Monday, September 16, 2013

Multi-state title agents: TAVMA may be your ticket off the island

At its convention last week, the AFL-CIO adopted a resolution inviting like-minded trade groups to join the union's effort to reverse the labor movement's waning political clout. AFL-CIO president Richard Trumka and his allies cite years of shrinking union membership as the driving force behind the initiative. The plan, in part, gives liberal groups a say in AFL-CIO decision-making; relinquishing power to allies to gain power in Washington, DC. Critics of the plan argue that alliances with non-union counterparts will dilute the AFL-CIO's power and distract the union from representing its dues-paying members. They're probably right.

Alliances among interest groups, whether they're trade unions or trade associations, work well in matters of mutual interest. They fall apart when interests compete. In fact, building alliances with more powerful trades on issues we agree on is how the majority of non-profits--all but the very largest of which generate mom-and-pop-shop type revenues--survive in the political arena. They've become adept at supporting the issues other organizations embrace and bowing out when their viewpoints diverge. The AFL-CIO's success in its outreach initiative turns on its ability to work with and support the union's non-union cohorts when it can, remain neutral when it must, and avoid taking on issues it has no business becoming involved in.

So too must the title industry trades, and they do. 

The multi-state mortgage settlement services model provides mortgage lenders and consumers cost, service, and scale efficiencies using information systems and processes specifically designed to transact a large number of closings pretty much the same way from one to another jurisdiction. Meanwhile, interest groups in a growing number of states erect barriers to interstate competition. These include residency restrictions for title agent licensees, bricks-and-mortar requirements, and unauthorized practice of law (UPL) statutes or regulations. UPL is an increasing challenge to interstate commerce, with a handful of states deeming non-attorney real estate closings unlawful or unethical. Barriers like these eliminate much or all of the cost savings lenders and consumers enjoy. I'm told the average cost differential in UPL states is upwards of + $100 per transaction. (Note too the vast majority of states permit lay closings, out-of-state, and non-resident competitors without showing of additional harm caused to consumers versus lawyer closings.)

The multi-state title agent's AFL-CIO predicament.

They're neither big enough nor powerful enough nor organized enough on their own to push back against organized efforts by state land title associations (LTA), State Bar associations, or other in-state interest groups to box competitors out of the state. So they organize. Many join the American Land Title Association (ALTA), the national association and voice of all things title insurance. Supporting a trade association is almost always a better alternative than sitting on the sideline (unless the trade doesn't offer a sufficient return on your dues-paying investment). Though I encourage every firm in the title industry to support the ALTA, for many reasons, ALTA (national) can't resolve the multi-state agent's barriers-to-entry problem(s) being discussed here. Title agents expanding their footprints need to understand this.

Unlike the AFL-CIO, which may or may not succeed in navigating competing interests among its core labor union and proposed workers-at-large constituents, the ALTA is keenly aware that it has UPL opponents and advocates in its midst. Imagine the uprising among state LTAs, the real estate section(s) of state affiliates, or the association's title underwriters and multi-state title agents if ALTA sided with one camp or the other. They've remained neutral thus far and for good reason. Don't look for this to change any time soon.

A plausible solution.

As many readers are aware, I formerly served as the executive director of the Title Appraisal Vendor Management Association (TAVMA), a leading advocate for removing UPL, and more recently residency and bricks-and-mortar requirements impeding interstate commerce in the title industry. Today, I serve the group in a limited non-policy role of outside administrator; answering the phone, filing forms and managing the books.

Recently, a small group of TAVMA leaders asked me to write a proprietary white paper about the case for recasting TAVMA to serve multi-state title agents. I've written in the Mortgage Third Party Risk Blog, and elsewhere about this being a significant yet under-served segment of the title industry. I've also written about the exodus from TAVMA of its appraisal management contingent following passage of the Dodd-Frank Act of 2010. A few large AMCs left to form a trade group in Washington, DC; most others just left. This leaves TAVMA comprised largely of multi-state title agents, a group it's  been advocating for on a limited basis since scaling back operations.

My recommendation to these leaders is, the new TAVMA must become as big and as powerful and as well-funded as it can, as quickly as possible, in order to engage these state-level turf battles. Or go home.

Thursday, September 5, 2013

What next for centralized vendor management platforms?

The drop off of interest rate-sensitive refinance activity gives the mortgage settlement vendor management
company  (VMC) industry pause to wonder about the future of centralized back-office loan production. Word of layoffs among VMCs big and small suggests that shrinkage in pipeline volume is a real concern. Equally troubling for some is a nagging Achilles Heal dating back to the industry's earliest days: the centralized VMC business model is built to serve refinance clients. As refinance loans continue to dry up, how successful will VMCs be servicing lenders in buy-sell transactions?

This is not to suggest VMCs don't do a decent volume of purchase money transactions. They do, in large part because big national clients like BofA, Wells Fargo, Citicorp and others have committed to the centralized loan production platform as an alternative to branch office personnel processing mortgage loans. And they continue to make a living handling foreclosure work. Yet with the lion's share of purchase transactions remaining in the hands of realtors, savvy buyers using online lending channels, and yes, mortgage brokers what now?

It's generally recognized that buy-sell transactions are far more complex and include many additional steps in the loan production process. A few years ago, I had the opportunity to conduct time and motion studies on several big name transaction management systems. My research found that the average title and closing process in a purchase-money transaction consisted of upwards of 75 unique steps; refi's involved maybe half that number. And that was just the title-to-close (fund, record, and disburse) continuum.

Purchase transactions also involve numerous parties to the transaction not generally found in refinances. Realtors, sellers, buyers, loan brokers, radon testers, dye testers, and others may look harmless. But don't turn your back on them. In refi-ville, the VMs customer face time is significantly less intensive and extensive. To make inroads into the buy-sell arena VMCs need to concentrate efforts on making multiple parties rave about their service... in a good way, of course!

Then there's the specter of the Consumer Financial Protection Bureau (CFPB) and its drive for transparency and clear and numerous communications throughout the mortgage loan process. CFPB's customer complaint database is just one example of the Bureau's interest in all things customer satisfaction. Assuring customer satisfaction is always an important consideration for any lender and-or third party vendor. Especially in instances where bank or vendor personnel interface with the consumer. A rule of thumb ought to be that every customer interaction has the potential to create a violation of one or another consumer financial protection act. A confidential consumer file left unattended on a desk; a momentary lapse in ethical behavior; a career-threatening utterance by a tired, overworked, and exasperated customer service representative; or worse can trip a complaint and "target review" by CFPB investigators.

My point: VMCs used to working in the refinance space with a single client contact, limited customer contact, and processing-by-committee/team approach have relatively limited exposure to consumer protection act gaffes. Purchase transactions involve more steps, more customer interactions, more complexity, and as a result are more prone to customer (dis)satisfaction gaffes. VMCs of the future will need to invest heavily in training, automation, and other mechanisms to reduce the risk of such gaffes. They'll also need a few entrepreneurs in their midst to figure out how to adapt the VMC business model to satisfy the many additional demands and risks the purchase mortgage space presents.

I don't think it's a wild-eyed exaggeration to speculate as to whether the next iteration of the centralized loan production model even includes third party vendor management companies. Lenders may decide the safest long-term route is to bring vendor management back into the bank.

Thursday, August 15, 2013

Note to Multi-State Title and Settlement Businesses: Organize!

The first step in leading change in organizations is to create a sense of urgency, says John P. Kotter, leadership consultant and author of Leading Change [1]. Multi-state title agencies, your competitive environment is changing. Time to take on a sense of urgency about organizing to promote and protect your interests.

Multi-state mortgage settlement service providers occupy an unenviable spot in the New Age of Regulating Everything With a Dollar Sign (RE$). Mounting political and regulatory pressures at both the state and federal level(s) of government threaten to upend a half-century's worth of innovation in the centralized title insurance and closing management business model. Independent regional and national title agents, vendor management companies, notaries, and others not among the mega-settlement service firms are caught smack in the middle of competing interests among individual state land title and bar association(s) and the new consumer protection bureau.

In this corner...

Some state LTAs and Bar Associations continue a Constitutionally questionable pursuit of legal statutes and/or regulations to protect in-state title and escrow firms from out-of-state competitors. The Title Appraisal Vendor Management Association (TAVMA) and its supporters have long opposed such protectionist gambits as violating the Dormant Commerce Clause of the U.S. Constitution. Yet the practice persists, and seems to proliferate, as centralized mortgage lending continues to play out.

