The country’s biggest title insurers are striking optimistic notes on the health of their industry, despite the expectation of additional interest rate hikes, which have already put a crimp on refinance business.
The 18 largest companies with operations in Orange County handled $34.7 billion worth of work last year, based on this week’s Business Journal list. That’s down nearly 23% from 2016, and ends two years of year-over-year gains.
It’s the lowest figure area title insurers—which write policies protecting real estate buyers from claims contesting ownership—reported since 2014, when $27 billion in transactions was represented on our annual list.
Transaction volume declined 27% year-over-year as rising interest rates took a big bite out of residential refinancing-related work.
Mortgage buyer Freddie Mac reported this month that 30-year, fixed-rate loans were at about 4.46% last week, and are at their highest since January 2014. A year ago the benchmark rate was 4.1%.
“The 30-year rate has been on a tear in 2018, climbing 48 basis points since the start of the year and increasing for eight consecutive weeks,” a March 1 Freddie Mac report said.
Signs are pointing to more interest rate increases in the near-term. Federal Reserve Bank of Dallas President Robert Kaplan said last week that he favors three this year, as the U.S. economy, at 4.1% unemployment, is what he and other Fed members consider near full employment.
“Residential refinance orders are likely to trend downwards as mortgage rates rise,” said First American Financial Corp. Chief Executive Dennis Gilmore last month during his company’s quarterly earnings call with analysts.
• Santa Ana-based First American posted $9.1 billion in transaction volume here last year, down 19.5%. Still, it retained the No. 2 spot on the list behind Jacksonville, Fla.-based Fidelity National Financial Inc.’s affiliated businesses, which did $13 billion in work, a 19% drop.
The two top companies represent 65% of transaction volume on the list.
All but three entries reported year-over-year declines in business.
List data was provided by Irvine-based CoreLogic Inc., which was spun off from First American in 2010.
Profits Elsewhere
The slowdown in refinance work was more pronounced toward the end of the year; Gilmore said refinance revenue dropped 37% in the fourth quarter.
Refinancing accounted “for 13% of our direct revenue in the fourth quarter, down from 20% a year ago,” he said.
The good news is that refinance business isn’t one of the most profitable for most title insurers.
In general, they earn about $1,000 for every home refinance transaction they work on. Home purchases can bring nearly double that. Title fees for commercial transactions can reach $10,000 or more, depending on the transaction size.
Home sales continue to be strong nationwide this year.
“Our purchase revenue grew 12% this quarter as we continued to benefit from growth in residential real estate market,” Gilmore said.
“Closed purchase orders were up 3% and the ongoing housing inventory shortages across much of the country continue to constrain the market.”
“The residential purchase and commercial markets continue to drive our performance,” said Fidelity National Chief Executive Raymond Quirk on the company’s latest earnings call with analysts.
In the fourth quarter, “residential opened and closed purchase orders per day increased 5% and 1%, respectively … and total commercial revenue grew by 1% versus the fourth quarter of 2016.”
Gilmore at First American said, “Our commercial business continues to show strength with revenues up 6%. We believe our commercial business is poised for another good year, given strong market fundamentals.”
As with area mortgage lenders, rising interest rates typically result in lower head counts among title insurers. That norm isn’t represented in this week’s list, however.
About 4,200 area employees work at companies on the list, up 3.1%, Business Journal data show.
Companywide, cuts are ongoing. Fidelity National said it trimmed about 400 positions in the last quarter, and First American said it’s “taken the necessary actions to improve earnings” in the rising-rate environment.
Acquisitions are a quick way to boost operations, and a few deals involving ranked companies took place last year.
• Midyear, No. 8, Stewart Title of California Inc., bought No. 10 entry, Title365 Co. If combined on the list, they would rank No. 5.
Smaller acquisitions involving title companies in the $2 million to $8 million range “don’t really move the needle, so we’re looking for larger acquisitions, and generally those acquisitions reside in the West,” Fidelity Chairman William Foley said during his company’s latest earnings call.
