The words “economic slowdown” generally spell bad news for the real estate industry, but for the first six months of 2001 activity in the title insurance market has been an exception. Transaction volume has remained strong in most areas of the country, in some cases exceeding the performance of the same six-month period a year ago.
Title insurance professionals report continued strength not only on the residential side of their business, which is to be expected in the face of falling interest rates, but also on the commercial side. Industry consolidation continues to impact the market, with some professionals “bundling” a wider spectrum of services, such as flood certifications, credit reports and title searches to create a one-stop shopping mentality. Although some observers see the pace slowing, many firms also are moving beyond their core businesses and acquiring other types of insurance firms, as well as data and information service companies, in an effort to continue improving customer service.
While technology continues to make inroads in the title insurance industry, the jury is still out, experts say, on when the truly “paperless” transaction will become a fact of life. Most agree it is still at least a few years away.
But for now, the prevailing message is that the good times continue to roll, although few are confident enough to predict that the torrid pace will continue if the economy fails to right itself soon.
Volume levels remain high
The current economic slowdown did not impact title insurance volume in the first half of 2001, according to Michael Glass, president of Universal Land Title Inc., West Palm Beach, Fla. “While new orders have slowed on the residential side in recent months, both in refinancing activity and in new home purchases, the commercial activity remains steady, and I think it will continue to do so at least throughout the remainder of this year,” Glass predicts.
Cole A. Stremmel, vice president and retail and production manager for Chicago-based LandAmerica Financial Group Inc., agreed. “The economic slowdown has not really affected the title industry in the first half of the year because of the Fed's easing,” Stremmel said. “The market has been very strong for all my operations in Chicago.” LandAmerica is the parent company for Lawyers, Commonwealth and Transnation Title.
“The slowdown has not affected us yet,” echoed Charles J. Kovaleski, president of Orlando, Fla.-based Attorneys Title Insurance Fund. “In Florida we are seeing close to record volumes. While refinancing is relatively strong, commercial volume hasn't slowed down much at all.”
But some observers paint a slightly different picture. “The economy has affected our commercial volume modestly,” conceded Terry Hendrickson, vice president of Midwest regional sales for Chicago Title. “Certainly, in many segments the market has been soft, and it has probably affected us here in Chicago to the tune of 5% to 10%. But revenue seems to be holding up and is pretty much at the levels of a year ago, which were record levels.”
Hendrickson said the scale of some major transactions has kept volume high. “Single [portfolio] transactions of over $1 billion are pretty rare, and we've enjoyed processing two of those in the first six months,” he reported. “And the market is still particularly attractive in the area of financing, where rates are low and it's still advantageous for businesses to restructure their capital vis-a-vis refinancing.”
In addition, Hendrickson noted, there are a number of business entities that are not traditionally thought of as commercial real estate players who have become active in the market. “One area of new growth, both in financing and new construction, is the utility industry,” he said. “They expand at very rapid rates, and these tend to be large transactions in the hundreds of millions of dollars.”
Another area of new growth is residential refinancing for commercial clients. “We always will get involved in the residential transactions of our commercial clients and volume is still heavy,” Hendrickson said. “You would think that everyone who would want to refinance already has, but apparently that's not been the case. And we probably have not seen the last cut in interest rates.”
Refinancing activity is still strong in Omaha, Neb., and commercial activity has “really not slowed down at all because interest rates are so good,” reported Rita Kennedy, vice president with Nebraska Title Insurance Co. “We've increased volume for the first six months over last year,” she added. “I really don't see any change for the rest of the year.”
Bigger is better
While many of the more attractive acquisition targets have already been gobbled up, industry consolidation continued in the first half of the year. According to title insurance experts, customers will be the beneficiaries.
“In my estimation, the consolidation that has taken place, which we expect to continue, has provided and will continue to provide improved customer service,” Glass said. “This will be particularly evident as it pertains to the available dollars to be invested into technology, electronic signatures and electronic recording.”
Universal Land, which has been in a growth mode since 1994, continues to expand, but at a more modest pace. It completed an acquisition in January 2001, buying Palm Beach County, Fla.-based competitor Cypress Title Insurance Inc. to cement its top market-share position. “But we are moving to a more cautious stance as the upward trend in real estate is starting to slow down,” Glass explained.
“Clearly, I think that what consolidation means in terms of service is that we've got to find a way to offer bundled products and services, and a wide spectrum of products and services,” Stremmel said. “We are bundling flood certifications, credit reports, appraisals, title searches and title commitments. We can offer one-stop shopping for all of those products with a single order.” Typically, he added, there are savings passed on to the client when services are bundled.
LandAmerica is in the process of determining which products and services might be appropriate additions to its current menu, Stremmel said. “There are a number of services that are customary in other parts of the country, but not here and vice versa,” he noted. “In some cases, title companies have gone another step just to keep business in the door.”
Chicago Title has experienced the large effect of consolidation through its merger with Irvine, Calif.-based Fidelity National Financial Inc. in March 2000.
“We have been quite successful in achieving the attendant advantages, particularly in our back-office operation: title searching, title production and those sorts of activities. There are advantages in terms of scale, and those are largely driven by technology,” Hendrickson said. For example, in the early 1990s Chicago Title acquired Ticor Title and assimilated its title production, giving Ticor substantial efficiencies not previously available.