Here's a partial list and a few examples of the three-most common state-level activities elbowing out independent multi-state settlement firms:

1.     Proliferation of Unauthorized Practice of Law (UPL) Statutes and State Bar Opinions.

The State of Massachusetts has seen the REBA v. NREIS case advance attorney control in that state.  The current requirements are that an attorney must be a primary part of any real estate transaction from the review and certification of title abstracts to the supervision of settlements including the control of disbursements.  Out of state deed preparation companies have been instructed to cease and desist from providing their services in the state even if they have utilized a state licensed attorney. I'm not sure why realtors and Lenders closing loans in-house apparently aren't held to the same standard; title underwriters are though; they're getting nasty letters. 

In North Carolina, the Bar Association continues to ratchet-up the pressure on out of state agents attempting to insure title and close transactions.  The Bar has become very aggressive in making certain that NC attorneys certify all title and approve all clearance of title prior to issuing title insurance.  The Bar continues to push for more of a Massachusetts’s type of control, dragging multi-state agents into the ring for a pummeling. 

The Georgia Bar has successfully pushed for attorney controlled closings either by attorneys or paralegals working under their “direct” supervision.  In the past year they have succeeded in requiring that all proceeds of real estate transactions must be disbursed by a Georgia licensed attorney. The class-action bar has entered the ring. 

In Mississippi there is currently pending before the Supreme Court of that state a motion that would require attorneys to handle all real estate closings and disburse them as well. 

The West Virginia Bar has continued its pressure to control all aspects of the real estate closing.  Currently, attorney title examination and certifications are required.  The Bar’s opinion is that attorney closings should be required but this has not been mandated by their Supreme Court.  An attempt to limit a lender from directly close and fund its own credit transactions was dropped after objections from the lending industry.

2.     Bricks-and-Mortar and Residency Requirements. 

Some state bar and land title associations have found a way to curb incursions of out-of-state competition through title agency bricks-and-mortar and residency requirements. Alabama, which previously required title insurance agents to form a domestic entity for that purpose, recently expanded the scope of the rule. As of June 1, 2013, title agencies must have brick and mortar in Alabama.

In 2012, the Colorado legislature through the appropriate committee narrowly blocked an attempt sponsored by the Colorado Land Title Association that would have required brick and mortar for all title agents.

In Montana, a recent bill would have required all out of state licensed title agents to have their title policies countersigned by a domiciled Montana state title agent.  This provision was eventually removed as a result of lobbying pressure. 

In a related development, some states seek to restrict or even outlaw notary closings.

3. Title and Escrow Commission Incursion into the Business of Title Insurance. 

In Utah, the Insurance Department’s Title and Escrow Commission (T&E Commission) sought to eliminate out-of-state agents, prohibit notary closings, and dictate title search criteria exceeding guidelines issued by the title insurance underwriters. This is part of a growing trend, in which public agencies in places like Utah, Colorado, Alabama, and Arkansas erect regulatory barriers that threaten the multi-state title agency model, ignoring the Commerce Clause of the United States Constitution. 

Proponents of the multi-state title and settlement services platform argue that title insurance activities can be effectively orchestrated in centralized production environments. They point out that entrepreneurs and title insurance mainstays alike invested heavily over the years in innovative information technology, infrastructure, and risk mitigation solutions meeting the demands of the increasingly centralized mortgage lending industry. And they argue, that there's no showing of proof that consumers are any less financially served by non-resident and/or non-attorney title and closing professionals. Expect this shoving match to continue. Expect also another big hitter entering into the ring, albeit for different, yet equally self-serving reasons as the current combatants. 

And in the opposite corner...

The Consumer Financial Protection Bureau (CFPB), either willingly or maybe unwittingly, is designing rules tending to favor supervised institutions' use of a few mega-real estate settlement services vendors--those sufficiently large and deep-pocketed to extract compliance through fear of fines for violating any number of consumer protection laws--over an expansive pool of small and midsize independent providers. Deal breakers for most firms include rules dealing with data security, disaster recovery, and business continuation. Although limiting third party providers to a keenly watched and contractually bound few vendors makes good sense for many reasons, compliance costs can be way beyond the financial means of all but the largest firms.

Opponents of CFPB's mega-service provider bias--and those of us who worry generally about the future of small business in America--appear to have a powerful ally: The Dodd-Frank Act (DFA). That's because, among the stated goals of the DFA is to encourage minority-owned and entrepreneurial small businesses in industries supervised by the CFPB. A small relief to small business people, meaning of course, the vast majority of independent title, closing management, and centralized settlement services companies not among the largest and most well-financed.

And in the unenviable middle...

These same independent title, closing management, and centralized settlement services companies not among the largest and most well-financed.  Industry leaders need to do something in the way of collective action to keep from being trampled by these heavyweights. Success or failure will depend on the industry's ability to organize to become strong enough and powerful enough to influence the discourse about the future.

Ironically, actions by the multi-state crowd to push back against CFPBs mega-vendor bias should find curious and unsettling allies in the very states seeking to keep them from crossing their state lines. That's because both camps fear loss of business to the elite few national firms. Protectionist state bar's and LTAs want to force the engagement of the thousands of law firms scattered throughout the state(s) to conduct title and/or closing functions. Multi-state agencies want simply to stay relevant in the New Age.

Staying relevant in the New Age requires collective action among practitioners of the multi-state model.


1. Kotter, J.P. (2012). Leading Change. Boston, MA. HBS Press. ISBN-10: 1422186431 |
ISBN-13: 978-1422186435

Thursday, May 30, 2013

An inevitable choice: What to do when service providers go all robo-signer?

An article in yesterday's Wall Street Journal, Retailers' Dilemma: Cut Off or Help Fix Unsafe Factories (subscriber-access only), illustrates the inevitable choice mortgage lenders face in the Age of Regulating Everything with a Dollar Sign in Front of It (RE$). Does a client cast a third party service provider to the lions for violating a CFPB-prompted "Thou shalt protect consumers from your own suppliers' evilness?" Or does a client help to rehabilitate the supplier to conform to its 36-page (21,000 word) General Service Agreement? 

The WSJ piece describes zero-tolerance clients like Wal-Mart, which reportedly cuts off factories for violating their strict production and safety policies. It also describes firms like H&M, a large clothier that instead works with factories to fix ethical lapses, contract violations, health and safety standards. Two retailers, two views on handling contractual violations. The same dilemma faces business executives in any line of work in which the client must choose either to outsource work or do the work in-house. So it is for the consolidating and highly supervised mortgage lending industry. 

It is little secret that the Consumer Financial Protection Bureau (CFPB), and big time lenders, see value in reducing the number of third party suppliers used to produce compliant mortgage loans. For the CFPB, it's better to oversee say 10 big supervised institutions than a hundred or a thousand and ten. Likewise, it's better for a mortgage bank to oversee a small handful of suppliers headquartered in five cities than a hoard of suppliers spread across 3400 or so U.S. counties. Shackle these few big suppliers with 36-page general service agreements; put the wood to them for hiring and releasing into the population the next Robo-signer. 

Which leads to the question of what to do with one or a few of these chosen providers when CFPB says they've run afoul.  Should they be cut off, sued for every ounce of restitution, and their workforce of living breathing human souls let go to find a new slot in the big world of work? Or, should the client stand and work with its supplier to make right inevitable failures? 

My wish is for lenders to work with their service providers to fix problems as they come along. It seems a more humane way.  

Wednesday, May 29, 2013

FNF's Acquisition of LPS is another step along the path to industry-consolidation

Yeah yeah. I told you so. The settlement services industry continues to consolidate.

Yesterday, Fidelity National Financial (FNF) announced that it is acquiring Lender Processing Services (LPS). Published reports put the value of the purchase at about $2.9 billion. And It brings what used to be Fidelity National Information Services (FNIS) back into the FNF family. Of course, the family's bulked up in the last decade with the purchase of a now-very (very) large ServiceLink, and more recently ATM Corporation. Clearly, FNF is positioning itself to be the largest non-bank-controlled provider of third-party mortgage settlement services in the land. But they're not alone.

