by Albert “Bert” Rush
Increasingly the title industry has received more criticism from the mortgage banking industry for our handling of claims. Here, as food for thought, are some of their complaints.
Each year title industry executives are welcomed at conventions of mortgage bankers throughout the United States, but last year was different.
Although the welcome mat was still out, last year industry representatives who attended these meetings heard new and stinging criticisms by mortgage servicers of title insurance and, in particular, title claims handling.
This drumbeat of criticism began in the spring of 2004 at a meeting sponsored by the Mortgage Bankers Association in Orlando, and reached a culmination at the ALTA® convention in New York last October. There I moderated a panel that included Diane Mitchell, vice president of default administration for Select Portfolio Servicing in Salt Lake City, UT; Chris Pitaniello, senior vice president of special servicing for Aurora Loan Services/Lehman Brothers in Englewood, CO; and Jonathan Richards, senior vice president and regional Counsel for Fidelity National Title Insurance Company of New York. NY.
As of this writing, issues being raised by servicers have engaged title management throughout the country and have spurred much discussion within the ALTA® Forms Committee. Here, in a nutshell, is what the servicers are saying.
“You Are Not Meeting Our Needs.”
Servicers are saying that title claims handling is much too slow. They say the “business model” that gives a title insurer the option to respond to a covered title defect by either paying the policy amount, seeking settlement, or defending the title through legal action too often results in unreasonable delay. They complain that insurers invoke this “option to cure” under the terms of the loan policy for protracted and indefinite periods, allowing servicers and others on the lender’s side to suffer unrecoverable damages.
Likewise, servicers say that claims handlers (whether in-house or outside counsel) do not provide regular progress reports and that when the servicer has a complaint, too often they don’t know who to talk to.
“You Don’t Understand Our Business.”
Today mortgage servicing is big business, separate and distinct from loan origination, funding, securitization, and marketing to investors (the “secondary market”). Top servicers are handling more than one million loans at any given time.
The essential work of the servicer is to receive mortgage payments, disburse income to investors, manage delinquency and default scenarios, and meet strict loss mitigation goals. Servicing agreements commonly obligate the servicer to make monthly payments to investors even when borrowers are delinquent. The procedures to be followed in the event of borrower delinquency are typically guided by a “decision tree,” which is part of the servicer’s overall loss mitigation strategy. When foreclosure is indicated, the servicer assigns the case to outside counsel (or “foreclosure mill”) for handling. Both the servicer and outside counsel are expected to accomplish foreclosure within strict timelines, periods of which are determined by local law and practice but are nevertheless strictly enforced. When timelines are not met, servicers and outside counsel give up income.
Servicers tell us that costs of delay range from $25 to $50 per day, which may be borne by the servicer and/or outside counsel.
Within the number of mortgage loans handled by a given servicing company, between 4 and 5 percent will be delinquent at any given time. Of these, servicers tell us that 8 to 10 percent of mortgages will be found to have title problems. Some, but not all, of these problems will be covered by title insurance.
The most common title problems encountered by servicers are prior liens and mortgages not released of record, erroneous legal descriptions, and “vesting issues” such as may arise from discrepancies between a vesting deed and subsequent mortgage, or from gaps in a chain of title.
In response to all this, some title people have commented that lenders have brought many of the problems upon themselves. For example, lender-driven automated loan underwriting and other cost-cutting measures have sped up loan closings and exerted downward pressure on closing and title fees. In their haste to deliver signed loan packages, escrow and closing agents have cut corners in reviewing documents prior to recording and, in some markets, have eliminated post-closing review and follow-up altogether.
To which servicers answer: “We are not originators, we are servicers working on behalf of your insured lender, and you should handle our claims without regard to issues you may have with originators.”
Which leads us to another point….
“Wall Street is Watching.”
Servicers say that the “business model” for title claims handling, by which they mean the so-called “option to cure” and the way it is invoked by title insurers, is outmoded. While it may have served lenders’ needs 40 years ago, it fails to do so today.
Forty years ago mortgage loans were typically originated by financial institutions, which both serviced and held the loan as an asset for the life of the loan. The asset value of the loan to the lender was the principal amount plus some calculation of interest to be earned.
