BANGALORE (Reuters) - Title insurer LandAmerica’s LFGRQ.PK bankruptcy is unlikely to set a trend for its surviving peers, who though roiled by falling demand amid the housing market meltdown may see a rebound in 2009.
Instead, the failure of LandAmerica, which controlled 20 percent of the title-insurance market, may prove to be a boon for the ailing industry as the exit of a big player leaves a larger market share for the rivals to grab.
“(LandAmerica) overloaded its balance sheet with debt and created a liquidity problem for themselves, which does not have any bearing on how the other companies are operating their businesses,” RBC Capital Markets’ Mark Dwelle said by phone.
The other companies are functioning as they are expected to during a real-estate downturn and are taking appropriate actions to solve their short-term earning problems, Dwelle said.
Once the No. 3 U.S. title insurer, LandAmerica, filed for Chapter 11 bankruptcy protection in November and agreed to sell its largest underwriting businesses, after bigger rival Fidelity National Financial (FNF.N) withdrew a $126 million takeover offer extended earlier in the month.
Title insurance guarantees that property owners have title to property and can legally transfer that title. Many lenders require that buyers have the insurance before extending loans.
The housing slump, worsened by tight credit and an economy that contracted in the third quarter, has resulted in lower demand for homes, cutting into title insurers’ revenue.
Most of the companies, including Fidelity National and Stewart Information Services (STC.N), have taken drastic steps like cutting jobs and slashing dividends to curb losses in the recent past.
Shares of Stewart Information have fallen 27 percent since January, while those of First American (FAF.N) have lost 17 percent of their value during the period.
IT‘S NOT THE END
The real problem for the companies has been the declining mortgage-origination volumes.
The industry is dependent upon total mortgage-origination volumes, which have been declining now for more than 18 months, RBC’s Dwelle said.
Total mortgage origination (1-4 family) fell 28 percent to $415 billion in the third quarter, according to Mortgage Bankers Association.
On October 21, the Mortgage Bankers Association estimated U.S. mortgage volume will fall to $1.67 trillion in 2009 from $1.86 trillion this year and $2.31 trillion in 2007.
“When real-estate volumes stabilize, these companies will move back toward a modest degree of profitability,” Dwelle said.
Several Wall Street analysts see the U.S. economy turning around in the second half of 2009 and if that happens, title insurers will also reap benefits.
However, order volumes may continue to fall if the market did not stabilize, say some analysts.
“If the market continues to decline from the present levels, that would create further stress on all of these companies,” Dwelle said.
The companies will have to adjust their cost structures if real-estate volumes continue to decline, Dwelle added.
Fidelity National recorded weak order counts for July and August, while the largest U.S. title insurer, First American, saw a 22 percent decline in title orders in the third quarter.
Going into 2009, title insurers will “be hoping for order volumes to stabilize and some bit of seasonality to return to the business,” Nathaniel Otis of Keefe, Bruyette & Woods said by phone.
Reporting by Sweta Singh in Bangalore; Editing by Vinu Pilakkott