Several formidable competitors are growing big to compete for too-big-to-fail back office settlement services work. Among the contestants in the go-big-or-go-home sweepstakes are Dataquick, which recently acquired RELS Title (a former affiliate of Wells Fargo & Co.), and Nationstar, which acquired and then combined Equifax Settlement Services into the firm's subsidiary, Solutionstar Settlement Services LLC. (See our post here.) Title Source, Inc., remains in hot pursuit of size and market share through a well-managed organic growth strategy (as we posted here and here). Look for First American Corporation to make similar moves to keep pace.

As we've reported, the next generation title insurance, appraisal, closing, and flood reporting business model is taking shape. It is what I refer to in this article (and this one) as the Go-Big-or-Go-Home strategy: Too-big-to-fail bank clients working with big-but not too-big-to-fail third party service providers.

Here's a link to my white paper, Five Super Trends: The Future of the Real Estate Settlement Services, for your consideration. JS

Sunday, April 28, 2013

My Dilemma

I'm at a career crossroad and can benefit from any points in the right direction that my readers have to offer.

The Mortgage Third Party Risk Blog is doing great. Topics discussed on the Blog range from appraisal management companies (AMCs), to title insurance and title agency, to Fed/State legislation and regulations impacting the settlement services industry. I'm getting upwards of 100 visitors per day, and soon will hit the 12,000 visitor mark! And my Alexa ratings continue to show traffic improvements.

As for my consulting career, I've worked with numerous small businesses over the past few years on business growth, feasibility, strategic planning and foresight projects. In addition, I continue to serve as the outside administrator of an industry trade organization (TAVMA). And, I am a frequent speak at industry conferences on topics relating to the future of the industry, the Consumer Financial Protection Bureau (CFPB) and Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), and strategic planning... with an eye to the future. In fact, I'll be speaking at the upcoming National Settlement Services Summit (NS3) in Cleveland, Ohio, on June 12, 2013. I'll look forward to meeting you there.

Here's my dilemma.

I describe myself to colleagues as a passionate forward-thinking representative of the real estate mortgage settlement services industry. I believe that my blog, articles, white papers, and consulting engagements make this clear. However, writing a trade blog, speaking at conferences, doing retainer- and project-based consulting work, and of course being a university adjunct faculty member (a highly gratifying job but one requiring a person to carry a ridiculous course load to make ends meet), isn't generating a sustainable income stream.

So here's my question:  What can I do to continue to represent the settlement services industry and make a living at it? 

Is it:
  • Designing and delivering onsite adult education courses in topics pertaining to leadership (leading change, emotional intelligence, futuring and foresight, etc.), new-hire orientation, or related matters? 
  • Teaching organizational leaders about the content and importantly how to design leader-centric approaches to dealing with the fully implemented CFPB requirements for third-party service provider oversight? 
  • Focusing more attention on leading strategic planning and foresight projects? (I'm finding some interest in this offering, however, I'm struggling to understand the scope and extent of the need.) 
  • Or something else? 
Futurists have long employed Delphi surveys as a means to poll thought leaders independently and collectively about emerging trends and outlooks about the future. Essentially, the surveyor (me) reaches out to a select group of informed thought leaders (you) to share their insights, observations, and outlooks; in this case what it is I can do to serve the settlement services industry and earn a sustainable buck.

Please give my dilemma your thoughtful consideration and email me, in complete confidence, with your thoughts. I will collate the input received and report back to my Delphi volunteer participants to clarify and hone my understandings of the collective wisdom.

With your support, I 'll have alternatives to the wife's counsel to, um, get a real job

Thank you for the courtesy of your wisdom. It is greatly appreciated! 

~ Jeff

Friday, April 19, 2013

North Carolina's Slippery Legislative Slope: AMC Escrow Accounts

Act as if the maxim of thy action were to become 
by thy will a universal law of nature.
~  Immanuel Kant

 Is compelling clients to deposit and pay vendors through escrow accounts
a principle that governments should follow? 
~ Jeff Schurman


If it's such a grand idea to force appraisal management companies (AMCs) to pay appraisers through escrow accounts, why doesn't the Tar Heel State force every client to pay its vendors that way? If it's such a grand idea, don't restrict the proposed law to just AMCs. Apply it universally. The better option might be to drop this idea like a stone. The precedent it'd set for other industries makes it not such a grand idea.

The AMC escrow account mandate
I was called last week by a former member of the Title Appraisal Vendor Management Association (TAVMA), where I previously served as the executive director. Full disclosure: TAVMA remains a client of my association-management firm. The caller reported on a proposed bill before the North Carolina General Assembly seeking to require AMCs to separate the appraisal fee and AMC administration fee, and deposit the appraisal fee (only) in an escrow account. The appraiser would be paid from the same account. Click here to view the text of House Bill 565.

SIDEBAR: HB 565 AMC Escrow Requirements


SECTION 6 . G.S. 93E - 2 - 4 reads as rewritten:
 § 93E - 2 - 4. Qualifications for registration; duties of registrants.  (10a) A certification that the entity has established a trust or escrow account in which the portion of all receipts from the entity's clients that are to be paid to appraisers are deposited into the account when the fees are received from the entity ' s client. The certification shall include the name of the financial institution in which the account is established. 

SECTION 8. G.S. 93E - 2 - 8 reads as rewritten:
 § 93E - 2 - 8. Disciplinary authority.  (a) The Board may, by order, deny, suspend, revoke, or refuse to issue or renew a registration of an appraisal management company under this Article… if the Board determines that… the applicant or registrant has done any of the following:

… (8) Commingled the appraisal fees owed to appraisers with the appraisal management company ' s operating or other funds or failed to maintain and deposit in a trust or escrow account in a bank as provided by subsection (g) of this section all fees for appraisers received by the appraisal management company . The trust or escrow account shall not bear interest unless the appraisers authorize in writing the deposit be made in an interest - bearing account and also provide for the disbursement of the interest accrued.

SECTION 9. G.S. 93E - 2 - 9 is amended by adding the following new subsection to read:  
(c1) Every appraisal management company shall maintain complete records showing the deposit, maintenance, and withdrawal of appraisal fees held in escrow or in trust for appraisers.

Protecting NC appraisers from non-payment of invoices. 
There has been a lot of trade press coverage about small-AMC bankruptcies. I'm aware of just two (2): Evaluation Solutions and AppraiserLoft. Surely, there are others. I envision many small and mid-size AMCs closing up shop, or de-morphing (is that a word?) back into appraisal shops within a few years, for a variety of reasons. However, AMC failures simply cannot justify North Carolina enacting this proposed legislation. Bankruptcy laws have been dealing with debtor/creditor matters for years; they'll handle AMC failures accordingly. Proponents of HB565 must know this.

If AMC failures aren't the fundamental reason for HB565, what is? I'm guessing proponents of the law seek to ensure payment of appraisal fees by AMCs that don't go out of business.

But is the proposed legislation such a grand idea? 
To find answers to such questions as this, philosopher Immanuel Kant's categorical imperative is a handy tool. Kant's categorical imperative calls upon critical thinkers to Act as if the maxim of thy action were to become by thy will a universal law of nature. In other words, if this (law, regulation, company policy, etc.), is applied universally, Is it desirable, or not? Is it good for society, or not? And so on.

Kant's universal law opens a window into the important issues confronting humanity. In fact, it is a window most of us use all the time, whether or not we're even aware of it, at home, at work, and in myriad legal/ethical dilemmas.

We use it:

  • At home, with Junior: Is jumping off a bridge because our friends do a principle that everyone should follow? 
  • At work, with a Robo-signing co-worker: Is falsifying documents something that an ethical business should engage in?   
  • In legal/ethical contexts: Is illegally downloading songs from the Internet a principle that an ethical society should engage in? 

How would a universalist thinker frame a question about the wisdom of HB565? Perhaps like this:

  • Is compelling clients to deposit and pay vendors through escrow accounts a principle that governments should follow? 

Some might object, saying that we're not talking about ALL clients, just AMC clients. (Idiot!) Yet that is what universalism is about: the entire universe of clients and vendors. It enables us to assess whether the principle IS or IS NOT one governments should follow; and we'd act accordingly. Discerning what is right or wrong is a far better approach to decision making and problem solving than simply tuning the dial on the dashboard to WII-FM (Whats In It For Me).

To be clear, I believe requiring an AMC (or any other business) to pay its vendors through an escrow account is not a principle North Carolina (and other states) should follow. I can't imagine there being sufficient numbers of clients not paying their suppliers to justify the cost and downside consequences of enacting an all-escrow-all the time approach to commerce. I suspect the North Carolina Department of Commerce would agree, or make some serious edits to the business environment section of its website.