Kovaleski said the frequency of consolidation has abated somewhat over the past few years, and he is not convinced consolidation is a boon to clients. “Theoretically, the fewer outlets you have for a product the less competition there is. In our case, fewer competitors mean fewer people to worry about, so that's a good thing. Whether it has improved the level of service is debatable,” Kovaleski said.
There's no debate in Omaha. Bigger definitely is not better, according to Kennedy. “We've been growing because some of those companies are so large, they can't keep customers serviced,” she said. “Some of them come to us because we are smaller and customer service is our number one priority, and that's the way we get our business.”
There is a clear relationship between the size of the client and the size of the title company the customer seeks, Kennedy noted. Major players want to align themselves with “mega” title agencies. “But there's plenty of business in Omaha for everybody,” she added.
Consolidation in the title industry has not been limited to title agencies and companies, Glass observed. “There has also been a strong move by title insurance companies to become involved in other areas of business, for example, diversifying into other insurance products. They are also actively acquiring information-based companies and data service providers, which will help facilitate one-stop shopping,” according to Glass. The April merger between Fidelity and VISTAInfo, which markets data and services to the real estate industry, is a prime example.
Technology: Industry slow to make the shift
While a number of observers have identified technology as one of the key drivers in the move toward industry consolidation, most title insurance professionals agree that the field operations have a long way to go before the technological revolution becomes a reality.
“There are few professions that have historically been as paper-intensive as we have been,” Hendrickson declared. “There is plenty of room and opportunity for title companies to take advantage of the changes in technology over the last several years to cut back on the amount of paper and to do more electronically, both internally and externally.”
The connection between consolidation and technology is borne out of customer demand for material to be sent electronically, Kennedy acknowledged. “We will get a new computer system because we have gotten to a certain size and we need technology to be competitive, but I feel we can do it on our own, and we don't plan to join up with anybody else.”
In weighing the relationship between technology and consolidation, Kovaleski said there are a number of important factors to consider.
“In many industries, people have done things simply because they were capable of being done technologically, without first checking to see if there was a market for it. We saw it with the dot-coms, and the same thing happened in our business and in other businesses,” Kovaleski said. “People put systems in place because it was doable, and now they're finding out the need for those services is in the future.”
Kovaleski added that technology puts larger companies in the position of being able to do more because of cost efficiencies. “The question is, when should you do it, and why? Our approach is that we will do it when it makes sense. When we think it will improve our internal processes, we'll do it,” he said.
So, does that make the highly touted “paperless transaction” little more than a pipedream? It depends on whom you ask. “The paperless transaction? It's not going to happen tomorrow,” Hendrickson declared. “I believe there is movement in that direction — not only in our industry, but in other financial service areas as well. It will come gradually and over a reasonable period of time; I'd say maybe five to 10 years. And it's more likely to occur in residential before it happens in commercial.”
Kennedy said the goal of achieving a paperless transition remains a long way off. “It seems that when we go to closings there's more paper than ever,” Kennedy noted. “Attorneys keep adding to their deeds of trust. Once they were 13 pages long, now they're 16. I just think there are too many people out there concerned with covering their butts. It would be nice if it happens, but I can't see it happening anytime soon.”
Stremmel agreed. “Right now, it's a pipedream,” he said. “I do think eventually there will be such an animal as a I can't see it happening anytime soon.”
Stremmel agreed. “Right now, it's a pipedream,” he said. “I do think eventually there will be such an animal as a paperless transaction, but it's probably 10 years away. Digital signatures and digital signature recognition technology still have a long way to go.”
Kovaleski called paperless transactions a delayed reality. “The technology exists, and it is going to happen, but the question is when?” Kovaleski said.
According to Kovaleski, there are two critical pieces that must fall into place before paperless transactions can become a reality. “The lender must drive it, and that hasn't happened as quickly as some of us expected it to,” he observed. “I don't know why. If I had to guess, it's because it will demand some changes in how banks or lenders do things, and it will require the investment of significant dollars in their processes to make the necessary changes.”
In order to make transactions truly paperless, continued Kovaleski, courthouses have to be ready to receive electronic transmissions. “I'd never make a guess as to when that will happen.”
Kovaleski said that Attorneys Title Insurance Fund still sells and supports a real estate closing program. “We started it five or six years ago, and we built into it a capability to receive and transmit closing documents. This took lot of time, and a lot of money has been put into it. We are ready for it, but we're still waiting for it to happen. Having said that, we are positioning ourselves to be ready for paperless transactions,” Kovaleski concluded.
Glass is a bit more sanguine. While acknowledging that technology has been one of the key drivers of consolidation in the title industry, he cautions that those professionals who tout the paperless transaction as an imminent reality are jumping the gun a bit.
“My research shows that the paperless transaction as a mainstream fact of life in real estate closing is still two years out,” he said. “That is due in large part to the need for the counties to be brought up to speed and their ability to accept this technology, and the need to improve the systems within the smaller title agencies.”
Of course, of more immediate concern to title insurance professionals is whether the current level of activity can be sustained. Because of economic uncertainty, most crystal balls tend to cloud up beyond 60 or 90 days.
However, Stremmel is willing to offer this prediction: “If the economic slowdown continues, other factors could come into play that would affect volume,” he asserted. “The poor state of the economy would start to affect purchase transactions, and fewer sales would take place.” Stremmel also said that when the interest rates remain at a consistent level, customers will refinance, shrinking the pool for potential business.
Stephen E. Lewis is a writer based in Alpharetta, Ga.