Aug. 12: Letters on the “why” of mortgage rates, LOs exiting the biz, and title insurance company business

Before I forget, the Department of Housing and Urban Development (HUD), in Washington DC, has an executive level vacancy for a Director of Single-Family Housing Program Development. The person selected will direct and manage three divisions: Home Mortgage Insurance Division; Valuation Policy Division, and Program Support Division. The Divisions share responsibility for the development of policy related to origination of single-family FHA-insured mortgages and loans. All applications must be received via USAJOBS; a description and salary are shown there as well. Hiring or firing, prospering or failing, the employment situation is rarely constant, and WeWork may be “on the ropes.” The co-working startup indicated that there are doubts as to whether they’ll be able to stay in business amid membership cancellations and a debt load that the market seems concerned about that can’t be paid. Since going public in October 2021, the stock price has dropped 99 percent. Debt? WeWork has notes due in 2025 trading at 33.5 cents on the dollar, an indication that there are significant doubts the debt will actually be paid.

More on the title industry and title policies

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Last Saturday the Commentary included a write-up surrounding an article pointing out that there are five title insurance companies that own 80 percent of the market. The article also discussed policies being overpriced, the profits of those companies, and the current policies in Iowa.

As a refresher, Investopedia comes to the rescue and tells us that, “Title insurance is a form of indemnity insurance that protects lenders and homebuyers from financial loss sustained from defects in a title to a property. The most common type of title insurance is lender’s title insurance, which the borrower purchases to protect the lender. The other type is owner’s title insurance, which is often paid for by the seller to protect the buyer’s equity in the property.

In April of 2022 UWM was looking at using attorney title opinions in lieu of title insurance. In March Fannie Mae was reportedly considering a pilot program that grants certain mortgage lenders a waiver on title insurance requirements for loans sold to Fannie Mae. That said, Fannie Mae retreated from this proposal to eliminate title insurance requirements for a pilot program. “This pilot will not be submitted to the Federal Housing Finance Agency (FHFA) for review or consideration.”

In general, many think that title insurance is a poorly understood area generally and this Voxtur program is exploiting that ignorance to shift title risks to lenders unwittingly. Lenders shouldn’t be fooled into saving a few bucks up front in return for greater risk down the road.

Mortgage lending attorney (and Mortgage Musings author) Brian Levy had this to say about the attorney opinion alternative. “Title insurance is a historically poorly understood area of the home ownership process for industry and consumers alike. Consumers groups and regulators are frequently confounded at the costs it adds to transactions because they don’t understand its value. In fact, I’ve also been known to be critical of title insurance as not really being insurance since if the title company does the public records search and legal analysis correctly, they are only insuring their own negligence. It’s not like insuring a random occurrence risk to a house like fire or a tornado.

“That said, until we have a more foolproof way of assessing legal risks and searching liens, easements and prior mortgages affecting a home (I’m talking to you blockchain enthusiasts), mistakes can be made, and title issues missed. So, it is more than just comforting to know that a strong balance sheet insurance company is standing behind risks that can cost lenders (and homeowners) the loan’s security. The value of title insurance would be a lot more intuitive for lenders if you ever had to file a six-figure claim with a title company due to a missed unsatisfied prior mortgage that put your loan into second position or had a client (or neighbor) come home to men drilling in their living room (true story) because of a pipeline easement missed on a title search (and survey).

“This idea to rely on attorney opinions and malpractice coverage in return for lower closing costs comes with some potentially costly deferred risks that lenders should be aware of. In particular, I would be concerned about representation and warranty repurchase and indemnification risks where the collateral might be impaired or totally unavailable to support the claim due to a missed prior lien.

“Attorneys can make mistakes just like title companies, but there are multiple reasons why a costly title loss could be passed back to the lender in this program that would not occur with traditional title insurance. Of note, the Fannie Guide specifically requires the attorney title opinion to be ‘be commonly acceptable in lieu of title insurance by private institutional mortgage investors in the area where the subject property is located.’