AMCs must respond to the challenge

This latest assault on the AMC business model comes at a precarious time for much of the AMC industry. Coordinating opposition to NC HB565 needs to happen now. Just like it was needed in 2010, regarding the appraiser independence section of the Dodd-Frank Act (DFA); in 2008, regarding the Home Valuation Code of Conduct (HVCC); during the past 3 years, regarding state-by-state AMC registration statutes. TAVMA was deeply committed to coordinating the industry's response to each of these initiatives. But not this time.

Although TAVMA members include the industry's premier title, closing and appraisal vendor management companies (VMCs), support from appraisal-only AMCs has been minimal the last few years. Thus, the Association's resources have gone to coordinating efforts affecting independent title agencies. AMC leaders need to act. Write letters, contact NC legislators, attorney's and lobbyists. Left unchallenged, the NC bill will be the template for other states to craft similar legislation.

Such a grand idea. Such a precedent for other industries doing business in the Tar Heel State.

Wednesday, April 10, 2013

Title Source, Nation’s Largest Provider of Title Insurance, Expands Footprint in California

Now licensed to perform title, escrow and closing services in all 58 California counties

Detroit, Michigan –  April 10, 2013 – Title Source, the largest independent provider of title insurance, property valuations and settlement services in the nation, today announced it has expanded its presence in California, and is now licensed to write title insurance policies in all 58 counties in the state. This is in addition to Title Source’s current presence in California, where the company has been providing escrow and closing services since 2004.

Title Source has been writing title insurance policies in the state’s most densely populated areas since its 2007 acquisition of Transunion Title and Escrow, but just recently expanded to include the entire state.  Also in 2008, the company’s service expanded to include title insurance in the most populated counties within the state.

“We are excited to extend our title coverage throughout the entire state of California and look forward to delivering the seamless and comprehensive service experience that our clients have come to expect from Title Source,” said Jeff Eisenshtadt, President and CEO of Title Source.

California is a major player in the overall real estate market.  According to a recent Zillow forecast for 2013, California holds four of the five best metro area housing markets in the country.

Having the ability to operate in all 58 counties in California benefits the consumer in that it allows for greater choice in shopping for the best combination of title rates and fees, most notably during a period where choice has become limited due to the number of companies closing down or leaving the California marketplace.

In Title Source, the consumer is provided with a highly qualified national title agent who maintains an exemplary regulatory record in the states in which it currently holds title and escrow licenses. 

“Successfully obtaining authorization from the Department of Insurance to operate in all 58 counties in California is a great achievement,” said Tim Donovan, Corporate Counsel at Title Source. “This is consistent with our mission to remain the largest independent provider of title insurance, property valuations and settlement services in the nation.”

About Title Source:
Title Source is the largest independent provider of title insurance, property valuations and settlement services in the nation. The company is an authorized agent of the highest rated title insurers in the industry and its solutions power many of the nation’s largest residential lending institutions. Title Source is a preferred provider to five of the top twenty FORTUNE 100 companies and many of the largest residential mortgage lenders. The company is based in Detroit, Michigan and retains regional operating centers in California, Pennsylvania and Texas. Title Source was named a Detroit Free Press Top Workplace in 2009, 2010, 2011 and 2012. For more information, visit Connect with us on Facebook, Twitter and our blog.

Tuesday, March 12, 2013

Looking Back, the FED Really Muffed the Definition of Reasonable

The definition of words is vital to clear communication. The FED didn't follow this rule when it came up with its now infamous presumptions of compliance with customary and reasonable appraisal fee requirements.

Some questions. If I were to intentionally ram your car with mine would it be appropriate to claim that it happens all the time? And therefore, I've acted reasonably in plowing in to you? Cars ram each other all the time, I'd say. So what I've done is similar to many others. Does this make what I've done a reasonable act?

Of course not. Yet that's what the FED did equating the term "reasonable" to the term "similar" within Presumption 1. Since then, all metaphorical hell has broken loose in appraisal world. It's time to fix the grammar usage error.

Words matter, making muffed definitions vital to correct. 
Here's what the Federal Reserve Board says about the first presumption of compliance:
First presumption of compliance (§ 226.42(f)(2)). A creditor and its agent are presumed to compensate a fee appraiser at a customary and reasonable rate if:  
  • The amount of compensation is reasonably related to recent rates for appraisal services performed in the geographic market of the property. The creditor or its agent must identify recent rates and make any adjustments necessary to account for specific factors, such as the type of property, the scope of work, and the fee appraiser’s qualifications; and,  
  • The creditor and its agent do not engage in any anti competitive actions in violation of state or federal law that affect the rate of compensation paid to fee appraisers, such as price-fixing or restricting others from entering the market.  
My issue with Presumption 1, continues to be the FED's distortion of the terms "reasonable" and "reasonably."  The FED says that,
"... the amount of compensation is reasonably related to recent rates for appraisal services performed in the geographic market of the property" (emphasis added). 
They really missed the mark on this one. Equating "reasonable" and "reasonably" to "similar" and "similarly," as in, if the rate is similar to recent rates paid for appraisal services it meets Presumption 1, throws a wrench in the entire customary and reasonable debate.

Oh, Definitions
We just need the FED to assign the right meaning to "reasonable" and "reasonably." That's all the Board needs to do to fix this C/R (un)happiness. Doesn't it make sense, that tying the reasonableness of something to its similarity to some other thing(s) undermines the utility of the term in matters of law and tradition? Reasonableness does not equal similarity to.

For instance, is it reasonable to surrender a body part for committing a petty theft? (A Google search of the topic returns over 10 million hits, so it is a sufficiently common occurrence in parts of the world to at least offer a glimpse of the conflicting pressures equating reasonableness to similarity.) Sure, it may happen all time. It may even be similar to, or even customary in other adjudications. But what if the theft is, say, of a loaf of bread?

The street urchin who lifts a loaf of bread to feed his hungry sister ought not be pursued for life. Yet, isn't that what happend to Jean Valjean, in Les Mis√©rables? We can argue that any breach of the law must be punished regardless of the nature or significance of the crime. Or similarities between one versus the other case irrespective of the value each involves.

In our industry, we have determined it unreasonable for a lender to up-charge an overnight delivery by say $25 beyond its actual cost. RESPA asked and answered the question, "Is it reasonable to take a $10 good or service and add another $15 for doing nothing of inherent value?" I doubt that HUD lawyers placed much weight on how similar such a practice was among lenders.

And what parent hasn't uttered, or child rolled their eyes hearing, the ages-old question, "Would you jump off a bridge if your friends did it?" We'd never approve or disapprove our children's activities based upon how similar of such an activity is to others.

Reasonableness, as it relates to the (2) presumptions of compliance shouldn't be determined by how similar it is to fees paid. Rather, "Is the appraisal fee reasonable compensation for the time and effort invested plus a return on this investment?"

What I'm urging the FED, and the rest of us, to frame the reasonableness of an appraisal fee question around the inherent reasonableness of the fee instead of how similar (or common) the fee might be.

Friday, March 8, 2013

AMC Cost Savings to Appraisers at Odds With the Doomsday Scenario

Ultimately, appraiser fees should start in the $400s not $100s, $200s or $300s. I have been doing my part by trying to educate my client base that without the increase in appraiser fees, we could be looking at a doomsday scenario in a very short time...
~Erik Richard, CEO, Landmark Network Inc. 
(in Valuation Review, 3/4/13)

Valuation Review continues to rock the "Customary and Reasonable" appraisal fee theme, most recently in an article in the March 4, 2013 newsletter entitled, Can higher appraisal fees avoid the doomsday scenario? (You'll need to be a VR newsletter subscriber to access the article.) I agree with the writer. In fact, I am convinced we're heading to an appraisal management company (AMC) "doomsday" scenario.

You read that correctly, an AMC doomsday. That's because the fate of the AMC business model--the very business model contributing to appraiser doomsday--is inexorably tied to the fate of the mortgage appraisal business model. No appraisers, no AMCs.

What is this Doomsday Scenario? 

The doomsday scenario goes like this.

