As mortgage insurance providers have grappled with image and regulatory problems, several have repackaged their offerings, in large part to appease activists.
Now these efforts increasingly are allowing companies to sidestep insurance regulators.
One such case — which pits traditional title insurers against Radian Group Inc., a new provider of low-cost title coverage — has drawn the attention of trade groups, state regulators, and Sen. Phil Gramm. Now, Radian could gain added crucial political support: a major consumer group with significant clout in Washington is close not only to endorsing the product but to campaigning for it actively.
The money at stake explains the widespread interest. Radian says that the price of its product, called Lien Protection, is less than half that of traditional title insurance, which translates to about $200 per loan — billions of dollars a year when all refinancings, home equity loans, and second mortgages are taken into account. (Radian does not offer the product for purchase mortgages.)
Central to the Philadelphia company’s strategy is its argument that it sells Lien Protection as a form of mortgage pool insurance and that therefore the product should not be regulated as title insurance.
In some ways the escalating fight parallels Bank of America Corp.’s announcement last week of a product, Borrowers Protection Plan, which replaces the controversial single-premium credit insurance.
Industry observers said the repackaging practice was probably inevitable.
“As the edges fuzz on traditional financial services you see a lot of blending and crossover,” said Craig Whitehead, a senior consultant at Milliman USA in Chicago. “I see an awful lot of fuzziness in these businesses.”
Valerie Jordan of the Jordan & Jordan consulting firm in Belchertown, Mass., said a growing number of insurance carriers and other financial services companies are “pushing the envelope” in their marketing and sales “by repackaging a product and calling it something different.” They “feel that they can justify going around or neglecting to adhere to” state regulations, she said.
Lien Protection has encountered fierce opposition from the title insurance industry, including a pending lawsuit in California to prevent Radian from offering it. The industry says the company is flouting state insurance regulations.
“They are issuing title insurance, and they are not licensed to do so,” said James R. Maher, the executive vice president of the American Land Title Association.
Title and mortgage insurance are monoline products, meaning that if a company writes one it cannot write the other, he said.
“If Radian wants to create a title insurer — get it licensed in all the states they want to do business in, and observe the same market conduct and form filing that we do — more power to them,” Mr. Maher said. But the way Radian is selling its product creates an unlevel playing field, he said. “You give us that kind of regulatory structure and we too can sell a product at a very low cost.”
Radian, on the other hand, has picked up some key allies by promoting Lien Protection as a savings for consumers.
Sen. Gramm, R-Tex., has adopted the issue, and John Taylor, the president and chief executive of the National Community Reinvestment Coalition, says that his group is looking at Lien Protection closely and may announce a national campaign of support as early as next week.
The group wants to see if the product offers consumers — particularly low-income and minority customers — less expensive ways of “remaining in their homes,” Mr. Taylor said in an interview Tuesday. “If indeed it is what it purports to be — which is a significantly less expensive way for people to refinance — we’re very interested.”
After attending a special meeting of the National Association of Insurance Commissioners in Kansas City on April 30, which had a discussion of Lien Protection as a top agenda item, Mr. Taylor said he “walked away more convinced than ever that this product has merit.”
He stressed, however, that the coalition has not completed its due diligence and that it could ultimately decide not to back Lien Protection. Moreover, Mr. Taylor said, it is not trying to favor one business over another but simply acting in consumers’ best interest.
“I’m no more committed to the mortgage insurance industry than I am to the title insurance industry,” Mr. Taylor said. “My commitment is to the consumers, and to see to it that they get the best deal that’s available.”
Nonetheless, Radian’s chairman and chief executive, Frank P. Filipps, said that an endorsement from the coalition and its CEO would be “astoundingly positive” and would raise awareness among other consumer groups.
“My hope is that these … groups will create such a force to be reckoned with that the community will have to deal with the fact that there is a better product on the marketplace that is cheaper and delivers the same protection” as title insurance, he said.
Ms. Jordan said that companies sometimes have to push to effect change in state regulations.
“Sometimes you need to be a little bit more aggressive in your marketing and sales efforts because of the onerousness of the regulations or the interpreter of the regulation,” she said. “That’s a way that you can test the waters and get the attention of a regulator, and that gives you an opportunity to defend your position and hopefully get a positive interpretation of the law.”
In testimony before the Senate Banking Committee late last year, Sen. Gramm, who will retire at the end of this Congress, said that title insurance does not represent a good value for consumers and that “fixing” the problem “could probably do more to promote home ownership” than any increase in funding for housing.
In late February, Mr. Filipps met with Sen. Gramm to tell him about Lien Protection, and on March 12, Sen. Gramm sent a letter to Mel Martinez, the secretary of the Department of Housing and Urban Development, encouraging him to evaluate title insurance alternatives.
“I recently learned of an innovative and less costly alternative to traditional title insurance, called Lien Protection, that provides lenders against losses … in much the same way” as title insurance. It “has helped to reduce the cost of homeownership by enabling consumers to refinance much more cheaply,” the letter said.
Mr. Maher of the American Land Title Association dismissed Sen. Gramm’s entrance into the debate, saying that the senator has long been “closely involved” with the mortgage insurance industry. “Much of his tirade regarding the title insurance industry is probably related to his support for the [MI] community in general and for the Radian company in particular,” he said. “Quite frankly I find it rather offensive.”
Mr. Maher also said that when Mr. Taylor does more research he will see that current title insurance offers consumers the best price.
The title industry has been fighting the battle on several fronts, he said — in the courts and in the offices of state regulators — and has had some success. Last year Florida and Texas told Radian that Lien Protection is title insurance, and so far this year New Mexico and Connecticut have done the same, he said. In addition, North Carolina issued a general bulletin to all its licensees that “mortgage impairment” — a title-industry term for alternative products — is title insurance.
The ALTA is also lobbying the Office of Federal Housing Enterprise Oversight to prevent Fannie Mae and Freddie Mac from using alternative title insurance, National Mortgage News reported on its Web site and an OFHEO spokeswoman confirmed Wednesday. The issue is being reviewed by the oversight office’s general counsel office, she said.
A pretrial conference has been set for Aug. 23 in the California suit, and within 60 days of that it will be assigned a trial date.
Mr. Filipps said that his company will successfully fight the suit and that, though there may be a “few other skirmishes, we would expect that the title industry will try to figure out a way to compete with this rather than to deny its validity.”
Mr. Maher said that Radian’s argument “is not a strong one” and that their contention “that what they are doing is mortgage insurance is awfully hard to defend.”
