As banks adapt their practices to fit the shifting marketplace, Fitch Ratings warns title insurers in a new report to keep an eye on their own operations—or risk another uptick in claims.
"Looser financial institution credit standards on residential and commercial policies could lead to an increase in title insurance claims if the insurers fail to maintain rigorous underwriting procedures," Fitch said in a release put out Monday.
Noting that "several credit metrics for 2013 vintage deals have deteriorated, including expansion of interest only loans, higher use of subordinated debt and higher LTV [loan-to-value] ratios," the ratings agency urges all title insurers to conduct thorough search and examination processes to head off future losses.
As far as title insurers working in lower credit metrics are concerned, Fitch anticipates the initial effects "will likely be minimal;" however, the agency notes future deterioration in underwriting, claims processes, and reserves practices may lead to a reassessment.
"Poor underwriting quality during peak demand was a source of increased title insurance claims activity in the previous property market downturn," Fitch said. “Maintaining underwriting discipline will mitigate large losses for title insurers regardless of any changes in mortgage lending standards."