Fitch sees neutral, yet hopeful 2025 for title insurers

Continued rate cuts from the Federal Reserve will benefit mortgage activity — and thus title insurance — during 2025, but Fitch Ratings' sector outlook for the year remained neutral.

Housing and mortgage markets are still expected to be dealing with the difficulties they have experienced in the post-pandemic years, although to a lesser degree, the report said.

"Fitch forecasts mortgage rates to be more favorable for borrowers in 2025, which will cause mortgage originations to gradually increase following recent periods of depressed activity," commented Christopher Grimes, senior director. "Maintenance of the sector outlook at neutral is a result of a benign claims environment and strong capital levels, combined with a leaner expense structure."

Fitch expects title insurer profitability to "expand modestly" from 2024 levels, as the companies will have higher revenues, as well as improved expense ratios.

In the third quarter, three out of the big four title companies were profitable, while First American's GAAP net loss was largely a result of investment income impacted by a portfolio rebalancing.

Title income is highly correlated with mortgage production, with purchase business bringing in more fee income than refinancings.

GAAP operating income during 2025 at all four will "broadly be in line" with this year's results, with the title operating margin rising by 10% on an aggregate basis.

Meanwhile loss ratios should remain below historic levels, but will still rise to 4.3%. Fitch gave some context, noting that during the financial crisis of 2008 and 2009, the loss ratio was 12.5%.

Fannie Mae's November forecast calls for origination volume to increase by $300 billion in 2025 compared with this year, to $1.94 trillion from $1.64 trillion. 

The GSE expects purchase originations could grow to $1.41 trillion from $1.29 trillion. Refis, even with rates expected to remain over 6% according to most observers, will increase in volume to $527 billion from $351 billion.

Fannie Mae's estimate of 19% growth is more conservative than the 28% increase the Mortgage Bankers Association projected.

While Fed rate cuts are not necessarily a sign mortgage rates will follow lower (as seen with what has happened since the Sept. 18 FOMC meeting), Fitch is forecasting it will cut the short-term rates it controls by 125 basis points next year and another 75 basis points during 2026 as inflation starts to decline.

A November survey of economists by Wolters Kluwer expected an average 108 basis points of rate cuts next year, and that was more bullish than the markets, which were pricing in 77 basis points.

"Improving housing supply and more favorable borrowing costs will increase 2025 originations and drive improved margins as title insurers are positioned to rebound from the housing market expansion," Fitch said.

Fitch foresees a stable year ahead for the title insurers it rates, based on their strong capital positions, which can absorb any near-term declines in operating performance. These companies also have "resilience in operating margins, albeit at lower levels from the highs of prior years."

As for the hot button topic of the government-sponsored enterprises title waiver pilot, Fitch says the program "is unlikely to have an impact on U.S. title insurer ratings given the relatively narrow scope of the proposal."

Commercial transaction volume, currently 9% of title revenue at the larger underwriters for the first nine months of the year, should increase along with transaction volume as interest rates moderate and a large volume of loan maturities is expected, Fitch said.

Commercial deals have average revenue per order of three-to-four times that of residential transactions, the rating agency noted.

Keefe, Bruyette & Woods recently held its annual Title Day meeting where it was joined by the management teams at three of the big four: Fidelity National, First American Financial and Stewart Information Services.

"While higher rates have slowed mortgage origination activity, residential originations have held up better than expected," the note from Bose George, Tommy McJoynt and Alexander Bond said. "Further, commercial trends remain strong in [the fourth quarter], which bodes well heading into 2025."

Margins are expected to improve next year, but meaningful growth is unlikely if volume increases only modestly from current levels.

"Meaningful margin growth" is likely in the next couple of years as purchase mortgage activity moves back to normal volume, KBW continued.

The three companies also expressed positive views on the regulatory outlook, "as the presidential election result is likely to lead to a change in directors at the Federal Housing Finance Agency and the Consumer Financial Protection Bureau."

Those agencies during the Biden Administration had the title insurance business in its crosshairs, with the CFPB going as far as to include title insurance premiums among what it considered to be "junk fees" in the real estate finance process.