What happens if a title company fails?

by Diane Cipa on September 9, 2008

That’s a really big question and it has two completely different sets of answers. Why? Well, the words title company are used interchangeably to describe two very different kinds of title companies. So, for you to fully understand the answers, you first need to understand the difference between a title agency and a title underwriter [the real title company].

Title insurance is written through AGENCY or DIRECT operations. When you focus on those two words, I think you can start to see the difference. DIRECT means you are dealing with an EMPLOYEE of the title underwriter/company. AGENCY means you are dealing with a person or entity who is an independent company - meaning NOT the real title company - who has been authorized to write title insurance on behalf of the title underwriter/company. Get it?

If you are in the mortgage business, this may seem like a model that matches the mortgage broker/mortgage lender model. If you look at it in that light, it’s similar but you’d have to add delegated underwriting and then it’s more in the ballpark.

The failure of the Mercury Companies “empire” - their nationwide structure of multiple and huge title agencies - which most people thought of as title companies - has people scratching their heads and thinking through the ramifications of failure. I’ll talk about some of the issues. It’s a much bigger subject than a single post could cover and frankly, I’m not an expert in failure - LOL - but I’ve witnessed it from afar and with interest.

The failure of a TITLE AGENT is almost always due to mismanagement of the books - either by theft or absolute negligence. In most states, the only one really watching the operations of a title agent is the title underwriter. This is one area that I think could be improved. I would prefer that states set an audit requirement as part of licensing so that we have a more secure and regular method of checking the operations of a title agent but that’s a different topic. In the meantime, if the title underwriter hasn’t noticed bad management by an agent, a failure can happen without any notice. A consumer or mortgage lender caught up in this kind of failure is apt to suffer inconvenience in most cases and in some, real financial loss. When a title agency fails, the real title company - the title underwriter - comes in and takes over. Their employees will sort things out - often with the state regulators keeping an eye on things.

All title insurance policies that have been written by the failed agent are honored because the agent had the authority to bind the title underwriter/company. Where it gets sticky is that agents who are doing a bad job with the money are usually doing a bad job with the policies, too. That means that they might have closed your transaction and failed to create a policy or pay the real title company. How do you protect yourself as a consumer? ALWAYS get a copy of the title insurance commitment PRIOR to closing and ALWAYS get and retain a fully signed copy of the HUD-1 Settlement Statement. The commitment is binding and identifies the real title company. That’s important if the title agent wrote for more than one company. The HUD-1 is your evidence that you paid for the insurance. Even if the title agent failed to remit that premium to the title underwriter/company, your payment will be honored. Remember that you should receive your actual title insurance policy - reasonably - within 90 days after your closing. Keep track and if you don’t get it - follow up. If the title agent is not cooperating, contact the real title company directly.

While I believe every consumer should shop for a title agent and make the selection based upon strength and expertise - it’s sometimes hard to figure out which company is run by a negligent or crooked manager. I’ve posted tips for shopping but you should also rely on your guts and then take heart that there is a different, much stronger and more heavily regulated title underwriter/company sitting behind every title agent and that is the strength of the system.

The big question I have been asked is what happens if a title underwriter - the real title company fails. First, you need to know that underwriters as insurance companies, are strictly regulated and monitored. They must maintain reserves and those reserve requirements adjust as the risk of claims adjust. All of this activity is monitored by states and private rating companies. Fitch is a good source if you are interested. Finally, most states have some sort of arrangement for overseeing the dissolution of failed insurers. So, I’m not worried about the failure of the real title companies. There are lots of eyes watching their every move and authorities will step in to protect the system and the consumer if a company goes out of control but the likelihood is pretty slim.

Hope that helps and if there is anyone out there who would like to add to the discussion, please do.

Tagged as: title company failure

  • Awesome Diane, until Mercury fell apart, a failed title company (either) was not even something I considered.
  • Folks in other states seem to see agency failures more than Colorado, I think, because you tend to have HUGE agencies out west. They are less likely to fail but boy when they do! Yoi.

    The folks I really feel sorry for are the vendors. Abstractors and independent closers are out of luck when any title agent goes down, but the big ones tend to hurt more.
  • Gina Gardner
    Good stuff, I appreciate the education. So in states where they use attorneys and not title / escrow companies would consumers always be dealing with agents (the attorneys) instead of directly with the insurers?
  • Good question, Gina. I'd have to say I'm not sure because the title underwriters have tons of attorneys on staff. I can't see why they couldn't do direct business. Perhaps we have a reader who will comment.
  • Great post. I never considered it either, but in the era of the Fannie/Freddie failures, I suppose anything is possible.
  • Yes, we are tiptoeing through a thicket of history making mortgage banking. Wonder what the textbooks will say.
  • I'm not a fan of regulation, but seems like most of the problems being faced right now are due to the sustained de-regulation and mergers in the last decade or so. Tighter regulations, and a splitup of big companies into local entities, would help ease the pain a lot in future.
  • I'm not so certain that de-regulation caused the problem but I believe regulators used to be able to trust companies to protect product integrity because it was in their own self-interest - title and mortgage providers. I do think regulators recognized the potential for problems and that was why quality control programs were made mandatory in the mid 80s. The boom mentality and stripping of security risk lowered standards across the board - including the rise of vendor management which gutted most quality control functions so the trust methods of managed regulation broke down without regulators understanding the damage until it was too late.

