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The Title Agent's Role in Outsourced Services

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January/February 2001 - Volume 80, Number 2

by Lee Kaplan and Jeffrey D. Vaughan

Today's lending market is in a constant state of evolution. Let's look at some of the more prevalent market forces that impact the title industry and the title agent. Lenders are finding that their mortgages are becoming more commoditized. People can and do shop the market for mortgage rates and points, be it via the Internet or through other sources. If a borrower has good credit, the least expensive lender will usually win out because the market perceives no other differentiating factor among mortgage companies. And Internet real estate brokers, who discount their services, are setting the wheels in motion to commoditize real estate commissions as well. Severe price competition has caused rapid consolidation across all market segments occupied by the title agents' traditional customers. This includes mortgage companies, loan servicers, relocation companies, and even real estate brokers. Industry mergers, acquisitions, and consolidations are occurring at an accelerated pace.

Not a week goes by without some announcement of more consolidation. Just recently Citicorp completed its acquisition of The Associates and Washington Mutual is now consolidating its operation with that of PNC Mortgage Company. On the brokerage front recently announced that they were the first real estate broker to be licensed in all states. By the way, they also indicate that they offer a fixed fee listing commission rather than a percentage of the purchase price. Change is constant.

Effect on Title Agents
One source estimated recently that only 25 lenders originated 85% of first mortgages in the first quarter of 2000. What effect does all of this consolidation have on lenders and title agents? In the case of lenders, local branch offices no longer function as processing offices that order title, appraisal, and other products. They now function as sales offices. Instead, remote processing centers assume responsibility for ordering all of the necessary products and services to get the loan approved and closed.

In many instances, the remote processing centers outsource much of the supply chain management. Why? The answer is simple. According to Equity Magazine, there are over 40,000 real estate Web sites trying to sell services to lenders. This doesn't include the companies that do not have a Web site. Lenders believe that if they can use a few vendor management companies who become responsible for figuring out connectivity, consistency, turnaround time and pricing issues, that they can further automate the loan processing process and reduce their costs. The effect of this can be huge. According to Stephen G. Timme, president of FinListics Solutions, a consulting company based in Atlanta, if an average company in the S&P Register with $5 billion in revenue could reduce its cost of supply chain management by 5%, it would increase profits by $20 million and market value by $450 million. According to CIO Magazine, Cisco Systems claims to have reduced its administrative overhead for processing and shipping an order from $100 to less than $6. This is both impressive and scary.

Vendor Management Companies
Which brings us to another market force affecting the title agent today: Vendor Management Companies or VMs.

Vendor Management Companies are large national and regional centralized process management centers. VMs trace their roots to the mid 1960s as service providers to the consumer finance industry. At that time, they furnished short searches (property reports), equity title insurance, and appraisals with quick turn times to meet market demands. Typically they operate with low brick and mortar costs with a centralized employee base. VMs are large and profitable independent agents that manage large networks of vendor suppliers for traditional title-related products such as property reports, title searches, title policies, closing management, centralized funding, sub-escrow activities, and document recordation. They also manage networks to provide appraisal and valuation services, flood and credit reports. VMs operate using customized, proprietary, refined, and advanced order management systems and offer their client base value-added services such as quality control, review, and warranties.

VMs saw a major market expansion in 1978 with the passage of the National Second Mortgage Act. It was then that VMs saw a considerable increase in the demand for their services. Lenders choose VMs for a variety of reasons: surety, warranties, performance guarantees, global coverage, consistency, and simplified process.

Today's fulfillment process is shifting away from the transactional order basis to that of a strategic process. And, strategic process management is replacing the piecemeal "commodity" concept. Vendor managers have evolved to become information and fulfillment managers as strategic alliance partners to their clients. Traditional companies such as Lender's Service, Inc., joint ventures like Household's Integrated, or wholly owned subs, such as Bank of America's HomeFocus Services, are examples of today's vendor management companies.

VMs now provide services to lenders in many channels: A paper, sub prime, brokers, equity, servicers, and relocation. And the VM market is growing. In 2000, VMs completed more than 15 million transactions and had combined revenues in excess of $1 billion.

What does all of this mean to the local title agent or branch office for an underwriter? In the customer environment that currently exists for title agents, the local contacts that once controlled the placement of title orders are gone. Responsibility for that function is shifting to internal centralized vendor management groups or outsourced to third-party vendor managers. If the local title office is fortunate, it retains the business. But it is likely to find that new customer, the Management Company, is going to order and manage strictly by a matrix. If the right products are offered, if the turn times and performance are met, and if the price is competitive, you keep the business. If not, the controller of the order will be forced to look elsewhere.

Adjusting the Title Product Mix
Since vendor managers also tend to be multistate title agents, vendors may not be asked to write the title insurance. They may, in fact, be asked to unbundle their current package of services. Traditionally, title agents have sold some combination of a search, examination of title, title insurance product, closing, and recordation services. The mix has tended to vary depending on the customs and practices in the location where the title is located. However, in most instances, products and services have been sold as a package. Vendor relations groups are constantly told, "I do not want to sell you a search or I do not want to do the closing if I cannot write the title insurance." This doesn't work in today's environment and is exactly why independent searchers, document-recording services, witness-closing companies, and document retrieval companies are emerging at a rapid pace and thriving.

New competitors will continue to enter the market to answer demand for services that they do not perceive as being met. These new entrants are a competitive threat to the title agent. But title agents are in the perfect position to offer the kinds of services being requested in the marketplace. The services routinely requested include: deed reports, ownership and encumbrance reports, full searches in a format suitable to write title commitments, full closings, witness closings, document recordation, and document retrieval.

Successful agents in today's market are those that sell these a la carte or as-an-agreed-to package. They also are able to adapt their business to include new products or variations on existing ones. Most of the processes used to produce traditional services have not been challenged or changed in many years. Tomorrow's agent will look for ways to radically change the process. They will set goals that may seem unrealistic like improving production time by 50% or reducing the cost to produce a service by 50%. They will likely find ways to hit these goals. Sometimes the risks in making the change are, at face, unacceptable. But often it is not. Management companies reengineer their business model and adapt to changing market at every opportunity as they move forward. Those that don't will be left behind. And the same may be true for the title agent.

Currently, the predominant share of business done with title agents is through the fax machine, through overnight mail, or in some cases through e-mail. Given that the goal is to create a seamless transaction from the customer to the vendor manager to the vendor and back, the current process can be greatly improved upon. The desired means of connectivity would be PC to PC or system to system order entry, order status and product delivery. In many cases this can be accomplished by using the Internet or some value-added network such as Real EC or Real Trans to transfer files in an agreed upon format—like PDF.

The successful agent will implement a method to address important items such as: confirmation of order receipt, real-time status of order, automated billing procedures, consistent, flat pricing of each product, guaranteed delivery times, and a cancellation policy.

The market is forcing lenders to change. As lenders change, so must the industries that support them. VMs look for service-oriented vendors that provide consistency in product and service. Their strategic business partners must meet the demands of the market. Title agents' customer base will change. Those customers will manage you by matrixes and you will be asked to provide a full menu of products and services.

Successful agents will develop and then sell their capabilities to vendor managers. In filling that role, they should look for opportunities to expand geographically. Change is constant and adaptability to change is key.

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