In these challenging times, banks, life insurers, pension funds and other mortgage lenders looking for revenue should search no further than their existing commercial lending groups. Settlement services tied to U.S. commercial mortgage loan closings constitute a multibillion-dollar sub-industry. By creating joint-venture title insurance agencies and using affiliated and preferred vendors, commercial lenders could net significant additional revenue without increasing loan proudction. * The bulk of this revenue would come from capturing title insurance premiums on commercial refinance transactions. Additional revenue could result from mortgage lenders offering customers an optional, all inclusive price for lender--required settlement services, which would include a reasonable profit for the lender. The Real Estate Settlement Procedures Act (RESPA) is inapplicable to commercial transactions, but lenders would still need to comply with anti-tying regulations and applicable state law.
Where's the money?
Banks and other residential mortgage lenders have been selling title insurance through affiliates and joint ventures for years. In fact, many of the nation's largest residential lenders already have affiliated vendor-management companies (VMCs) or jointventure title agencies that service a large percentage of U.S. residential refinances.
To date, VMCs and other lender--affiliated settlement-service providers have focused their efforts on capturing residential transactions. There is a growing awareness, however, that commercial settlement services are an untapped market for lenders and offer a higher profit margin than residential settlement services.
According to a November 2006 report by Oldwick, New Jersey-based A.M. Best Co. Inc., the leading insurance industry rating agency, underwriting commercial transactions represents the highest profit-margin activity for title insurers.
Only 2 percent to 5 percent of insured transactions produce 20 percent to 25 percent of all title insurance premiums written. (This estimate is based on the 2006 Pennsylvania Title Insurance Statistical Report [revised], published by the Title Insurance Rating Bureau of Pennsylvania [TIRBOP], Wayne, Pennsylvania). Between 2 percent and 5 percent of all policy types written in Pennsylvania in 2006 were for insured amounts equal to or greater than $500,000; these transactions are assumed to involve commercial property and accounted for between 20 percent and 25 percent of title insurance premiums earned in Pennsylvania. Pennsylvania statistics have been extrapolated to estimate total premiums earned on all U.S. commercial transactions, both purchase and refinance. It is likely that similar ratios hold true for other settlement products, including residential vs. Commerical appraisals, surveys and property inspections.
In 2007, title insurance premiums earned on U.S. residential and commercial real estate transactions were $13.9 billion, according to the Washington, D.C.-based American Land Title Association (ALTA). (This amount does not include premiums earned in Canada, Mexico, Guam, Puerto Rico, U.S. Virgin Islands, American Samoa or "aggregate/other" jurisdictions.) Approximately 20 percent to 25 percent--or $2.8 billion to $3.5 billion--resulted from commercial transactions. (This estimate is based on the 2006 Pennsylvania Title Insurance Statistical Report.)
But how much of this potential revenue could mortgage lenders capture? Excluding purchase transactions, which are notoriously difficult to control, U.S. commercial refinance transactions generate approximately $1.5 billion in title insurance premiums annually, according to an estimate based on the 2006 Pennsylvania Title Insurance Statistical Report.
By implementing some or all of the strategies outlined in this article, lender-owned title insurance agencies and VMCs could conceivably capture a large percentage of these premium dollars. …