Payback time for title insurance clients

Title insurance claims have rocketed since the recession hit. Christopher Taylor of London & European looks at the different types of claims and discusses whether premiums and cover are likely to change

If anyone had ever questioned the value of title insurance before, they can no longer harbour any doubts as to its value today. Over the past 18 months, title insurers in the UK have faced an unprecedented level of claims notifications since the credit crunch took hold leading to the current recession.

Over the past two years, London & European alone has received almost four thousand notifications. Approximately half of these have evolved into a full blown claim and a third of these have been settled to date. I would challenge anyone to tell me that a title insurance policy isn’t worth the paper it is written on!

Back at the beginning of 2007, London & European received on average between 20 and 30 claims a month. This reflected similar conditions experienced since the beginning of the new millennium. The economy had undergone a boom period. The property market was as dynamic as it had ever been and given the benign conditions, title insurance claims were the exception rather than the rule. However as life changed for us all in September that year, so did our claims experience and both notifications and claims received began an inexorable upwards climb.

Given the increasing use of title insurance amongst lenders, particularly in the non-standard sector, as a risk management tool over recent years, it was not a surprise to see claims volumes increase. Rather than a steady upward trend that we expected however, we have experienced dramatic spikes followed by periods of stability – although numbers have not returned anywhere near those prior to the credit crunch. We hit a peak in the spring of 2008 and then again in the summer and that pattern repeated itself in 2009.

It is difficult to explain this trend. It doesn’t appear to be strictly linked to unemployment, which has been on a steady upward curve since the beginning of 2008. It is even more difficult to forecast exactly what is going to happen over the months to come, although I would put money on the fact that we won’t be returning to average claims received of 30 a month in the near future.

Repossessions

A key driver to title insurance claims is mortgage possessions. Thankfully, it looks like we may not hit the 75,000 possessions forecast for this year, which the Council of Mortgage Lenders recently revised down to 48,000. Statistics published by the CML show that the number of mortgage possessions actually fell in the second and third quarter of the year and cases of arrears levelled off. Hopefully, a combination of low interest rates and lenders showing forbearance to borrowers is staving off a significant number of potential possessions, but I don’t think we should be jumping for joy in the belief that the worse may be over.

There can be no complacency about the potential scale of future payment problems. At the time of writing, the UK was still officially in recession as gross domestic product contracted by 0.4 per cent from July to September - the first time it had contracted for six consecutive quarters since quarterly figures were first recorded in 1955. This grim statistic means that the current recession is the longest since modern records began. So much for the so-called green shoots that the economy has been showing, in particular in the housing market: the data is pointing in a very different direction.

It is highly likely that arrears and possessions are going to continue to rise well into 2010. There are a large number of homeowners who will be facing a potentially fatal payment shock when their existing tracker arrangement comes to a conclusion and they need to remortgage. This could be a mini-tsunami for the property market as unemployment continues to rise. I think those economists still forecasting that we will reach three million out of work next year are sadly going to be proved right. While one third of these may well be in the 16 to 24-year-old bracket and so unlikely to have a mortgage, it is highly likely that title insurers are going to continue to face significant numbers of claims well into next year.

Types of claims

Looking back to a piece I wrote for Mortgage Finance Gazette in July 2007, I not only forecast an increase in the volume of title insurance claims but also talked about a shift in the types of claims received.

Claims against a title insurance policy for issues such as lack of or missing deeds, the lender’s charge not being registered with the intended priority, Land Registry error, defective lease, defect on sale and the like remain relatively constant. L&E has experienced a steady but minimal drip feed of these ever since we launched in the UK fifteen years ago.

Back in 2007, however, we were seeing an increasing number of claims triggered by acts of fraud or forgery. Borrower fraud represented a significant percentage of the claims we processed between 2001 and 2005, and in the summer of 2007 I thought that trend would continue. With repossessions on the increase, it was highly likely that more fraudulent acts would come to light. I have been proved right and we are now experiencing a steady flow of claims for borrower fraud – however, they don’t occupy the number one spot.

Right-to-buy claims

Claims relating to right-to-buy (RTB) properties have quite simply gone through the roof. In 2007, this type of claim formed a relatively low percentage of our total claim volumes. At the time, I expected to see an increase in this type of claim as many RTB borrowers stretched their finances to get a foot on the property ladder believing – like many homeowners – that the value of their home would continue to increase. The combination of unemployment and plummeting property prices has, I fear, sounded the death knell on a significant percentage of RTB mortgages, and many lenders who have been forced to take possession of these properties have no doubt been faced with a shortfall when it comes to repaying the local authority or housing association discount. In the first three-quarters of this year, RTB-related claims amount to 83 per cent of all claims managed by L&E.

