Perspective on Rejected Title Insurance Claims; Even More Negative News for RMIC; Commercial Delinquency Rates

Lots of folks take vacations during the summer, and many have to ration out their days-off during the year. How does the amount of vacation you have stack up to the rest of the world? Although there is no corresponding chart of GDP per person, the chart is at Vacation. Lock Desk personnel will wish they had a vacation after the last few business days. Beginning last Friday, mortgage prices have been on a tear, with locks prior to Friday now being way out of the market and everyone reviewing renegotiation policies and talking about a mini-refi boom. Now, all we need is some equity and borrowers that qualify!

Current coupon 30-yr Fannie 3.5%'s (containing 3.75-4.125% mortgages) are around a price of 99. Throw on a little servicing, and suddenly 4% mortgages are above par (100). As a result of the horrible GDP numbers and a debt ceiling package that will do nothing to support growth, the market over the last week has shifted from eventual Fed exit strategies to potential for what the Fed could do to provide further stimulus.

As investors continued to cut off RMIC (see below), Radian Group (#2 MI company) swung to a second-quarter profit from a year-ago loss and said it expects claims to trail down after it reached its peak this quarter. Radian also reported a decline in mortgage insurance delinquencies for the sixth straight quarter.

Monday the commentary discussed claims with title companies. "I just wanted to comment on the subject of claims with the title companies.  I can tell you I had a personal claim against a national title company that missed some back taxes owed by the previous owner on a short sale.  The county contacted me and said I was responsible for these back taxes, but that it was the title company's fault and I should contact it.  Even though it was a clear case of the company being at fault the claim was denied.  I had to eventually hire an attorney and threaten a lawsuit before getting them to settle.  It took a lot of time and resources to get it to admit fault even though I had clear documentation from the county etc.  I just thought I would share as this seems to back up what you are hearing."

One reader wrote, "As far as I can tell, from over 20 years of experience in this business, rejection of virtually all title claims by the insurer has been standard operating procedure.  This is not a new phenomenon.  In fact, a similarly jaded former Chairman of a small Midwestern thrift (long since deceased) once was heard to say that title insurance is "insuring pig iron underwater...with a rust exclusion".  The economics of title insurance are vastly different from ordinary insurance with upwards of 80% of all premiums being paid to title agents merely for delivering the business.  Only about 5% of all premium income is allocated to paying losses (the rest is administrative expense-such as lawyers to fight claims).  The economics of casualty insurance, on the other hand, are reversed.  There is rarely accountability between the purchaser of title insurance and the person making a claim (consider in many states the seller buys the insurance), but it's the buyer (or lender) who will have to pursue the claim.  As a result, there is no need to have a good claims paying history since the buyers of their insurance never have to deal with a claim denial. In fact, if you think about it, if the title company does a proper search and knows the applicable law, the risk of loss should be zero.  It is not as if a random occurrence like a tornado can hit your title and cause it to change.  Title insurers are really just insuring their own negligence (and malfeasance) on the front end. Title losses were covered up by rising real estate values generally during the first half of the 2000's.  Now, mortgage holders are seeking to hold title insurers liable for title losses whenever possible, many of which are really the result of fraud.  Title claim volume has no doubt increased, so title insurers are just continuing their business model (of not paying claims easily) in more visible fashion."

And Brian Levy from Katten & Temple, LLP, wrote, "The title issue is quite similar to the mortgage repurchase discussions that have been occurring over the past few years.  Mortgage losses drive repurchases much in the same way that fraud can drive up title claims and rising real estate values can mask the underlying liability for both. Nearly 50% of my current work is in defending mortgage originators from repurchase claims that range from legitimate fraud by the borrower to immaterial claims that the originator failed to verify the source of $50 of closing funds or failed to properly document something that was self-evident.  One of the basic problems I face is that once a position is taken by an investor that a representation or warranty violation has occurred, there is no room for compromise; only a full repurchase will resolve the problem regardless of any connection between the violation and the loss.  That is a recipe for litigation unless high level strategic negotiation can be implemented.