“Outside of Iowa and perhaps one or two other places, I’m not aware of places where attorney opinions are commonly accepted in lieu of title insurance. Second, title insurance is for the life of loan, but it is unclear whether the attorney malpractice liability insurance backing any attorney opinion will extend beyond a few years after the transaction closes, particularly if an attorney were to have their license revoked. Endorsements commonly obtained with title insurance may be unavailable with an attorney opinion. Moreover, title insurance also includes a duty to defend whereas to collect on an attorney opinion you would need to sue the attorney for malpractice (and hope they are solvent or have malpractice insurance available).”

Brian wrapped up with, “Finally, I would be very concerned about consumer claims arising from use of this on purchase transactions to “save money on closing costs” in lieu of an owner’s policy. If a title problem arises later, it is likely that the lender will be sued as a deep pocket defendant for failing to look out for the borrower’s interests.”

Jeremy Yohe, VP of Communications with American Land Title Association, ALTA, also addressed the piece.

“I’d like to address the myth that title insurance is ‘seriously overpriced.’ While other forms of insurance have seen rate increases in recent years, the cost of title insurance coverage actually decreased 7.8% nationally since 2004 and roughly 5% from 2019 to 2021, based on recent industry financial statements. For title insurance, a homebuyer only needs to pay a one-time fee at closing, which is about .5% of the purchase price of a home.

“It is critical to understand the difference between an owner’s policy of title insurance and a lender’s policy. A lender’s policy protects against claims that may affect the lender’s loan and does not protect the owner’s property rights, which is why title professionals recommend that consumers purchase an owner’s policy to protect one of life’s greatest investments.

“Without title insurance, homeowners are not protected from a devastating financial loss, sometimes in the tens of thousands of dollars, that may result from a title defect, a tax lien, an undisclosed easement, fraud, or forgery. Importantly, title insurance also covers legal fees and court costs to defend a consumer’s property rights if a legal dispute arises. This means that title companies will fight for homeowners to stay in their homes for no additional cost.

“In approximately half of the states, the seller helps pay for title insurance in some form, whether the seller splits costs with the homebuyer or pays for the owner’s policy fully, with just a nominal cost to the homebuyer for lender title policy coverage. Title insurance companies also offer numerous methods to reduce the cost of title insurance, including a discount when the owner’s and lender’s policies are issued simultaneously.

“When a homeowner refinances, they are also required to purchase a lender’s policy of title insurance on a new loan. In the period between the purchase of a house and refinancing, problems could have arisen that the lender must know about before approving a new loan, such as a lien from a contractor or a judgment on the house due to unpaid taxes. A new lender’s policy is necessary when refinancing to protect the lender, but most title insurance companies offer discounted refinance rates to reduce the cost.

“Another myth is that title insurance companies have ‘fat profits’ because they pay out so few claims. Title insurance is fundamentally different than other insurance products. Unlike other insurance products where most of the upfront cost is marketing, for title insurance, significant upfront expenses are related to conducting public records searches, examination, and rectifying problems found. The work of title insurance professionals is to not only prevent claims from being made, but also to provide coverage if a defect arises. Claim prevention is paramount because a claim on someone’s property can be devastating and costly, and it would not be resolved by simply receiving a check. Low claims rates means that the title professionals did their jobs properly at the outset.

“Importantly, title insurance also protects against “unknown” risks that are not found in a public records search, such as federal tax liens, HOA liens, and fraud or forgery of title documents. That is why much of the cost/expense goes toward paying expert title professionals to review titles and correct any issues before issuing a title insurance policy. It is the title insurance company’s willingness to stand behind this work, even if the defect originated in faulty public records or was unknown, that provides lenders with confidence that they have a first lien mortgage, and homeowners with peace of mind that their property is truly theirs.

“Lastly, I’d like to address that myth that in Iowa, title insurance ‘costs $175 for home purchases up to $750,000’ compared to ‘$1,400 to $2,700 for the median home’ in the rest of the country. The fact is that the current government-operated system in Iowa is often cited as an alternative to traditional title insurance. But while the cost for title insurance in Iowa can be lower than rates in some other states, comparing title insurance in Iowa and title insurance in other states is comparing apples to oranges.

