Title insurers are bracing for a bumpy fourth quarter due to the Consumer Financial Protection Bureau's new mortgage disclosure rules. But the timing of the regulation might actually help get the short-term pains out of the way during what's typically a slower period of mortgage activity.
The Oct. 3 implementation of the Truth in Lending Act-Real Estate Settlement Procedures Act Integrated Disclosures, as known as TRID, may result in a slowdown in title business for the rest of the year, a number of insurers warned during their recent third-quarter earnings conference calls.
That's because mortgage closing times are likely to take longer while lenders get acclimated to their new process under TRID. What's more, title companies recognize expenses on their balance sheets as they perform their work, but recognize their revenue only after loans close — which could create an accounting mismatch over the next few quarters as revenue for work done in the fourth quarter won't get recognized until the beginning of 2016, explained Keefe, Bruyette and Woods analyst Bose George.
"In some ways, I feel the timing of TRID is kind of good because it is happening at a seasonally slow time for the market. By the time you get into the spring selling seasons, all the kinks are worked out," said George, who covers First American Corp., Fidelity National Financial and Stewart Information Services Corp. He also covers five of the seven private mortgage insurers, but said TRID will have less of an effect on mortgage insurers because they recognize premium revenue over the life of a loan.
Nevertheless, the effects of TRID are definitely on the minds of title insurer executives.
"We are pleased with our title margin performance this quarter, but…we need to see continued improvement in the residential purchase market," FNF Chairman William Foley said in an Oct. 27 press release on its third quarter earnings. "Additionally, as we enter the seasonally slower fourth quarter, our title margins will have to absorb the cost and more lengthy closing process resulting from the new TILA-RESPA closing disclosure requirements."
Fidelity National Financial, the largest title underwriter, posted consolidated net earnings of $132 million for the third quarter, of which $150 million is attributed to its core title business and an $18 million loss from its FNFV Group, the tracking stock for the company's non-real-estate investments. A year ago, had net earnings of $102 million, with the title business recording a $114 million profit and FNFV a $12 million loss.
"Wait and see" may prove to be TRID's catchphrase, as some expect the normal seasonal slowdown in the fourth quarter to have a greater effect on title insurer business.
"My sense about the drop in underwriter's earnings this quarter is that it is a whole lot of nothing. There is no question that mortgage applications slowed down significantly as banks geared up for TRID and that since it debuted they have being very cautious and going slow under the new rules," said Marc Israel, president of MiT National Land Services, a New York-based title agency. "I think you will see this continue for a month or so until everyone settles in with the new rules at which time the application levels, and with it the underwriters' profits, will all go back to normal."
Executives at Stewart and Old Republic Title Insurance Co. agree.
"Although the industry has seen a
Old Republic International seems even less concerned than its competition, only discussing TRID when it came up during the question and answer session of its recent earnings call.
"We saw a little bit of a slowdown the week after the CFPB introduced the rules. But I don't think it was a great deal of the business. It's a wait and see as to how it will affect it in this quarter when you'll really see the effect of what the rule may have done," said Rande Yeager, CEO of Old Republic Title Insurance Co.
And while KBW adjusted its outlook for First American's earnings, the move was largely "because we are also incorporating the new Mortgage Bankers Association's year-over-year change in mortgage volume, there is a little more of a decline than we had originally thought," said George.
Last month, the MBA said it expects purchase mortgage originations to increase 10% in 2016. But while purchase transaction title policies
First American does not provide earnings guidance, and company officials referred to CEO Dennis Gilmore's comments during its earnings call, when he said he expects only short-term delays due to TRID.
"We're ready to go, our people are ready to go, and our systems are ready to go. So I think it's actually an opportunity for us as we get through these changes," Gilmore said.