In the not so distant future, some say 5 years hence, thousands of appraisers will have left the profession. Not because automated valuation models (AVMs) become sufficiently robust as to render appraisers unnecessary. We aren't there yet; maybe never. Fewer appraisers walk the earth because many have retired, re-careered, or run out of financial reserves to wait out the competition. The average appraiser age, which in 2012 was over 50 years old, in 2017 stands at 55 plus. How do we know? Because the pipeline of appraiser trainees has dried up. As recently as 2009, Top-10 Jobs of the Future lists included real estate appraisal as one of the hottest jobs around. No more. Educational degree requirements, appraisers unwilling to take on trainees, client restrictions on the use of trainees, and comparatively high salaries in other fields like health care and information technology have combined to keep new blood out of the appraisal profession. Absent a sustainable appraiser population the AMC industry collapses. The exceptions are the few AMC heavyweights able to leverage vast financial and marketing resources in the service of a small handful of to-big-to-fail mortgage originators. These firms prosper by offering menus of Broker Price Opinion (BPO)-type products, enhanced BPOs, automated valuation modeling technologies, perhaps even Global Positioning Systems (GPS) technology; maybe even Drones. They're able to sustain these generally low-end products by researching and developing additional non-valuation tools aimed at virtually every other profit center within the to-big-to-fail's back office.

Doing the Math to Quantify the Underlying Problem

So that's the doomsday scenario. Others will disagree, but I believe we started down this road, or perhaps hastened the arrival of our industry's doomsday, with the enactment of the Home Valuation Code of Conduct (HVCC).

When we wrote The AMC Full-Fee Hypothesis, my writing partner Rick Grant and I explained the stunning shift in the ways mortgage appraisals are acquired. We explained that in the good old days, before the Home Valuation Code of Conduct (HVCC) upended the traditional appraiser-client relationship of course, AMCs accounted for a small fraction of the appraisal acquisition marketplace. So it didn’t matter, systematically, that AMCs paid less than the full price for an appraisal. If AMCs represented say 10 percent of an appraiser’s book of business, and full-fee clients made up the remaining 90 percent, appraisers could withstand the discounted fees paid by the AMC segment. HVCC changed the calculus. AMCs now control the majority of residential appraisal orders. They are the 90 percent!  

Let’s do the back-of-the-napkin math. A certain appraiser completes 100 full appraisals in a period. Pre-HVCC, that breaks down to about 90 full-fee and 10 discounted AMC fee appraisal reports. For our purposes, we also say the appraiser makes $350 from full-fee clients and $225 from AMC clients (a lot of appraisers would challenge my AMC fee as being too high; but work with me here...). Ninety appraisals at $350 generates $31,500 in gross revenue; ten appraisals at $225 generates $2,250; a combined total of $33,750 for the 100 appraisals.

In the Post-HVCC era, using the same 100 appraisal orders, but with the distribution now reversed, the appraiser would generate $3,500 from their full-fee clients and $20,250 from their AMC clients; a combined total of $23,750 for the 100 appraisals. That’s a reduction of $10,000 per 100 orders. One appraiser survey from 2007 reported that 60% of the appraisers surveyed said they can do up to 10 appraisals per week. With this as our guide, we can reasonably estimate that the appraiser in my example completes about 500 appraisals in a year. Besides, using 500 makes the math easier on the back of a napkin. Our appraiser, with 90% of their book being AMCs, and 10% being full-fee clients earns about $50,000 less per year than they would pre-HVCC.

That AMCs Add Value by Reducing Transaction Costs

Some AMC executives would be quick to challenge the impact of the numbers laid out above. They'd argue that appraisers who work with AMCs can complete more appraisal reports with AMCs in the mix than without. And they'd remind that an appraiser has exactly two choices: 1). Perform all non-appraisal production tasks themselves, including tracking and updating client orders, communicating with parties to the transaction, handling market value disputes, marketing their services to mostly-centralized lenders sometimes a thousand miles away, etc.; or, 2) Let the AMC perform these and other non-appraisal production services in return for a discounted appraisal fee.

Should an AMC executive call, I would listen intently as they made their case. Yet in light of what seems to be a looming doomsday scenario I'd need to see quantitative proof. Because the appraisal profession is not reacting as one would expect the system to react given the cost-saving and therefore value-adding services the AMC business model promises.


Don't get me wrong. I have worked closely many of the AMC industry's leading executives. I am not an adversary, although I gotta say the Full-Fee Hypothesis paper led some to conclude I am! I said then, and will say again now that I'm not trying to destroy the industry. I'm trying to save it. As it stands, we're heading toward the doomsday scenario.

Avoiding this doomsday scenario requires mortgage lenders to step in and command AMCs to pay appraisers their full-retail or rate-sheet fees. Neither appraisers nor AMCs can force such a system wide increase on their own. Lenders must lead this charge.

Sunday, February 24, 2013

From the Archive: Conjecture about high AMC registration fees seems to be coming to pass

A highly informative article in Valuation Review confirms two of my conjectures, in October 2009, that high AMC (appraisal management company) registration fees influences the number of AMCs registering in a given state. 

The article, The AMC state registration experience (you must be a VR subscriber to read the entire article), by Jason Morgan, offers a clear-eyed assessment of the AMC registration bureaucracy that it's become ever since the Appraisal Institute rushed onto the scene to advocate state-by-state AMC registration. Unfortunately, what would have been a good idea if a single federal banking agency managed and enforced AMC registration, the process has become bogged down in unintended consequences coming with state-by-state oversight. 

There are any number of quotes from AMC operators attesting to challenges involved in AMC registration. Inconsistent rules and regulations, varying degrees of readiness among states to actually, you know, oversee AMCs, and high registration fees in some states are just some of these challenges. Yet the quote resonating with me comes from Frank Danna, president and chief operating officer of Appraisal Logistics.  
“Many of the smaller AMCs are finding it difficult to meet the financial burden of the state registrations and are electing to get out of the business or scale their businesses down.”  
Below is a reprint of an article I published back in March 2009, which supports Mr. Danna's observation and explains why this is coming to pass. It also suggests that my original conjecture was correct, despite the lamentations of my critics at the time. 

Yeah, a shameless I-told-you-so. JS

Why State Regulation of AMCs Will Put Small AMCs Out of Business
March 30, 2009

Finally, someone in media has reported what I've been trying to get across for the past month: That state registration and regulation of appraisal management companies (AMCs) will assure the survival of only the largest of the large AMCs.

Unintended Consequences
In a story, about a proposed AMC bill in Missouri in today's Valuation Review, I am quoted (correctly) as saying that, “'… (T)his new legislation will have unintended consequences. Small or in-state AMCs won’t be able to afford the initiation fee. The state is essentially forcing small or local AMCs out of business. They’re taking jobs out of the state and putting them in other states with the large, national management companies.'”

The story also reported that "Schurman would prefer a federal regulatory solution: “We’d be happy to register AMCs, but not at a state level.” But this is a story for another day. For now, I'll stick to my contention that the Missouri bill and others like it will put small and in-state AMCs out of business and drive appraisal management to the big competitors.

That I am an independent leadership and business development consultant is well known in the settlement services industry. Over the years, I've done time and motion studies on (4) of the title industry's best known transaction management systems. I've done income and expense pro formas on a variety of businesses including title agencies and appraisal management companies. I've collected and analyzed surveys from across the settlement services industry, and used these data to power complex Excel models. And so, as it regards building AMC financial models, I have some level of experience. Enough to know that small AMCs paying big-time registration fees -- like the $5,000 registration fee and $2,000 renewal fee proposed by Missouri -- are toast.

Math Time
I don't even need to show you my pro formas as proof. You can do the math yourself. Get out a piece of paper (or Excel worksheet) and jot down a few numbers.

1) Estimate the average appraisal fee charged by an AMC for a combination of URAR, drive-by, REO, field review, multi-family and FHA appraisals. For this hypothetical example, I'll suggest using $315 as the average fee paid by a hypothetical client (remember, this is a blended fee for (mostly) URAR appraisals and a smattering of FHA, MF2-4 and lower-end valuation products).

2) Estimate the average fee paid to the appraiser by the AMC for the valuation product. Let's say the average fee to the appraiser is $200 (again, hypothetically... I don't want objections to the fee to drown out the context of the point being made).

3) Subtract the $200 appraiser fee from the $315 client charge, which leaves the AMC with $115 (36.5 percent gross margin).

The last step is where it becomes uncomfortable for the small business owner/operator.