    I agree, I'm not generally for regulation - however - nothing but legislation and regulation will restructure and set up policing methods for our industry. We could've and should've self-policed to avoid government intervention but we didn't.
  • Diane,

    I certainly can understand your position on these important issues as they affect all of us and I applaud you on addressing it in a "user friendly" and informative way (title is very misunderstood).

    I agree with many of your assertions and would add however, that many defunct title agents are not necessarily guilty of bad accounting practices. The implication as I read it is that our industry is riff with fraud. As our industry is so closely tied to the real estate and mortgage banking and lending industries and relies almost exclusively on them for business, it makes sense that we have seen an almost equal drop in business.

    It is no secret that these declines that have been occurring in real estate nationwide, the tightening of lending guidelines and availability of credit internationally have been part of the reason that many companies have gone out of business. And as this could be boiled down to mismanagement of expenses versus revenue, I think a big culprit is simply the decline in title orders and resulting closings for these ailing agencies.

    The fact is that when times are good, as the were in the last 5 or 6 years, many agents were simply not prepared to address the precipitous declines that are being experienced nationally. That is just poor planning (kind of like the children's story of the Ant and Grasshopper, )

    I do think there are plenty of examples of "mismanagement of books", but because our industry is regulated by the state insurance agencies and the restrictions on each title agent by the title underwriters (Fidelity, First American, Stewart, et al) it is very difficult to purposely make these types of errors and get away with it for any length of time.

    The bigger issue I believe is the loose oversight of the state agencies on each title agent and the wide discrepanies of how much "mark-up" there is on the title insurance and the various junk fees that title agents charge. This is where most agencies are different and in most cases, the consumer has nothing to measure this. This is the biggest tragedy. I think the playing field is not level here and consumers are not getting the best "deal".

    Bo Hussung
  • Good food for thought. I never experienced a failed title company. Now, I will have second thoughts.
  • Its not all on the LO's and Real Estate Agents. Buyers need to take responsibility for their situation too. If a buyer gets a home with an ARM anticipating continued appreciation and profit in a short term then they have to be ready to accept the reality of the opposite happening. This is the case for so many buyers and the reason for the problems. Granted this was not the case for everyone but eliminating certain loans and tighting the rules for approval is not the solution. Buyers need to understand the decision to buy a home is serious. If I invested all my savings in a stock and that stock went down, no matter how loud I cried about it I wouldn't get my money back. If I borrowed the money to invest in that stock I would owe it and it would follow me everywhere. Why are we letting so many of these buyers of the hook with their loans?
  • The tighter the guidelines the fewer the buyers and the more foreclosures that will happen. We need to push for less restrictions and more education of the home buyer.
  • Diane, thanks for the post, I really didnt know the differnece between the two, I have always used First Am so I really didnt think it was a problem.
  • Let's consider two different title agencies for a moment and let's assume both used to produce decent volume. One is run by a prudent manager who faithfully triple reconciles the escrow accounts and watches the income/expense relationship closely. The other company is run by a manager who frankly isn't so good with the books.

    With sufficient volume pumping through both companies, from the perspective of an outsider they might both seem like well run companies.

    Stop the volume and the impact on the two companies is very different. Company number one will have normal business risk such as how to cut expenses quickly enough to mitigate damages and save the company. They may ultimately decide or be forced out of business just because there isn't enough volume to make normal ends meet or they may be able to cut back, hunker down and wait it out.

    Company number two is in absolute crisis mode because unbalanced accounts are out of control and if you lose the steady flow of cash masking mismanagement, the accounts fall short. This manager can't make it through the crisis and doesn't have the ability to even make the decision, it's just a failure, a defalcation - whether by malfeasance or misfeasance.

    Lack of volume forces both hands but my observation is that most title agency failure is due to wreckless management of escrow and/or operating funds and not simply a decline in volume.
  • Here's a great comment by John Bethell on Title Insurance Talk....
    Diane:
    Good post and good advice to retain your commitment and evidence of payment. Under the commitment terms, that usually initiates coverage. Be sure that the commitment names the Buyer as proposed insured and that the proposed policy amount equals the purchase price. Without those two things, the underwriter has a window to deny coverage.

