Market Questions Title Insurer Exposure

Given the rising costs of insuring against title defects before the recent foreclosure mess, investors haven't put much faith in the title-insurance industry's statements of limited exposure.
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NEW YORK (

TheStreet

) -- When it comes to title insurers' exposure to the "robosigning" fallout, the market seems to think

the lady doth protest too much.

The industry has maintained that it has little to no financial exposure to legal skirmishes that banks are now facing over foreclosure documents that may have been improperly handled. Attorneys general in dozens of states are taking action over the practice of "robosigning," in which employees of banks or third parties signed thousands of foreclosure documents without verifying information.

Title insurers would seem to have a liability if courts deem documents to be invalid. The industry cross-checks title documents, then insures that information is correct. If a homeowner with title insurance has issues due to document errors or previous owners claiming to have a legal right to the property, title insurers must stand behind the insured owner in a lawsuit.

Fidelity National Financial

(FNF) - Get Report

, the country's largest title insurer, said last week that the robosigning mess "will not have a material adverse impact on its title business." The insurer said that new owners and lenders still had "rights of good faith purchasers," even if there were document defects. Fidelity added that, even if a court deems a foreclosure to be wrong, the foreclosing lender would have to return all the funds obtained in the earlier transaction.

The American Land Title Association, an industry trade group, stood behind those comments.

"It is unlikely that a court will take property from an innocent current homeowner and return it to a previous homeowner who failed to make payments on the loan subject to the foreclosure," said Kurt Pfotenhauer, CEO of ALTA.

Still, ALTA acknowledges that the cost of insuring against lost property claims soared to $480.5 million during the first half of this year, a 14% rise from the same period in 2009.

The industry reacted to the "robosigning" news by taking a giant step back from new transactions. Reports indicating that executives at GMAC and

Wells Fargo

(WFC) - Get Report

had signed off on faulty documents, combined with foreclosure freezes and investigations into practices at GMAC,

Bank of America

(BAC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

,

PNC Financial Services

(PNC) - Get Report

,

U.S. Bancorp

(USB) - Get Report

,

Citigroup

(C) - Get Report

and

Goldman Sachs'

(GS) - Get Report

loan servicing division, Litton Loan Servicing, sent shivers through foreclosure auctions.

"Title insurers and buyers in foreclosure market were both staying away because they're suspicions and don't want to get tied up in a fight over titles," says James Keneally, a partner at Kelley Drye & Warren who has represented banks in financial-fraud cases. "Things were falling into turmoil."

But while big banks' stock prices ended the week up on Friday, their title-insurance counterparts were deep in the red. Fidelity took the biggest hit, losing nearly 5% to close at $14.33, while other big title insurers

First American Financial Corp.

(FAF) - Get Report

and

Old Republic International

(ORI) - Get Report

lost 2.5% and 0.7%, respectively, to close the week at $14.12 and $13.58.

On Monday,

Bloomberg

reported that ALTA was moving toward an agreement with lenders and regulators that would potentially insulate the industry from losses. First American and Old Republic shares took back some of their losses late in the day after the story posted on the Web, though Fidelity lost another 1.5%.

Part of the issue for investors considering title insurer stocks right now is that there's no clear indication of what might happen in court - or if proceedings will get there. It's also unclear how much any of it stands to cost and who will end up paying for it.

So far, the only definitive number that's come out has been from the office of Ohio Attorney General Richard Corday, who sued GMAC seeking $25,000 per faulty foreclosure document, plus untold restitution for affected consumers. But that case doesn't seem to have much to do with title insurers. It's hard to tell whether homeowners who defaulted and are now challenging the veracity of foreclosure documents have the financial wherewithal to battle anyone in court.

"The delays caused by the foreclosure moratoria will surely help some homeowners right their finances and save their homes," says James R. Gomes, director of the Mosakowski Institute for Public Enterprise at Clark University. "What is hard to tell is what will happen when people who have already lost their homes challenge the validity of their foreclosures and thus call into question whether the new owners have good title to their properties and the new lenders have adequate security."

Since title insurers had already been facing higher costs from insuring against title errors, though, it's understandable why investors may doubt their statements of limited exposure.

"Court rulings on valid foreclosures are going to be challenged," Pfotenhauer told

Bloomberg

. "That means we may get pulled into litigation."

-- Written by Lauren Tara LaCapra in New York

.

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Lauren Tara LaCapra

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