On a brighter note, I do expect to see this type of claim start to fall off over the next 12 to 18 months. A large number of existing RTB mortgages covered by title insurance are approaching the end of their five-year pre-emption period – and given the fact that lending to this sector has more or less dried up, there are very few new mortgages out there to fall into arrears.

Premiums and cover

Given the fact that title insurers are experiencing unprecedented claims levels and paying out substantial sums, are title insurers likely to follow the trend in other sectors of the insurance market such as payment protection and put up premiums? And will they look to reduce the level of cover provided or make changes to the terms and conditions of the policy.

While I can’t speak on behalf of my competitors, I think it highly unlikely that any title insurer will adopt a broad brush approach. It is more likely that lenders will see title insurers looking at the chemistry of their mortgage portfolios. I would expect to see insurers reviewing the claims history of the lender and the make-up of its lending portfolio and price policies based on the individual risk exposure of each portfolio. Insurers across the board price policies according to risk just as lenders provide loans at an interest rate commensurate with the risk presented by the borrower – so arguably this will take the pricing of title insurance to where it should be rather than the commoditised offering that it became in the early part of the millennium.

So, for example, we know that RTB portfolios represent a significant risk. If a lender chooses to play in this sector again and wants to title insure this type of business then it is likely that an insurer would charge more for a policy covering this type of lending as they would essentially be insuring a known risk that could have a severe impact on claims ratios.

I am not, however, forecasting a dramatic increase in premiums and don’t believe they will move much beyond the £100 mark on average. Equally, I strongly doubt that any title insurer is going to implement any dramatic change to terms and conditions. Certainly at London & European, we have no intention of reducing the level of cover provided and our capacity provider remains as committed to our unique six month ‘cure or pay’ guarantee.

Guarantee

This guarantee is worth its weight in gold. There are a number of title insurance policies available on the market but they all require a lender to crystallise their loss before processing a claim, which can then take many months to settle particularly if there is an allegation of solicitor negligence or borrower fraud or forgery. The London & European policy does not require a lender to prove the loss before making the claim, and I would argue that few lenders would be able to take possession of a property and re-sell it within the six month period that we give ourselves to either sort the problem out or pay up.

Those lenders without the cushion of title insurance to fall upon must be hurting given the rate of repossessions over the past 18 months. Given the fact that around 25 per cent of all properties have some form of title defect according to the Law Society, the number of possessions must mean that a reasonable number have a problem with the title resulting in a headache for the bigger lenders. Add to that the increasing incidence of borrower fraud and allegations of solicitor negligence, and I suspect that a few may now be experiencing a painful migraine.

At the risk of alienating some MFG readers, if there are any lenders out there who have not explored the use of title insurance as a risk management tool going forward, they should be picking up the phone as soon as they finish reading this edition. As we have all sadly experienced over the past couple of years, none of us know what is round the corner. The economists can’t even accurately forecast from one quarter to the next whether the UK will clamber out of recession or not – and let’s not start on the weather service!

Risk management

Risk management is at the top of the regulator’s to do list for lenders. And before any of you think you can sit back and just wait for the Conservatives to win power and abolish the Financial Services Authority, it is hardly likely that Mr Cameron is going to let things go back to the way they were. Whether it is the FSA or some other body, it is highly likely that anyone involved in financial services is going to have to face a more intrusive and interventionist style of regulation and clearly our European masters are going to continue to review solvency requirements and the like.

It is going to be an unpredictable trading and regulatory environment for some years to come. Lenders in particular are going to have to cope with increased scrutiny and interference with their business models.

Right now, there is a significant margin on mortgages while the cost of title insurance is negligible – so is there really any valid excuse for not taking one simple step towards assigning part of the risk your business faces? Unemployment is going to go up and more of your borrowers are going to sadly fall into arrears and probably default on their mortgage. Can you really afford the time and effort of sorting out a title or fraud or negligence issue that could take months to resolve when you could simply claim against a title insurance policy and let someone else do all the hard recovery work while you walk away with the claim settlement in your pocket?

Christopher Taylor is CEO of London & European