Mortgage impairment represents one of the most serious threats facing the title industry today. Over the last five years nearly a dozen insurance companies and others have been attempting to offer products to lenders that purport to be a cheaper substitute for title insurance. Most have been limited to second mortgages and home equity loans. All have certain characteristics in common: They (1) indemnify lenders against loss due to "undisclosed liens"; (2) involve limited or no search of the public records; (3) are offered by non-title insurers; (4) require a borrower affidavit or a certain FICO credit score for eligibility; and (5) provide only lender protection—no owner’s coverage. ALTA® has contacted both state departments of insurance and our affiliated state land title associations and encouraged action against these providers. We’ve acted as a clearinghouse for information about their existence, policies, marketing materials, and other practices. We’ve had some limited success in convincing regulators to take action. And we are seeking disgorgement of their profits for the benefit of Radian's customers who purchased the product and, damages on behalf of title insurance licensees in California.
But the threat posed by mortgage impairment generally has escalated with the introduction of a new product called Radian Lien Protection offered by Radian Guaranty, Inc., and its subsidiary, RadianExpress (formerly ExpressClose.com). While it contains all the elements of any other mortgage impairment product, it has two unique characteristics: It’s provided by a mortgage guaranty company with extensive direct ties to many of our existing national lender customers, and its coverage has been expanded to include refinance transactions as well as seconds and home equities.
These variations, in addition to Radian’s strong marketing efforts, required a more proactive role by ALTA® than that taken with previous mortgage impairment products. Consequently, ALTA® and its member title insurers and affiliated state land title associations have taken a number of actions, including litigation, to be discussed in this article. In addition, it’s important to understand Radian’s product and our challenges in combating that product, including the contentions that Radian is making, both in litigation and in other forums.
The Radian Product
First, let’s examine our adversary’s product. And that’s a bit of a challenge -- because there is no product on paper called Radian Lien Protection! The coverage Radian trumpets in its press releases, annual reports, and investor advisements does not exist as a freestanding policy form. Rather it’s subsumed in a product called a Mortgage Pool Guaranty Policy. The reason is fairly obvious: This placement gives Radian its best chance to avoid regulatory scrutiny.
The mechanics of the coverage are interesting however, once you get down to the actual Lien Protection language. First, it’s a true "pool" policy--no individual, transactional policies are issued. The policy insures a lender on a portfolio basis, although individual loans must be registered or identified--and appropriate premiums paid.
Second, and of particular interest, is the policy amount: It provides 50 basis points-½ of one percent-of the value of the mortgages in the pool. Since title insurance provides coverage equal to 100% of that value, it’s obviously very limited protection. In fact, by our calculations, the cost per thousand for Radian’s product can be 100 -to - 200 times that of refinance rates for loan title insurance in many states. Even the product’s publicized transactional cost-suggested to be around $275 for refinances-represents no great bargain for consumers in most refinance transactions.
And you won’t find a number of other features in the Radian product that we-and lenders-have come to expect from title protection: There’s no insurance for title vesting. There’s no insurance for the priority or enforceability of the underlying mortgage. And there’s no insurance for the cost of a defense against a challenge to title or the mortgage. Finally, in order to file a claim, the borrower must be in default—something we’ll discuss further.
While all these policy differences are great countermarketing advantages, there remain challenges on a number of fronts. From the marketing perspective, all these mortgage impairment products continue to be perceived by lender customers as "better, faster, cheaper." While clearly the product isn’t "better," and, in many transactions, questions can be raised about its being cheaper (although on both counts perceptions still need to be countered), the speed of delivery remains a matter of concern. While title orders in most urban and suburban markets can now be acted upon in the 24 - to -48 hour time frame, the supposed "instant" insurance characteristic of these products continues to have an appeal. Our challenge, in addition to improving delivery times, is to convince our lender customers that placing title orders early enough in the transaction can permit parallel processing, resulting in no delays, even in no-cash-out refinance transactions.
Our challenges, however, aren’t limited to the perceptions of our lender customers. We are also challenged in our dealings with our regulators. Most of these mortgage impairment providers (unlike Norwest and its TOP program of a few years ago) are licensed insurance companies in all states. Consequently they are authorized to issue insurance policies, albeit limited to the lines of insurance for which they are licensed. The challenge, therefore, has been convincing legislators that the peril against which these insurers, including Radian, are insuring (namely undisclosed liens) is title insurance. In 32 states with monoline restrictions (title insurers are licensed to issue title insurance, cannot issue other forms of insurance, and no other insurance licensee can issue title insurance) that could be the end of the debate.