4) From the $115, subtract the following expenses: Personnel (appraisal ops., customer service, QC, sales and marketing, and executive), support services (IT, payroll and accounting, etc.), labor burden, quality control reviews, telecom, computer, travel and entertainment (someone has to find and cultivate clients... AMCs do that way better than appraisers), legal and professional fees, warranties/E&O insurance, facilities, office lease, data subscriptions, transaction management systems technology, etc.

Oh, and by the way, suppose every state adopts Missouri's $5,000/$2,000 AMC registration scheme. You'll need to break those fees down to a per-unit basis in the expense calculation above. If Missouri is the only state to nick a 250 order-per-month AMC add just 60 cents to each appraisal; if all 50 states and D.C. do, add $30.60 per appraisal.

The bottom line is that there's a pretty thin net income in appraisal management. But as business schools teach, a small number times a big number is a big number. Which is why the nationwide AMCs have a distinct advantage over small in-state competitor. They do a lot of appraisals -- some upwards of 1,000 or 1,500... per... DAY!  So, if Missouri's aim is to wipe out AMCs, they'll be part way to their goal. They'll wipe out in-state AMCs and the local employee (tax and voter) base displaced by the AMC statute.

The math also lays bare the folly of the contention in the appraisal trades that an appraiser who's lost her or his license might morph into an AMC. The numbers say they simply don't have that great a chance even without usurious registration fees. Besides, an appraiser bad enough or unethical enough or lacking enough in the trust dimension to lose an appraiser credential has little chance of attracting enough lender-clients to lift an AMC off the ground. To do 1,000 or even 250 units a month requires a few huge or a lot of small clients. A defrocked appraiser without experience, contacts, or technology would surely wash out in the due diligence process.

The AMC Strikes Back!The only recourse for the small time operator doing say, 250 orders per month, is to raise fees to the lender (costing consumers more by way of higher interest rates, points and fees), and/or lowering appraisal fees to appraisers (in this example to under $100 per unit). Hardly what the legislators and state appraiser boards wanted when state regulation of AMCs was proposed.

This comes at a very critical time for mortgage brokers and appraisers seeking to service the broker community through local AMCs. Fannie and Freddie have been at odds over whether a mortgage broker can order an appraisal directly through an AMC. Freddie says yes, while Fannie, up until now has said no dice. If Fannie changes its stance (I've heard it is reconsidering) and allows brokers to order directly with a local AMC, guess what? There won't be a local AMC to funnel work to local appraisers. The Missouri bill will see to it that the only alternative will be to place orders with the 8-10 heavyweights in the AMC industry.

Much luck to appraisers not on the national AMCs fee panels.

Wednesday, February 20, 2013

Regulators in the Great Customary and Reasonable Fee Debate: A Solution!

I re-learned a great lesson last week. As many readers know, I teach in the MBA program at a local university. My topic is Leading Change in Organizations. I was recently asked to sub for a professor in the undergraduate business program. Given free reign to speak on a leadership topic of my choosing, I chose "Why Leadership Matters."

Leadership is best taught and understood using a combination of discussion, simulation, case study, and Socratic questioning techniques. The Lecture Method, which leans heavily on the cognitive (intellectual) learning domain doesn't work as well in a leadership class. Leadership is a tough subject using a systematic approach. The better route is to draw materials from all three learning domains, cognitive, affective (emotional), and behavioral (physical). This is typically what graduate schools do. That's all fine and good, but I was leading a classroom of undergraduates. Understandably, their experience in the business world, and the world of leadership, is comparatively limited.  

I structured my session as more of a discussion about leadership than it turned out to be. About a third of the class weighed in with insights and questions, perhaps out of pity. Others though seemed content with me simply lecturing them. To their credit, the class appeared attentive, engaged, and courteous. No one threw a shoe. Several thanked me on the way out. Yet by the end of the session we all seemed ready to go home. 

The lesson re-learned? Saul Alinsky was on point, in Rules for Radicals, when he said, “Never go outside the experience of your people.” Had I been teaching a math class, or English, my charges would have 12 or so years of similar experiences to reflect on. But a leadership class? Better to have approached it from where my students are experientially.

The same lesson can be helpful for those who are charged with sorting through the great customary and reasonable appraisal fee debate.

Never go outside the experience of your people.
I've written at length about the debate over what constitutes a customary and reasonable fee for an appraisal, here, here, and here. Appraisers claim AMCs aren't paying customary and reasonable fees; AMCs say they are.

The argument centers on the AMC contention that their long presence, and prominence (post-HVCC) in the appraisal administration marketplace combine to make their (discounted) fees "customary." And because they're customary, and because AMCs have been paying these (discounted) fees for so long now--and appraisers have accepted them--they must also be reasonable. Appraisers say that's crap for the most part. Regulators are wondering how to resolve the inter-family disconnect.

Here's my suggestion, made before, but now with a new emphasis. Quantify the so-called reasonableness of the AMC/appraisal fee... within the experience of the people charged with separating hype from fact in the great C/R debate: state regulators.

Similar to the students in my recent leadership class,  regulators best understand matters of regulation from their own experiences, and those of their colleagues. What do they really know about appraisal and AMC fees? Really.  Or the arguments of the various sides in the debate. But what if we approach the question of customary and reasonable from a perspective they surely do understand. Math class and English class.

Lets first look at English class. Our English teacher was right in stating that a brief definition of terms is vital to clear communication. Today, lumping the terms customary and reasonable together to form a new word, "customaryandreasonable," has the effect of blurring the fact that these are two distinct terms. Regulators should decouple and separately define the two terms. Doing so would go a long way to bringing clarity to the debate. They could say, 1) Is this fee $x customary? And, 2) Is this fee $x reasonable?

After we've defined the (2) terms, we turn to our experience in mathematics to quantify the reasonableness of a given Appraisal Fee $x. I envision using a tool familiar to the experience of regulators, and the rest of us: An Excel spreadsheet. In fact it's been done, at least on the appraisers' side.

Tom Inserra wrote an excellent article in 2011, for Appraisal Buzz, quantifying the transaction and production costs making up the total cost of an appraisal. You'll find the article and spreadsheet here. Regulators could use Tom's spreadsheet, or one of their own design, to quantify the production and transaction costs making up the total cost of an appraisal. When a C/R fee dispute arises, the state regulator (or say the Consumer Financial Protection Bureau (CFPB), could invite the AMC to submit a spreadsheet of its own, this one to quantify the value AMCs render to the appraiser to  prove the reasonableness of the appraiser's fee. Compelling each side to quantify their assertions of C/R would be the fairest way to proceed in determining the overall fairness of Appraisal Fee $X.

Not everyone will agree with my suggestion. Count on the loudest objector(s), appraisers or AMCs to be the side that's bereft of hard data with which to make a strong case. 

Thursday, February 7, 2013

Trending Toward the Next Generation of Settlement Service Providers

Throughout the course of the Mortgage Third Party Risk Blog, I've been advancing the case that the next generation of real estate mortgage settlement services companies will be big, Big, BIG firms. Here's more evidence of what I view as a trend to be taken seriously.

Nationstar Mortgage Holdings Inc., issued a press release today announcing the acquisition of Equifax Settlement Services Holding LLC (ESS), from Equifax. What began as a joint venture between Equifax and ATM Corporation of America, ESS becomes the latest in a long line of vendor management companies (VMCs) and appraisal management companies (AMCs) to be sold off to large banks and nonbanks. These are the same firms that the Consumer Financial Protection Bureau (CFPB) has its sights on for scrutiny. 

LEWISVILLE, Texas--Nationstar Mortgage Holdings Inc. (NYSE: NSM) ("Nationstar"), a leading residential mortgage services company, announced today that it acquired Equifax Settlement Services Holding, LLC ("ESS") from Equifax Inc. on February 6, 2013. ESS is a leading provider of appraisal, title insurance and settlement services in the United States and serves a broad array of blue chip clients, including the largest financial institutions in the country. Nationstar intends to combine ESS with its Solutionstar platform and rebrand ESS as "Solutionstar Settlement Services".

"This acquisition will play a key role in our goal to become the long-term strategic partner of choice to financial institutions," said Nationstar CEO Jay Bray. "Combined with our asset management and recovery businesses, ESS brings critical capabilities and an experienced management team that will greatly enhance the value of Solutionstar. In support of our strategy to further broaden our real estate services offering across the entire mortgage lifecycle, we will continue to pursue strategic acquisitions of fee-based services companies that meet our return thresholds."