"Title insurance, however, is a bargained for risk transfer.  Mortgage loan sale agreement rep and warrants, on the other hand, were never intended to be used to pass the entire risk of loss back to the originator except in extreme cases.  In fact, true sale opinions demanded that be the case, lest sale agreements were viewed with the dreaded "recourse".  Rather, the intent of the representation and warranties was to insure that a properly underwritten loan was delivered.  The difference is subtle, but critical from a risk allocation standpoint.  Case in point: stated income loans.  How can investors that desired to purchase loans without income verification come back to originators for losses based on the fact that the income was inaccurate?  Clearly, that risk transfer was not bargained for and, I would argue (and have in many instances), was specifically waived by the investor. Title insurers will likely take the position that many of the claims being brought today are really fraud issues for which they should have no liability (straw buyers, id theft etc.).  So, they need to fight all claims to separate the wheat from the chaff.  Likewise, the standoffs on repurchase issues generally are not resolved between investor and originator without escalation to a third party or legal counsel.  Today, everyone is playing a game of "hot potato" by trying to pass losses to someone else, but there is a paucity of people with authority or skill to find a reasonable compromise and there is no generally accepted roadmap to follow to reach those resolutions. Nevertheless, I have found that with patience, clever and principled negotiation skills and a healthy dose of persistence that negotiated resolution of these disputes is possible both on the title front and the repurchase front." (Katten&Temple)

Commercial mortgage delinquency rates moved up in July. Per analytics provider Trepp, "the delinquency rate on commercial mortgage-backed securities spiked 51 basis points to an all-time high of 9.88%." The news was better in recent months, but the delinquency rate is certainly higher than where it was a year ago at 8.71%. Trepp flags a loan as delinquent once it sees a servicer pursuing a foreclosure although there had always been a small percentage of loans that were current but heading toward foreclosure.

To the surprise of few, the MBA reported that home mortgage apps were up about 7% last week. Refi's were up almost 8% and purchase apps up about 5%. (Watch what happens next week!) But applications are still about 30% lower than last year's levels.

The fun continues for RMIC. "Effective immediately, Freddie Mac is suspending Republic Mortgage Insurance Co. and RMIC of North Carolina (collectively, "RMIC") as approved mortgage insurers. With this suspension, mortgages insured by RMIC with note dates before May 1, 2011, and on or after September 1, 2011, will no longer be eligible for sale to Freddie Mac. To help manage your pipeline, mortgages insured by RMIC with note dates on or after May 1, 2011, and before September 1, 2011, must be delivered to Freddie Mac on or before November 30, 2011, whether for borrower-paid or lender-paid insurance. Please also note the following critical information as a result of the suspension: As an exception, mortgages with existing RMIC certificates of insurance will continue to be eligible for sale to Freddie Mac if they are refinanced under the Freddie Mac Relief Refinance Mortgages offering, and the coverage is continued through modification of the existing mortgage insurance certificate. The suspension does not impact mortgages already sold to Freddie Mac that are insured by RMIC. There are no changes to the servicing requirements for mortgages insured by RMIC. Freddie Mac Servicers do not need to take action on mortgages that have already been sold to us, whether at renewal of the insurance or otherwise." Fifth Third Mortgage Company has temporarily suspended RMIC for any loan, excluding 5/3 to 5/3 DU RefiPlus loans.

As you can imagine, no one is complaining about mortgage rates! The focus is back to the slow U.S. economy (as one trader put it, "Low rates don't help too much when the economy is flat-lining"), the global economic outlook, and debt worries associated with Greece, Italy and Spain. 10-year notes rallied a point and closed at 2.64% - its lowest level since early November 2010. MBS prices jumped 28 and 20 ticks, respectively, on 30-year 3.5% and 4.0% coupons; similar coupon 15 yrs. were up 10+ and 6+ ticks.

Two Minnesota mechanical engineers were standing at the base of a flagpole, looking up. A woman walks by and asks what they were doing.

"Ve're supposed to find da height of da flagpole," said Sven, "but ve don't haff a ladder."

The woman took a wrench from her purse, loosened a few bolts, and laid the pole down. Then she took a tape measure from her pocketbook, took a measurement, announced, "Eighteen feet, six inches," and walked away.

Ole shook his head and laughed. "Ain't dat just like a voman! Ve ask for da height and she gives us da length!"

Sven and Ole are currently serving in the United States Senate!