But while it may be apparent to those of us in the title industry that insuring against loss due to undisclosed liens is title insurance (and would appear to be so under the statutory definition of title insurance in most states), not every regulator has seen it that way. As we in the title industry know, most insurance departments aren’t as well versed in title insurance as they are in other lines of insurance with which they deal more often. And our various mortgage impairment providers have been quite adept at obscuring their true undertaking. Some have couched it in the form of lender’s "errors & omissions" insurance. Others have attempted to write it in general property & casualty insurance terms. Some have even removed from their policy-insuring provisions almost all discussion of what risk they’re insuring against in an attempt to pull the wool over the regulator’s eyes! And if one strategy fails, they’re back with a "new and improved" version. The very volume of providers and products has contributed to the difficulty for both the title industry and the regulators in dealing with this problem.
And now we have Radian’s Lien Protection product: mortgage impairment\title insurance masquerading as mortgage guaranty. Here are a few of Radian’s standard arguments: "It’s just mortgage insurance!" In making this claim, Radian touts the fact that mortgage insurance provides indemnity in the event of the borrower’s default, regardless of the underlying reason for such a default. They then point to their Lien Protection product and suggest that its requirement for a borrower default demonstrates that it’s "just mortgage insurance." Of course what they fail to identify is that the real peril being insured is that of undisclosed liens. They obscure that real insured peril by insisting that the triggering event for a claim (borrower default) is the insured peril.
They also say, "Title insurers are in the mortgage guaranty business." The best defense is a good offense! Radian makes this preposterous contention because of the definition of loss in a Loan Policy. Since the lender must have suffered "actual monetary loss" before it can make a claim under its Loan Policy, Radian contends that that’s equivalent to requiring a borrower to default before a loss can be suffered. Obviously a lender with a performing loan would generally not have suffered a loss. But, again, the problem is not focusing on what is the underlying insured peril: Regardless of when a claim can be filed, an undisclosed lien having priority over the lender’s insured first lien would be a covered matter under either a Loan Policy or Radian’s Lien Protection product—albeit on decidedly different terms and payout procedures.
Another contention: "This product’s been approved for years!" Yes, the Mortgage Pool Guaranty Policy has been around for years, and every mortgage guaranty company has one. But there’s never been a Mortgage Pool Guaranty Policy like this one. In addition to the obvious addition of the Lien Protection feature, it’s interesting to note that Radian’s version also retains at least the barest nub of what would be considered traditional mortgage insurance: It provides for ONE basis point (that’s right, 1/100th of one percent!) of the mortgage pool value in the event of a borrower default not involving undisclosed liens. This appears to be an attempt to legitimize their contention that this is a mortgage insurance policy. We’re advised that all other mortgage guaranty companies using such a form typically provide for 200 times this amount of coverage-and certainly don’t provide anything like undisclosed lien protection. In fact, all other companies would demand clear title as part of any lender’s claim involving the conveyance of title in return for insurance benefits.
What have ALTA® and our member companies and affiliates been doing to combat Radian’s incursion into title insurance? The answer is a great number of things. They involve public relations, regulatory challenges, grassroots and educational activities, lobbying efforts, and, of course, our litigation in California. Let’s address a few of these areas.
Regulatory Action to Date
ALTA® has organized and conducted meetings with departments of insurance (DOIs) in California, Illinois, Florida, Texas, New York, and Arizona. Additional meetings have been held with DOIs in Pennsylvania, North Carolina, New Mexico, Utah, Georgia, and in several other states. Each meeting has had representatives from the state land title association, all or most of the five national title insurers, and, usually, an ALTA® representation. The presentations made to each DOI were tailored to provide state-specific statutory and regulatory references and included a standard presentation in order to assure a consistent message being presented. The meetings generally have resulted in favorable reaction and considerable sympathy with our position. However, most DOIs have deferred any action until they can evaluate the Radian product and their own laws and regulations. And almost all have strongly requested information on whether Radian is actually doing business in their state—something that continues to be another challenge for us since these products aren’t sold with the kind of local connections we in the title industry are used to. Radian’s pool policy is sold without use of local agents, and their subsidiary, RadianExpress, offers signing services for closings so that most of their activities take place outside of the normal title insurance loop.
We’ve already had some successes and one disappointment. Texas, Florida, and Connecticut have rejected in writing Radian’s filing of their mortgage pool guaranty policy because of the Lien Protection component. Radian then withdrew the filing, making public statements suggesting that the product had already been approved and the withdrawn filing was not necessary to their continued marketing efforts. This is an indication of a further strategy by Radian: They contend their policy really isn’t issued in the state where the property or borrower is located; it’s issued where the lender is domiciled. We think the better position is that the proper regulator is the one in the state where the property and the borrower paying for the insurance is located.