“In Iowa, title insurance costs do not reflect all the necessary costs that are normally included to produce a title insurance policy. The total cost that consumers pay for title searches, examinations, and clearing of any title problems in Iowa do not differ substantially from other states. In 2021, Iowa’s total closing costs were higher than 12 other states.”

Loan officer employment numbers, and employment overall

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The ranks of residential lenders have been being reduced, and it seems that everyone is expecting more cuts. Tony Thompson writes, “Hey Rob, I wanted to respond to the Mortgage Employment Numbers from the BLS discussed in last Saturday’s commentary.

“For the last three years, NAMMBA has been conducting a State of Diversity report for our industry and one of the glaring trends is the declining loan originator headcount. I have been on record since 2021 stating our industry will lose over 200k LOs by 2026. We are in a period of what I call the ‘Great Reset’ for lenders and loan originators.

“For mortgage lenders, they must quickly understand, the mortgage industry will have its own pandemic in 2026 due to thousands of LO’s exiting the industry while having a demographic of consumers, we call the multicultural market (women, millennials, communities of color and LGBTQ) who are not being served because lenders don’t understand they need a new playbook to connect and engage with this $2.9T market. For loan originators, they will continue to leave our industry because they have failed to pivot from selling rates, closing cost discounts and products to educating these young and diverse consumers. Most LO’s are not on the same platforms the multicultural consumers are on (You Tube, Instagram, Twitter and Tik Tok).

“I think this will be the first question I ask you, David Stevens, CMB, and Mitch Kider at NAMMBA CONNECT 23, September 14 – 16 at the JW Marriott Bonnet Creek in Orlando, FL during our opening session. NAMMBA wants to give lenders the playbook to thrive in today’s market. Simply, get your ticket and NAMMBA will include the first night’s room stay for any Mortgage, Marketing or HR Executive who would like to attend the conference. This is our way of giving back to the industry. This offer will expire Friday, August 18, 2023. To reserve your seat click here. To see the agenda click here.

Understanding supply and demand and interest rates

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Rithm Capital put out a piece this week worthy of at least a skim for anyone trying to grasp interest rates.

“Never before has this scale of monetary policy tightening occurred with such large public sector influences at play. This is what the Treasury yield backup last week points to. This ranges from the high fiscal spend and resulting deficits that need to be financed, to the nuanced workings of the Federal Reserve’s balance sheet runoff (Quantitative Tightening), to global factors extending to the Bank of Japan’s Yield Curve Control (YCC) policy.

“While the focus has been on what will break in the private sector, these public sector dynamics (downsizing the Fed’s balance sheet, running a higher deficit) are unraveling through the recent run up in Treasury yields.

“The first factor in the recent Treasury yield backup is the mechanics of the Fed’s balance sheet runoff. Maturing Treasuries on the Fed’s balance sheet results directly in the Treasury having to raise debt to pay off the Fed. On the other hand, monthly paydowns of agency MBS open up a technical supply / demand imbalance requiring private sector (money managers) to step in.

“The other factor is higher fiscal spending and the resulting deficit. The mix of higher Social Security, Medicare, and defense outlays, in addition to increased spending from some of the Acts (such as the CHIPS Act and the Inflation Reduction Act) and increased infrastructure spending have contributed to higher borrowing needs. Thus, Treasury auction sizes are expected to grow into 2024.

“Higher supply of Treasuries coincides with demand largely dependent on money managers, as banks and overseas investors have stepped back. The economy is surprising to the upside, compared to the last time the 10-Year Treasury yield was north of 4% in October 2022. The Citi Economic Surprise Index, a measure of economic data surprises relative to expectations, has surged higher this summer. The turnaround in housing is one notable example where the backdrop has solidified meaningfully. Homebuilder stocks are materially higher after bottoming in October, and homebuilder sentiment has also reversed course after bottoming this winter.”

I want to tell you about a girl I met in Michigan this week who only eats plants. You probably have not heard of herbivore.

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Rob Chrisman