    Unfortunately, the commitment provides no coverage to the seller in the unlikely event that the title agency suddenly goes belly up. While not fool proof by any means, if the title agent appears unorganized, stacks files all over the office and conducts business in a casual, unprofessional manner, there is a higher likelihood that the books are not being kept to the standards required when dealing with other people’s money. Does that make the agent a crook? No, but it does increase the chances that the agent doesn’t know how much money they have in their accounts and who it belongs to. And that’s a recipe for problems, for sure.

    Most agents that go out of business do so quietly and only stiff the underwriter for some back due premiums. A few exit in more spectacular fashion, usually due to gambling, drugs or excessive lifestyles. Occasionally, an employee will be the culprit, but almost always when that’s the case lack of internal controls is the enabling root cause.

    Underwriters left to pick up the pieces have no one to blame but themselves. They’ve spent most of the last ten years signing up anyone with a pulse and a brother-in-law who could refer business. They’ve failed to make running the agency in a professional manner important to the ultimate consumers of their insurance and then validated that failure by providing Closing Protections Letters to facilitate the “brother-in-law business plan.”

    I could go on but I’m at my self-imposed word limit.

    Regards,
    John Bethell
  • Diane,

    There have been many casualties in the mortgage industry over the last 24 months, including title companies. I agree with your example, but it is anecdotal to say that through observation many of these companies failed because of malfeasance and accounting and escrow mismanagement. I am sure that any careful audit of a defunct company (title, mortgage, whatever) might unearth some book keeping discrepanies, but my guess is that there simply was not enough revenue to support overhead. And they were too slow to make the necessary adjustments to stay afloat. The national numbers are sobering.....purchases are down, refinances are down, closings are down, so title orders are down and the bottom line is these companies need title revenue and fee volume to pay their bills.
    Thanks
    Bo
  • Thanks for the comment Bo. I'm not including mortgage companies is this example at all. Mortgage companies tend to sink or swim based on volume and marketing decisions. I can recall only one defalcation in my career - the owner bilked the warehouse lender and left the country. On the other hand, I hear of title agency failures due to theft or mismanagement of the accounts every day now. Before this credit crisis, we heard about failures of this kind several times a year.

    Check Fitch or AM Best and you will find that defalcation is probably the biggest cause of claims. That's right, consumers pay for self-created title claims that have nothing whatsoever to do with title - just theft or negligence. It stinks.

    The dirty secret about the title agency business is that a whole heck of a lot of title agencies have horrible books and depend on volume to cover undiscovered shortages. Regulators depended on underwriters to guard their own self-interest. Rather than responsibly monitor agents, many underwriters just adapted to the risk and the premiums paid by consumers covered it. So now with the loss of volume, losses are way off the charts and underwriters have gotten audit religion. Thank heavens. Bettter late than never. They still have to flush out the crap in the system but moving forward, we hope for better audit oversight.
  • You are welcome Diane. I am running with you on this. Essentially you have described embezzlement. Desperate times cause people to do desperate things. I am amazed at the depths that people will sometimes go. Unscrupulous activities in our industry make the rest of us look bad and unfortunately, we all pay for it. I do not endorse a heavy regulatory environment, but it is sorely needed and yes thank heavens, it is getting better. You know?....doing the right thing is not really that hard.
    Bo
  • Thanks, Bo. Making the right choices isn't hard, I agree absolutely and can't figure out how some don't fly straight. That said, I have to say that figuring out how to properly account for and control the flow of massive funds in and out of our office is not easy. No one really teaches it. They touch on it in CE but most of our systems we've developed on the fly over years of trial and error and with only one or two tips from underwriters. I frankly have no idea how other title agents do things but our underwriters are always happy when they visit and do an audit and I can sleep at night. ;)

    OH, yes - of course - it's embezzlement, but for some reason not everyone gets that.
  • If your title company goes belly up and you end up losing your insurance does that effect your mortgage. Basically since most lenders require title insurance. Is there any chance they would call your loan due.
  • Morning, Late Night: ;)

    Agencies fail all the time, but underwriters don't, so the likelihood of a policy being in jeopardy is slim to none. When an underwriter does fail, insurance regulators oversee the dissolution and the interests of consumers are guarded.

    I wouldn't worry about it. If you bought your title insurance through a Mercury Company, the actual policy was probably issued through First American and they are still in business.
  • Jon
    All fields of business have all sorts of people. Gratefully there is regulations that protect us as home owners. I have definetly dealt with good and bad agencies.
  • Almost people like us not having know about difference about both two no one take urge to know about technical and after they gets frustrated fail result. might possible policy having other problem too.
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