"Nationstar is proud to add ESS to the Solutionstar family of services," said Solutionstar President Shawn Stone. "ESS` reputation for customer service and quality execution set the company apart. We remain committed to serving ESS` current clients and are excited for the opportunity to further grow the Solutionstar platform."

About Nationstar
Based in Lewisville, Texas, Nationstar offers servicing, origination, and real estate services to financial institutions and consumers. Nationstar is one of the largest servicers in the United States, with a servicing portfolio of over 1.8 million residential mortgages in excess of $300 billion in unpaid principal balance as of February 1, 2013. Nationstar`s integrated loan origination business mitigates servicing portfolio run-off and improves credit performance for loan investors. Our Solutionstar business unit offers asset management, settlement, and processing services. Nationstar currently employs over 4,900 people.

A Few Observations
All of which suggest a trend toward very large VMCs. Consider:
  • Nationstar is the eighth-largest residential mortgage servicer based on volume, according to the website; 
  • Importantly, six (6) of the seven (7) residential servicers ahead of Nationstar in the ranking are banking institutions; all seven are supervised by the CFPB; 
  • A HousingWire article indicates that ESS generated $65 million in revenue last year; with an employment roll of 130; 
  • Over the past decade numerous VMCs/AMCs have traded hands: LPS owns LSI; FNF bought ServiceLink (which bought ATM); Fiserv bought and later sold General American Corporation to ISGN; and the list goes on;
  • Most of the big banks own or control settlement services firms (aka VMCs and/or AMCs); 
  • AMCs Solidifi and Kirchmeyer recently announced a merger, thus going from two mid-size providers to a single mid-to-large size provider; 
  • Fortress Investments recently informed 200 or so employees at subsidiary VMC, National Real Estate Information Services (NREIS), that the firm is being shuttered. NREIS once sported some 1500 workers;  
  • Evaluation Solutions and its subsidiary entity ES Appraisal Services filed for bankruptcy last month, leaving untold numbers of appraisers and real estate brokers $11 million in unpaid fees. It is a small AMC in the big picture. The bankruptcy is believed to have come on the heels of the loss of a key client;  
  • In 2Q2012, RELS Title was sold to DataQuick, adding another component to its impressive range of services; and, 
  • It's no secret that the CFPB has gone out of its way to impress upon big lenders that they'll be accountable for third party service providers' that harm consumers. 
So if...
CFPB holds lenders financially responsible for the actions of their third party suppliers, lenders would be expected to take risk-mitigating actions. Thus they are bound to wonder, Is it is better and less risky CFPB-wise for us to manage vendors in-house? Or, do we hire someone else to do it? Lets look at the options. 

To manage vendors in-house a lender would have to lease hundreds of thousands of square feet of office space, cubicles, telecom and computer equipment, hiring, training, to name just a few tasks. They'd also take on the risks normally associated with outsourcing: strategic risks of intentional non-performance or under performance by suppliers; compliance risks in cases where the vendor(s) violate one of 17 or so federal consumer protection Acts; the reputation risks associated with the unfavorable media accounts of such scurrilous deeds. And the fines. Oh yes, the fines. Some in the hundreds of millions of dollars range. All in all a huge and uncertain investment.  

For most lenders the benefits of sourcing settlement services to a professional manager seem to outweigh the self-managed alternative. Many in the trades--appraisers especially--pine for the days when lenders engaged them directly. I don't see that happening. The bulk of mortgage lending resides with the 5-to-10 lenders atop the food chain. I believe this trend will continue, only now, big lenders will be served by big suppliers. 

Once a lender commits to sourcing settlement service work to outside vendor managers, they must wonder, Is it better to use a lot of small vendor management companies? Or do we limit our panel to a few very large vendor management companies? Managing 3-5 big vendors, deep-pocketed ones hopefully, bound to tome-like general service agreements (GSA) written so as to heavily favor of the interests of the lender, seems more sensible route. Besides, what small time operator could realistically comply with a 35-page GSA? Even if the document uses a 24 font size? 

I foresee small numbers of big suppliers working for small numbers of large banks and non-banks. 

The final word(s)
Read again the quote, from the nearby press release, by the CEO of the buyer in the Equifax Settlement Services deal: 
"This acquisition will play a key role in our goal to become the long-term strategic partner of choice to financial institutions," said Nationstar CEO Jay Bray. "Combined with our asset management and recovery businesses, ESS brings critical capabilities and an experienced management team that will greatly enhance the value of Solutionstar. In support of our strategy to further broaden our real estate services offering across the entire mortgage lifecycle, we will continue to pursue strategic acquisitions of fee-based services companies that meet our return thresholds."
... and a quote by the president of DataQuick had to say on 9/6/12 in a press release about the RELS Title purchase: 
"DataQuick has a long and outstanding history of delivering centralized title services to the lending community,” said John Walsh, president of DataQuick. “Combining our expertise with RELS Title’s exceptional service capabilities, local presence and relationships, operational expertise and industry knowledge will allow us to provide a wider range of title and settlement services to the marketplace.”
... and a paragraph from an excellent article by Peter Christensen, The Anatomy of an AMC's Failure And Why Lenders Should Care, published this week in Appraisal Buzz:
"The failure of Evaluation Solutions and its subsidiary ES Appraisal Services (I refer below to both companies as "ES"), in particular, provides a good look at the anatomy of an AMC's downfall and bankruptcy. ES filed its Chapter 7 Bankruptcy Petition on January 25, 2013 in Florida. The AMC had signaled that it would file for bankruptcy in December, when it was widely reported to have lost its biggest client JPMorgan Chase Bank."
The Lesson
Go big or go home. (A)n expression the speaker says to the listener to encourage the listener to be extravagant, to go all the way, and do whatever you are doing to its fullest - and not flake out.  ~ Urban Dictionary

Tuesday, February 5, 2013

Current Events Suggest the Next Iteration of the Vendor Management Business Model

There is a great article on the Appraisal Buzz website that I encourage readers to consider.

The Anatomy of an AMC’s Failure and Why Lenders Should Care, by attorney Peter Christensen, dissects the recent bankruptcy filing of Evaluation Solutions and its subsidiary ES Appraisal Services. This suggests to the author that the bankruptcy leaves appraisers and real estate agents/brokers to eat over $11 million in unpaid fees. Or go after someone else for the money, as the article explains. 

This is eye opening; especially for appraisers either owed money by ES, or any settlement service provider for that matter, whose accounts receivable heavily weigh to less financially sound clientele, which in this new age of regulation increasingly means those of us not in the Top-5 lender category.

Nevertheless, the ES-type conundrum is not unexpected to readers the Mortgage Third Party Risk Blog. We have been conjecturing on the future of third-party settlement services industry and the business models underlying the industry across numerous posts.

The Sourcing Business Model is Evolving Again

To illustrate this evolution, let's look again at the appraisal management company (AMC) business model. In the first iteration of AMCs, a few independent third-parties competed for appraisal (and/or title) business from a growing pool of in-state and regional consumer finance companies. They later broadened their client base to include non-bank mortgage banking institutions. Eventually, due mostly to interstate banking laws and resulting consolidation within the mortgage lending industry (the Top-5 lenders now control 52% of originations), we entered the second iteration of the sourcing model: Large independent and bank-controlled AMCs.

What is happening today, with small AMCs and others falling out of the race, suggests that the AMC model (among others) is once again in play. Although this time, lender consolidation isn't the only factor; the Consumer Financial Protection Bureau (CFPB) is having an effect.

Last April, the CFPB issued a shot over the sourcing bow, CFPB Bulletin 2012-03. While FDIC and some other FFIEC agencies have rightly been warning lenders since the Y2K era of their responsibility vis-à-vis third party vendors, CFPB put the wood to several supervised lenders for alleged misdeeds of a few suppliers. Here are links to just one such case:
The bank in this example, Capital One, agreed to refund about $140 million to two million customers, and to fork over another $25 million in penalties. Although the vendor was called out as the culprit, CFPB isn't buying the notion that the client can lay off strategic, reputation, and related risks. This must be a lesson for all lenders who use vendors. 