Later, increasing numbers of mortgages were purchased from originators by government sponsored entities (GSEs), principally Fannie Mae and Freddie Mac, and “securitized” as the basis for offerings to investors. This securitization involved creation of mortgage pools and offering of interests in the income stream generated by the mortgages, to investors. Thus, a pool of mortgages earning interest at 6.25% might be packaged and offered as a security paying 6%, with the GSE indemnifying the investor against risk of borrower defaults. Although not part of the offering, investors considered the GSE indemnity as being backed by the U.S. government. Servicing of pooled mortgages was assigned to servicing companies, but servicers were not too involved with defaults since GSEs typically required originators to repurchase problem loans.
In recent years the GSE business model has been copied and adapted by investment bankers, who likewise assemble mortgage pools and offer interests in the resulting income streams to investors. Like the GSEs, these private issue (or “private label”) offerings include indemnification against risk of borrower defaults, but, unlike the GSEs, they include nonconforming and non-prime loans, and they are not backed by the government. In the absence of GSE or government backing, Wall Street analysts and investors value these offerings in reliance on ratings bestowed by independent rating agencies such as Standard & Poors, Fitch Ratings, and Moody’s. These ratings include evaluations not only of loan quality at origination but also default management and loss mitigation performance through servicing. It follows that servicer performance with respect to default timelines and loss mitigation directly affect earnings of the investment bank and the servicer behind the offering.
So today’s servicers find their reputation and earnings affected, in part, by timely resolution of title problems and title claims handling.
Servicers warn that if title insurers do not address their concerns, these issues may grow in importance with rating agencies, Wall Street analysts, and investment bankers, and the value of title insurance may be seriously questioned.
Where Do We Go From Here?
Servicers seem to appreciate that it is not reasonable or feasible to expect title insurers to simply “buy” every mortgage found to have a “title problem.” If we were to attempt to do so, we would be certain to endanger the solvency of the title industry, and, equally as certain, there would be more problem loans.
Instead, servicers have argued that title insurers should observe timelines in connection with claims handling and pay when time runs out (either by purchasing the mortgage or maximizing settlement offers to fix the problem). In response, title folk say it’s unreasonable to set time limits on claims handling, because in many cases timing cannot be controlled, and hurried claims handling would result in waste and unpredictable growth of loss expenses. Servicers answer: “We are required to complete foreclosures within timelines in every state, and every county, and you should share this burden.”
Servicers have also suggested that title insurers might be rated on claims experience and claims handling. These ratings might be done within the mortgage lending industry or by the same agencies that rate offerings of mortgage-backed securities.
Some have suggested that title insurers might centralize claims handling, so that servicers might have a single, reliable point of contact for all claims-related inquiries and issues.
Finally, the ALTA® Forms Committee is considering two provisions to be included in the new loan policy form, which is expected to be approved by mid-2006, that would (a) increase the policy amount by 10% in cases where an insured mortgage is unsuccessfully defended through legal action and (b) allow the insured lender to measure damage from a covered title defect using either value of the insured land at the time the defect was discovered or at the time a policy benefit is to be paid, whichever the lender prefers. But some servicers say this does not do enough, because it would not adequately “share the pain” of protracted claims handling.
The risks covered by title insurance are many and varied, and standard policy forms provide great flexibility for claims handlers to find ways to meet the needs of the insured. Indeed, over the years the “option to cure” has been viewed by many insureds as a great benefit, allowing for costly legal defense of insured titles in the face of uncertain outcomes with assurance of indemnification if the defense is unsuccessful.
But now we are hearing from mortgage lenders that their industry has been reorganized, divided into discrete segments, and one segment, the servicers, believes that our products and services may not be meeting their needs. Put differently, the old option to cure may be gumming the works of mortgage finance.
The servicers have spoken. We are now called upon to respond in ways that will affirm our commitment to customer satisfaction, and reemphasize the value proposition of title insurance.
Bert Rush is senior vice president/national counsel for First American Title Insurance Company, Santa Ana, CA. He is also the chair of the ALTA® Claims Administration Committee. This article is an excerpt from his presentation at ALTA®’s Annual Convention last October in New York. Bert can be reached at email@example.com.