Foreclosures hit title insurer
Giant title insurer First American Corp. posted a second-quarter loss Thursday because surging mortgage foreclosures indirectly increased the number of claims filed on policies sold by the company.
Mortgage lenders and some home buyers obtain title insurance to ensure that a property can be legally transferred from the seller to the buyer or, in the case of a refinancing, to ensure that the home is indeed legally owned by the borrower. If fraud or other snags from a previous transfer of the property are later discovered, voiding the title, the title insurer is liable for the losses that result.
First American said its title claims jumped 62% in the first half of this year from the same period in 2006. Frank McMahon, the company’s chief financial officer, said he expected claims to climb even more in the second half of 2007, but he declined to provide a figure for the projected increase.
As a result, the Santa Ana company added $243.6 million more than planned to its provision for policy losses and other claims, reducing pretax income for the quarter by that amount and net income by $158.3 million, or $1.64 a share. That led to a net loss of $66 million, or 68 cents a share, compared with a profit of $25.5 million, or 26 cents, a year earlier.
The increased claims generally have been on policies sold before this year, but the higher rate of claim filings coincides with the current housing downturn, the company said. That’s because a higher-than-expected rate of foreclosures on mortgages, especially sub-prime loans, issued during the housing boom made it more likely that any title problems that First American had insured against would be uncovered. First American said it anticipated 12 to 18 months more of elevated claims stemming from higher defaults and foreclosures.
“Many of these claims are arising in connection with sub-prime loans, and it appears many of these claims involve fraud, forgery and other factors often seen where loans are made to borrowers in financial distress,” Chief Executive S. Parker Kennedy told investors and analysts.
During the height of the boom, many borrowers with subpar credit overstated their income, exaggerated their assets or hid their debts to help them qualify for a mortgage as housing prices were skyrocketing. Many did so with the guidance of mortgage brokers and loan officers.
In addition, like lenders, title insurers were so busy during the boom that they weren’t as diligent as they should have been in examining records, said Gerald B. Glombicki, an analyst at Fitch Ratings, which rates insurers and corporate borrowers.
“Those years in particular, First American and many others in the title industry weren’t doing their homework,” he said.
Fitch on Thursday changed the outlook for its ratings of First American’s ability to pay insurance claims to “negative” from “stable.” Fitch cited concerns about First American’s profitability during the downturn as well as about how it estimates losses.
Wall Street analysts on average had expected First American to report a profit of 90 cents a share, according to Thomson Analytics. Analysts often don’t include one-time items such as additions to loss reserves when estimating earnings. Excluding the special addition to its loss reserves and an 18-cent-a-share charge for asset write-downs and branch closures, First American earned 96 cents a share, beating the Wall Street estimate.
Revenue was flat at $2.16 billion.
First American’s stock rose 62 cents Thursday to $44.05.
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