A California Senate bill, inspired by Radian Group Inc.'s effort to offer a controversial title insurance alternative in that state, would go much further by imposing wholesale changes on the title and mortgage insurance industries.
The bill, introduced on Feb. 19 by Democratic state Sen. Jackie Speier, does not mention Radian by name but would nonetheless accomplish what the Philadelphia mortgage insurer has been unable to do through state insurance departments and the courts: legalize its Radian Lien Protection nationwide.
Title insurers have lobbied to block Radian from selling the product. It stopped doing so in June after the California Department of Insurance issued a cease-and-desist order warning Radian that it would be barred from selling any insurance in California if it offered anything other than mortgage coverage in any other state. A California administrative law judge affirmed that decision in January.
Sen. Speier's bill would allow mortgage policies to cover unknown or undisclosed liens on refinanced and second mortgages, essentially permitting insurers like Radian to offer title coverage. It would also allow title insurers to cover default risk on the same types of loans.
That could prompt another constituency - other mortgage guarantors - to oppose Radian's efforts to bring Lien Protection to market.
As a result, several industry observers said the bill might give Radian buyer's remorse. On the one hand, the insurer is one step closer to being able to sell Lien Protection, but on the other hand, it now faces potential competition in its core business from the title industry, and associated resentment from other mortgage insurers.
The bill "certainly is more than what they asked for," said Brian Perkins, the staff director for the California Senate Insurance Committee, which Sen. Speier chairs.
If Radian executives have any regrets, they are not showing it. "We are in support of the bill," a spokeswoman told American Banker last week. "It looks like it's going to be good for consumers, which is what we've been proposing with Radian Lien Protection."
But an executive at one of Radian's competitors, who asked not to be named, called the bill "questionable public policy" and said he expects much of the mortgage insurance industry to oppose it.
More bluntly, members of the title industry claimed that the bill would lead to discrimination against people with credit problems.
The proposed changes "are not in the interest of homeowners or consumers," said Mark Bogetich, a spokesman for the California Land Title Association. "Radian's product is deficient and would not serve the market well."
Sen. Speier's influence in California is making both industries sweat even more, several sources said. Mr. Bogetich said the senator "fights very hard for what she believes in."
Radian introduced Lien Protection in September 2001 as a cheaper alternative to title insurance. Until the cease-and-desist order it was offered on refinanced and second mortgages for about $200 less than traditional title policies.
The product was structured as a form of mortgage insurance so that Radian would not have to obtain a title license, a maneuver that became the focus of the controversy. California and 29 other states have monoline insurance laws, which prohibit companies that sell mortgage or title coverage from offering any other type of insurance. Because about 70% of Radian's earnings come from mortgage insurance, there was little chance that it would give that product line up.
The source at a Radian competitor argued that opening the mortgage insurance business to title insurers, which are not subject to the same capital requirements, would be risky. He noted that segregation between the title and mortgage industries came after the Great Depression, when many companies that offered both went bankrupt.
"The California bill seems to revive an idea that's already proven to be a failure in an earlier era of our country," the source said.
Mr. Perkins responded that, with today's data collection technology, analytical techniques, and capital markets that can judge lending risks, it is time to revisit the Depression-era wall between the businesses. Why, he asked, should insurers "constantly overcharge" people for covering title defects - which were much more prevalent during the Depression than today?
"Why should we have to be haunted by the costs of our grandparents and great-grandparents?" Mr. Perkins asked. "They paid that price, and we can be freed from the cost of that risk. It simply doesn't exist today."
The legislation would leave it up to state regulators to determine appropriate capitalization levels, he said.
Observers said it would be difficult for a title insurer to quickly move into mortgage insurance, but not the other way around, because mortgage insurers are subject to more stringent capital requirements and pay claims much more frequently.
"You've got to have the underwriting capabilities to offer any type of insurance," said Gary Gordon, an analyst with UBS Warburg. "If somebody told Radian that tomorrow they could issue auto insurance policies, they'd say, 'Very interesting, but what do we know about claims in the auto business?' "
Moving into title insurance "is a much easier transition" for Radian, because it has ample capital and expertise in assessing real estate risk, he said.
Mr. Perkins said that Radian's difficulties in obtaining approval for Lien Protection prompted California lawmakers to reconsider the long-standing wall between title and mortgage insurers. But Radian did not ask for new competition, he said.
After studying the issue, Sen. Speier decided that there was no reason to let mortgage insurers offer some forms of title coverage without allowing title insurers to offer mortgage products, Mr. Perkins said. "This isn't about Radian, the title industry, or the mortgage guaranty industry. It's about how you remove a firewall that may well have outlived its original purpose."
