Fitch: Lower Credit Metrics Could Increase Title Insurer Claims
NEW YORK--(BUSINESS WIRE)--Looser financial institution credit standards on residential and commercial policies could lead to an increase in title insurance claims if the insurers fail to maintain rigorous underwriting procedures, according to Fitch Ratings.
We anticipate the initial effects on title insurers of lower credit metrics will likely be minimal. However, future deterioration in title insurers' underwriting, claims processes and reserves practices would cause Fitch to reassess ratings to determine if they accurately reflect potential risks.
Title insurers reported an uptick in claims related to lender policies during the previous economic downturn. For a claim to be made on a lender policy, two events must occur: First, the lender must incur a financial loss on the property. Second, that loss has to be related to a defect in title covered by the title policy. Declining home values increase the chance for a material title claim on a lender policy.
Commercial activity has been very strong for title insurers over the past two years. Further, refinancing many CMBS deals from peak vintage years of 2005-2007 will provide a strong pipeline of activity for title insurers in the next several years. However, Fitch recently noted that several credit metrics for 2013 vintage deals have deteriorated, including expansion of interest only loans, higher use of subordinated debt and higher LTV ratios.
Poor underwriting quality during peak demand was a source of increased title insurance claims activity in the previous property market downturn. At current property transaction volumes, title insurers have adequate capacity to conduct thorough search and examination processes to limit future losses. Maintaining underwriting discipline will mitigate large losses for title insurers regardless of any changes in mortgage lending standards.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.