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Title Shares Suffer Foreclosure Fallout

NEW YORK ( TheStreet) -- Investigations into foreclosures of home lenders such as JPMorgan Chase ( JPM) and Ally Financial should not affect the title insurance business, but the market is punishing the stocks nonetheless.

Title insurers' stock took hits on Friday after reports that they are backing away from doing business with JPMorgan's foreclosed properties due to rising concerns that faulty documentation on a foreclosed property could lead to the new owners facing legal action by the former owners over the property title.

On Friday Fidelity National Financial's stock fell 4.5% to $15, while First American's (FAF - Get Report) stock slid 3.4% to $14.43. Monday morning Fidelity National's stock opened down 11 cents at $14.93 a share, while First American's stock opened down 15 cents at $14.33 a share.

Old Republic National Title Insurance said on Friday that it will no longer write polices for properties foreclosed by JPMorgan.

Meanwhile, Fidelity National Financial (FNF - Get Report) put out a press release reacting to a Bloomberg story that claimed that the defective documentation would blight titles.

In the release Fidelity argued that the investigations will not have an adverse impact on its title business for several reasons, including the fact that new owners and their lenders would have the rights of "good faith purchasers" that should not be affected by poor documentation. The statement also noted that even if a judge sets aside a foreclosure, the lender would be required to return all funds and would result "in no loss under the title insurance policy."

The American Land Title Association (ALTA) also issued a similar release.

RBC analyst Mark Dwelle and KBW analyst Nathaniel Otis told TheStreetthat the investigations into the foreclosure ruling should have little impact on the industry.

"There is nothing in the disputes for foreclosures and the foreclosed that would create a title break," Dwelle said. "Really the biggest challenge right now is the real estate market, which is just lousy."

"It doesn't look like the title companies should have any real exposure," Otis said.

Three insurers own about 85% of the market, according to Dwelle. The largest title insurer is Fidelity National Financial. The second largest title insurer is First American Financial Company (FAF - Get Report). Stewart Information Services (STC - Get Report). is the third largest player in the market.

Dwelle said that second results for the insurers were better than 2008 and 2009, but not as positive as results for 2005 and 2006 due to the housing market. "Insurers were helped in the second quarter by first year home buyer credit and this quarter they should be doing pretty good due to refinancing activity."

"The challenges in the market right now are really lower order volumes and well as companies getting expense bases in line with those order values," Otis said.

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