In Illinois, however, we’ve not been as successful to date. Title insurance is regulated by the Department of Financial Institutions (DFI) and mortgage insurance by the DOI. Unfortunately the DFI in Illinois has stated that it would not assert jurisdiction if Radian observes some relatively nominal restrictions. While we were disappointed in the initial results there, we will continue to work to convince the Illinois state regulators of our position.
National Association of Insurance Commissioners
We’ve also been active with the NAIC. Their Title Insurance Working Group has agreed to include mortgage impairment generally in their charge. One of our California litigation counsel made a formal presentation to the group on mortgage impairment generally and Radian specifically with a counterpresentation made by Radian at the same time. Our understanding is that the presentation by the title insurance industry was well received. However, the time allotted was considered insufficient for a full discussion of the issues, and another hearing, this time for a full day, has been scheduled for the end of April at the NAIC’s headquarters offices in Kansas City. Other mortgage impairment providers will also be invited to that session for a defense of their practices as well. It is hoped that given the sometimes disjointed nature of the state-by-state regulation of insurance, this collective approach involving numerous insurance departments will enable both sides to make a cohesive presentation on this difficult subject.
Of course what has received the greatest notice has been our lawsuit against Radian. ALTA® filed suit in California last November. California was chosen because it provided a strong statutory cause of action for a competitor—or a competitor’s representative—to bring an action against a party who had allegedly engaged in an illegal act that harmed the competitor plaintiff. We also wanted the ability to obtain both injunctive relief and damages. California’s §17200 provides such a cause of action. It’s sort of an Unfair and Deceptive Trade Practices Act for businesses. We allege that Radian’s offering of this product in California without being licensed to do so is the necessary illegal act. And we are seeking disgorgement of their profits for the benefit of title insurance licensees in California.
We initially filed the action in California state court, but Radian removed the action to U.S. District Court in Los Angeles. A hearing on whether that court has jurisdiction to continue to hear the matter was held in April, and nothing has been decided. Discovery on the merits has begun. However, assuming it goes forward in U.S. District Court, the current schedule for proceeding on the merits of the case will be no earlier than sometime next year. We may seek a preliminary injunction but that strategic decision hasn’t been made yet.
What Do Fannie and Freddie Say About This?
We’re often asked about Fannie’s and Freddie’s position in all this. The GSEs have thus far taken a hands-off policy regarding the mortgage impairment issue. Their respective Sellers’ Guides have not been amended with respect to title insurance. They both, in effect, indicate a strong preference-if not an out-right requirement-for title insurance over other assurance products. But with respect to pass-through MBS transactions, the GSEs will rely on the reps and warranties of their sellers with respect to title matters. So on individual master agreements for purchasing pools of mortgages, both Fannie and Freddie may well be accepting Radian’s product. Their advice to us: either (1) beat the mortgage impairment providers in court or with the regulators; (2) convince the primary market that title insurance is better, not that expensive, and quick enough; (3) offer a competing product; or (4) get out of the refi arena. Not a whole lot of sympathy, or likely assistance. It’s up to us.
What Can You Do to Help?
Find out if mortgage impairment products are being offered in your market. See what’s happening with the public record, and bring this to the attention of your state DOI. ALTA® has created a Mortgage Impairment Resource Center that’s available on our Web site. On that page we’ve put up policy forms and marketing materials from a number of MI providers, as well as the basic grassroots package for presentation to your state DOI if it hasn’t already been made. Copies of the Radian policy and marketing materials, together with the Texas, Florida, and Connecticut action letters on the product, are downloadable from the site.
With one notable exception the trade press has been very even-handed in their coverage regarding the dispute between ALTA® and Radian. Our argument that all we want is a level playing field has been well received, and so has our contention that our product is superior in coverage and value for the price paid. And we’re making inroads concerning the speed of delivery issue. These are the issues that you need to get across to your local elected officials and real estate press.
I mentioned earlier a public awareness campaign about the value of title insurance. ALTA® is working with a public relations firm to place press releases and ads in industry-related papers and magazines. We will also have a grassroots kit available later this year with sample press releases, speeches, and ads to use at the local level. Educating mortgage lenders, Realtors®, and consumers about the value of title insurance is another way to eliminate the market for mortgage impairment products. You can contact ALTA® headquarters to be put on a list to get a copy of the kit when it’s ready.
So, What’s Next?
It’s a long fight. If we’re successful against Radian, we’ll have to go back and fight the same fight against all the other providers. Each has its own policy, marketing materials, market segment, and strategy. Unlike the TOP program that we battled several years ago, mortgage impairment is a constantly shifting threat. New products will pop up, and just as we’re about to be successful in mounting a regulatory challenge, we’ll have to address a look-alike product all over again. But it’s important to remain active and vigilant, and with your help we intend to do just that.
Jim Maher is executive vice president of ALTA®. He can be reached at firstname.lastname@example.org or 1-800-787-2582.