First American Gets Closer to Offering One-Stop Service

On the surface, First American Financial Corp.'s acquisition binge during the past few years may seem to be the execution of a well-laid out strategy in its drive to become a single source of loan-related services to the mortgage industry.

In reality, however, it was anything but that, says Parker Kennedy, president of First American and great-grandson of the man who founded the Santa Ana, Calif.-based financial services company in 1889.

Rather, the acquisition spree was a result of the entrepreneurial style of John W. Long, president and chief executive of its St. Petersburg, Fla.- based subsidiary, First American Real Estate Information Services Inc.

"We just followed the direction where the customers wanted to take us," Mr. Kennedy said, noting that the mortgage industry is contracting, with the survivors becoming much bigger and wanting a broader array of services. And sometimes, Mr. Kennedy said, one deal logically led to another.

Mr. Long acknowledged that is how he operated. "What really happened was, over time a strategy evolved," he said. In many cases, companies came to him asking to be acquired because of the industry's consolidation. "We saw acceptance in the marketplace," Mr. Long said.

At this stage of the evolutionary process, though, Mr. Kennedy acknowledged that his goal was to be able to offer one-stop shopping to all mortgage originators and lenders.

Its latest deal appears to go a long way toward achieving that goal. First American has agreed to acquire Contour Software of Campbell, Calif., a major supplier of mortgage origination programing and services, including its flagship product, the Mortgage Banking Series.

First American has made 10 other major acquisitions and many small ones since Mr. Long became chief executive of the information services subsidiary in 1994. Since then, revenues have climbed from $94.1 million to $331.1 million last year. This year, they are expected to reach $450 million.

Jeff Lebowitz, a principal of SSP Associates of Chevy Chase, Md., a technology-based marketing and consulting firm, agrees that the marketplace is working in First American's favor. "What's helping First American," he said, "is, the trend toward consolidation will create a demand for centralized services."

But Mr. Lebowitz adds, "The job of First American is to convince customers that centralization is a good economic proposition."

"We don't compete on price; it's a losing game," said Mr. Long, "but we're as competitive as anyone." Mr. Long says customers that ask for four or five services "are able to negotiate a better deal than if they use us for one or two."

First American's real estate information services operation provides credit reporting, flood compliance, appraisal services, real estate tax reporting and certification, document preparation services, property reporting and valuation, mortgage loan servicing, and default management services.

These services have been augmented by a Jan. 1 transaction with British- based Experian Group, which has a significant presence in Orange, Calif. Its California operation was a major supplier of real estate data, including property valuation information, title information, tax data and, importantly, imaged title documents.

The two companies agreed to combine their real estate functions into an entity called First American Real Estate Solutions LLC that is 80%-owned by First American Financial, with Experian owning the rest.

First American's loan servicing software division, Excelis Inc., however, was excluded from the deal and remains wholly owned by the parent company. Also not included in the transaction was Experian's credit reporting operation, formerly part of TRW.

Mr. Kennedy said that acquiring Experian's imaging operation was an example of how one transaction logically led to another. It gave him and Mr. Long the idea to buy Data Tree Corp., a California company that offers data base management and document imaging systems to county recorders, government agencies, and the title industry.

"You can see imaged documents from any location," Mr. Kennedy says, adding that this business will be grown nationally from Data Tree's existing presences in Arizona, California, Florida, and Texas. "Ultimately we'll do all the counties but start with the big ones," he said.

While First American was on the acquisition trail, Mr. Kennedy said in explaining the Contour deal, "we saw that 50% of originations were made by mortgage brokers. Contour will help us with that segment." Contour has many mortgage brokers as clients, Mr. Kennedy said, and he hopes to cross-sell First American's other products to the brokers.

"Now they can go to small lenders through our desktop computers," says Scott Cooley, Contour's president.

Mr. Kennedy and Mr. Long say that they are slowing down their merger activity for awhile to allow them to digest the companies that First American has been rapidly gobbling up for the past few years.

For one thing, even though the company may offer a full range of services, Mr. Kennedy and Mr. Long see the need to upgrade First American's method of getting them to customers. "We must improve our system's delivery," Mr. Kennedy said.

A major shortcoming is that all of First American's products are delivered on separate systems. "We are working to deliver them in a single shot," Mr. Long said. "What's important now is to improve the services and their delivery."

Among the operations that the company will spend time on streamlining is Excelis' mortgage loan servicing operation, a unit that was bought in 1996 from Prudential Insurance Company of America.

Excelis provides real-time, on-line loan servicing tailored to benefit the largest servicers.

Shortly after the Excelis acquisition, Pennsylvania-based GMAC Mortgage Co. shifted to the First American subsidiary its $54.5 billion first mortgage portfolio of more than 540,000 residential loans. That portfolio has since grown to almost $90 billion.

Also in 1996, First American purchased Cuffaro Appraisal Services, now known as First American Appraisal Services, which provides property value assessments.

Shortly after that transaction, Ward Associates was acquired. First American describes the firm as the country's oldest and second-largest field inspection service.

Ward was combined with an existing field services operation that had been acquired a year earlier from Lomas Mortgage USA. The merged operation was renamed First American Field Services.

The division now serves seven of the nation's top 10 mortgage servicers and performs more than 150,000 inspections per month. One of the services it provides is inspections of properties that secure delinquent loans.

The default market is one of the areas that First American's management never thought about entering until customers began to ask for it. "They said that if we help them on the origination and servicing sides, why not the default side," Mr. Kennedy said. "Defaulting loans are really part of the servicing function," he said.

Mr. Long says that First American Credco is the nation's leading mortgage credit reporting group, processing more than 400,000 reports a month. This operation is a prime example of how economies of scale pay off, he says. Credco issues reports for $15 or $16 each, against the $50 to $60 that small firms must charge, Mr. Long said.

Credco's Robertson Co. unit is a regional tenant screening company that provides apartment managers with credit and background information on prospective tenants. Landlords are alerted to whether prospects had been evicted elsewhere, served time in prison, and other information.

First American Flood Data Services is first in market share, says Mr. Long. It processes more than 350,000 flood certifications per month by using its network of data bases from which it can provide an array of geographically referenced information nationwide.

"We've had minimal claims for the size of our exposure," says Mr. Long. "The data base is excellent."

First American's real estate tax service group, the information service's original business, ranks second in its field, reporting on 11 million properties annually, Mr. Long said.

First American Equity Loan Services offers centralized title and escrow services to equity loan lenders nationwide. And Strategic Mortgage Service holds the No. 2 position among property appraisers and it also prepares mortgage documents.

The challenge now for First American, says Mr. Kennedy, is to refine these products and furnish them to customers on one system. "Once we're further along," he says, "it will give our customers reason to use a single vendor."

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