a crisis to prompt the adoption of practices which can provide benefits reaching far beyond the immediate need. We are finding now more so than ever that building societies are interested to work with us in understanding just how wide ranging the benefits of title insurance are and how it can be of value now and in the future. Prompted by the specific needs of the current climate, we are more than happy to look at adapting and innovating our policy to do that in a way that best suits each lender’s particular needs and circumstances. For example, we are currently working with one Tier 1 lender to introduce an annual policy. It is applied retrospectively to a book of mortgages at an agreed ‘deposit premium’. The size of the book will naturally flux throughout the year, at the end of which, an adjustment is made (either up or down) depending on whether there are more or less mortgages than there were at the start. For lenders this means that they are only insuring a property for the period of the loan, so they simply pay for the number of properties they’ve got on the books. This makes ultimate sense in a time of constant ebb and flow within the property market, it gets year one costs down for the lender, and means they only pay for what they need at any one time.

My arguments here hopefully serves to illustrate the fundamental purpose of title insurance which is to help with the security, simplicity and speed of property transactions, whatever the economic climate.

It does seem to me to be those lenders which are pre-disposed to prudence, namely the mutuals which have grasped the value of title insurance and are adopting it as part of a belt and braces approach to lending, while certain others believe that they can take the risk. Either they are deluded or doing something differently that we don’t know about! In fact I would argue that it is in the public interest that those who are playing with fire with taxpayers money should be most careful to avoid getting their fingers burned.

One thing is for sure, to capitalise on all the benefits that title insurance can offer, lenders need to act now. No title insurer in the land will insure a failing asset, so even the smallest arrears on a mortgage will designate it as a failing asset and will render it uninsurable.