Rarely does an executive disparage a product his company is preparing to offer.
But, as odd as it sounds, when Ernest D. Smith, a co-chief operating officer at Fidelity National Financial Inc., calls the lien protection policies it plans to sell "a lousy product," he is at least being consistent.
Fidelity National, one of the nation's largest title insurers, was one of the firms that lobbied to quash a bid by the Philadelphia mortgage insurer Radian Group Inc. to offer an almost-identical product, which protects lenders only against undisclosed liens and encumbrances and involves a less-thorough title search.
Part of that effort involved publicizing the shortcomings of lien protection. While it is cheaper for consumers and faster for mortgage banks to cover only a portion of title risk, the title companies say, the product is not as cheap as it looks for lenders, because it is riskier than standard title insurance.
So why did Fidelity National, of Irvine, Calif., apply last month to the California Department of Insurance for permission to sell lien protection?
By putting lien protection on the menu, it could have "much less confrontational conversations" with the growing number of lenders that have been saying they want to give consumers the option, Mr. Smith said. "If it's that important to have this product, we're not going to be your mommy and daddy anymore and tell you that you can't have it."
For Radian's chairman and chief executive, Frank P. Filipps, Fidelity National's move validates what his company has been saying all along: Lien protection can work well for certain lenders with refinancings, second mortgages, and home equity lines of credit.
"In the past they have made all sorts of accusations that the product is inferior," Mr. Filipps said. "Now I guess they have come to see the light."
During the nearly three-year-old refinancing boom many borrowers have felt the sting of title insurance costs several times. Consumer groups have lobbied on Radian's behalf to legalize lien protection, which would typically cost less than half as much as regular title coverage. For example, both companies' products would trim the cost of title protection for a $250,000 California home to $275 from $700.
"Lenders like that, because it obviously gives them an advantage" in winning over cost-conscious consumers, said Chris Buonafede, an analyst with Swiss Reinsurance Group's Fox-Pitt, Kelton Inc. in New York.
That means a number of title insurers will likely sell the product, despite its lower revenues, he said.
The warnings about lien protection came on top of the title insurers' objections to allowing a mortgage insurer to sell a product they see as a form of title coverage. (California law prohibits mortgage insurers from covering title risk and vice versa.) Radian, which hopes to bundle it with private mortgage insurance, describes lien protection as a type of mortgage guarantee.
The California Department of Insurance originally agreed with the title insurers, as did a state administrative law judge, apparently dashing Radian's hopes. But a new state insurance commissioner, John Garamendi, said in April he would issue a fresh opinion on the issue.
Mr. Garamendi, who is expected to rule by August, left in place a cease-and-desist order barring Radian from offering the product. His decision could influence whether mortgage insurers can offer lien protection anywhere in the United States, because California can block companies from doing business there if they fail to follow its monoline insurance regulations elsewhere.
Now the department must also weigh Fidelity National's plan. Mr. Smith said that, since his industry believes lien protection is title insurance, it makes sense for Fidelity National to accommodate demand for it, even if that demand is misplaced. "We're trying to follow our own argument to its logical conclusion."
Brian Perkins, the staff director of the California Senate Insurance Committee, said it is not even clear whether lien protection falls into the category of either mortgage or title insurance. "You have to say it's a contract that has characteristics of both and therefore can't be offered by either."
A bill introduced by Sen. Jackie Speier, D-San Mateo, that would allow mortgage and title insurers to offer lien protection will be considered during the committee's first hearing in January, Mr. Perkins said. The bill would also allow title insurers to cover default risk on refinancings and second mortgages.
Lien protection is cheaper than typical title insurance, but it carries risks for both the insurer and the insured. It covers only undisclosed liens and encumbrances, so a lender would be exposed if it turns out a party other than the borrower owns the property or if there was a forgery. The underwriter performs only a quick electronic search of public records, making it more likely that it will have to pay a claim.
Also, loans that have lien protection instead of regular title insurance cannot be securitized by Fannie Mae and Freddie Mac, so it would be used only for loans that the lenders expect to pool themselves or keep on the books.
Mr. Smith of Fidelity National admitted that sometimes lien protection would make sense for a lender, especially if it was planning to completely self-insure against title risks or is refinancing an existing loan, in which case a more thorough title search has already been performed.
But for the most part, the higher risk that lien protection entails makes it a bum deal for lenders, and Fidelity National will tell them so, he said. "It allows them to not be suspicious that we're only selling them what we have" and not what is best for them.
Mr. Filipps of Radian dismissed the suggestion that lien protection is inferior to title insurance. "It's fast, cheaper, and it covers all the risk that lenders want considered." He also denied that it would require consumers to reveal their credit scores.
Jim Maher, the executive vice president of the American Land Title Association, which has criticized Radian's effort to sell the product, said Fidelity National's move made sense, because it would give the insurer another "arrow in the quiver." In addition to title insurance, it offers a range of real estate-related services, such as escrow, default management, mortgage-loan fulfillment, exchange-intermediary services and homeowners', flood, and home-warranty insurance.
Mr. Maher said he doubts there will be a wholesale shift from title insurance to lien protection, especially when it comes to purchase loans, because homebuyers often want the security of a title search as much as lenders. "The great majority - if not a universal amount - of buy-sell transactions are going to involve title insurance."
Last month Fidelity National said it would buy the 34% stake that it does not already own in the publicly traded Fidelity National Information Solutions Inc. In April the parent company said it was negotiating with the City of Jacksonville to move its headquarters there, and it bought Alltel Corp.'s financial services division, now called Fidelity Information Services, for $1.05 billion.