Lessons from the Woodshed

The new risk environment has many bank' in-house vendor managers coming around to believe it is better to manage small numbers of very large deep-pocketed suppliers who manage suppliers than to directly oversee 50 thousand or so individuals and small-businesses. How else to explain the rumored meeting of a Top-5 lender and its title underwriters?  As the story goes, following some pleasantries like coffee and donuts the lender got down to the business at hand, asking its title underwriters about the feasibility of limiting the number of title agencies they use to 10 agencies nationwide! Because feasibility matters, the underwriters said, 'No way.' The lender responded with something like, 'Well, how about 100?' 

None of this should be a surprise. We can expect more bankruptcies like ES, shutdowns like NREIS, sales like RELS Title, and consolidations of mid-sized AMCs seeking to become large through mergers. We are already seeing big lenders present prospective suppliers with 35-plus-page master service agreements in a take-it-or-leave-it way. The combination of these trends, intended or unintended, puts the wood to innumerable small-time operators in the settlement services space. 

What is unlikely is a return to the way the settlement services industry—flood, appraisal, credit, title—used to be. 

Thursday, January 24, 2013

The Future of Sourcing Real Estate Settlement Services: A Re-Emphasis on Size

Many posts on the Mortgage Third Party Risk Blog deal with the future of the real estate settlement services industry. Perhaps obsessively. My overriding theme in such conjecture centers on my own belief that sourcing of various settlement services--Flood, Appraisal, Credit, and Title (FACT)--to independent or lender-controlled third party providers is manifest destiny. Lenders will continue to source these services, given that their only other option for acquiring settlement services is to do it themselves.

Significantly, this shrinking pool of mega-vendors is not blessed by government to be too-big-to-fail. And that will become a big deal in the years to come.

That the FACT industry is consolidating is not new; its ongoing. What is new, relatively speaking, is the Consumer Financial Protection Bureau (CFPB), which is causing lenders and vendors to reconsider the FACT sourcing model. Of particular concern, is how the industry will digest the risk components of CFPB Bulletin 2012-03, the document affirming the consumer bureau's expectations of supervised institutions in managing third-party relationships. The Bureau's determination to hold supervised institutions accountable for supplier consumer-harming behavior is making a mark. The Bureau has won consent agreements from several banks over certain vendor naughtiness. We get it.

Among strategies for shielding themselves, big lenders are looking to pare down the ranks of supplier-organizations. Consider.

Where there's smoke 
Rumor has it that a very large lending institution corralled its title underwriters in a room and laid out a plan: The underwriters would limit their agency relationships to ten (10) regional and super-regional title agencies. The significance of the proposal--innovative, out-of-the-box, paradigm shifting, albeit not achievable (due to fragmentation in the title agency industry) as it is--cannot be understated. Nor can the lender's self-interested rationale for culling the flock be waved off.

Limiting an underwriter to a handful of regional/super-regional FACT vendors could potentially eliminate, or at least shift the burden, of the risks normally associated with sourcing back office loan production services. Better to monitor closely and supervise a panel of ten very large providers, the rationale goes, than a thousand-and-ten small agencies. "We will monitor and supervise you (10); you will supervise your thousand-and-ten agent relationships" is one logic. Should a deal go very bad, the lender would have but one throat to choke, the underwriter, is another.

At any rate, as the story goes the lender got push-back, lots of it, from those in attendance. Attendees correctly pointed out, there aren't ten regional/super-regional title agencies that together could assure nationwide coverage. The lender demurred. "How about 100 regionals/super-regionals?" they asked. That too was nixed. Same reason.

The same rationale applies to lenders who use appraisal management companies (AMCs): a) Closely oversee a small handful of large AMCs; b) hold these few firms to air-tight contracts and a sworn oath to protect consumers from financial harm in the practice of their craft; and, c) make suppliers pay dearly for running afoul of CFPB. Unlike title-side vendor managers, the appraisal management company sourcing model is feasible if we're talking 10-15 mega-AMCs. In fact, most of the big banks use only a few national AMCs, or bank-owned or controlled AMCs with support of independents for overflow purposes.

The main challenge is on the title-closing side of the transaction. So where this story ends, and how many title agency relationships is the right number, remains to be seen. The point is, lenders want to funnel back office settlement services to fewer, not more title service providers. But this concentrates the risk.

A Plausible Scenario for the Future

  1. Lenders continue to whittle down the numbers of settlement service providers to a small handful; the smaller the better, they'll rationalize; 
  2. These few key suppliers will be made to agree to and execute 35-page plus master service level contracts, an attempt by their client(s) to shift the compliance burden to suppliers; 
  3. If called on the CFPB carpet, these supervised banks and nonbanks (hoping they'll never actually be called on the carpet) will dutifully pay substantial fines and restitution, admit approximately zero culpability ("We relied on the vendor to do the right things; it says so in the contract..."), and part ways with the offending vendor; 
  4. Of course, this won't be the end of it. The defrocked supplier will be asked (I doubt nicely) to make the client whole. Why not? The vendor signed the master service level agreement; they contractually agreed to do in practice what they said they'd do in signing the contract. Now they're asked to pay under the same agreement. 
Considering this plausible future, I'm re-emphasizing a component of my long-standing conjecture: Concentration of financial, reputation, strategic and other risks on individual settlement services providers will lead to a concentration of title, appraisal, and closing order volume on a smaller pool of large and very large service providers; providers with deep pockets and increasing risk tolerance; but importantly, not too-big-to-fail. Big lenders will rely on big vendors.  

Is all this good for consumers? I don't know. What does seem apparent is that the CFPB, mortgage lenders, and settlement services firms seem to think the next iteration of the mortgage industry features five (5) or so of the too-big-to-fail mortgage lenders working with a corresponding number of not-too-big-to-fail third-party service providers. This will become a factor in the future as CFPB identifies bad actors in the midst of the few service providers... and socks their clients with $40 million, $50 million, or whatever million dollar they'll absorb in fines.

The clients will point to their master service level agreements but to no avail. Make no mistake, CFPB does and will hold the client responsible for the sins of their vendors. Question is, how many big-money hits can these elite vendors absorb before we begin to see yet the next iteration of the mortgage industry? 

Thursday, January 3, 2013

Title Source to Hire Almost 400 Team Members Nationwide

Michigan Top Work Place increases recruiting to keep up with industry demand.

PRESS RELEASE. Detroit, Michigan – January 2, 2013 – Title Source, a Detroit-based title, appraisal, and settlement services company, will fill over 400 positions by March 2013. The bulk of the new positions will be based in Detroit, with 375 open positions. Title Source is hiring ten title clearance specialists in Pennsylvania, and ten escrow admins, and junior escrow officers in California. Title Source is also hiring abstractors, examiners, title clearance analysts, vendor service specialists, HUD reviewers, disbursement analysts, and final policies specialists in Texas.

“We're encouraged by the continued growth of our teams across all of our locations and business channels,” said Jeff Eisenshtadt, President and CEO of Title Source. “Increasing client trust in the execution of our service and opportunities presented in the marketplace, have allowed Title Source to more than double in size over the past few years.”

Title Source, which offers title, appraisal and closing services, boasts a robust work hard, play hard atmosphere. The company’s office is a remarkably creative and colorful space which includes everything from slushie-machines and snack dispensers; to Razor scooters and flat screen TV’s.  Its team members enjoy industry leading benefits such as annual tuition reimbursement to an on-site full service gym. Title Source also takes strong community relations initiative by giving team members paid time off to volunteer. In addition, Title Source rewards team members with cash prizes, and gift cards for working ideas that improve the business and office space.

Title Source moved 1,100 team members to its new headquarters in Detroit’s First National Building in the summer of 2012, and will continue to create more jobs in metro Detroit, as well as nationally throughout 2013. The company ranked third in the 2012 Detroit Free Press Top Workplace competition and ranked as a Top Workplace for the last four consecutive years.

For additional information about working at Title Source, visit:

About Title Source:
Title Source is the largest independent provider of title insurance, property valuations and settlement services in the nation. The company is an authorized agent of the highest rated title insurers in the industry and its solutions power many of the nation’s largest residential lending institutions. Title Source is a preferred provider to five of the top twenty FORTUNE 100 companies and many of the largest residential mortgage lenders. The company is based in Detroit, Michigan and retains regional operating centers in California, Pennsylvania and Texas. Title Source was named a Detroit Free Press Top Workplace in 2009, 2010, 2011 and 2012. For more information, visit Connect with us on Facebook, Twitter and our blog.