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Fitch: Government Shutdown Could Squeeze Title Insurers’ Margins

A key variable in determining the impact of the government shutdown will be its duration. According to ""Fitch Ratings"":http://www.fitchratings.com, title insurance companies may be among the first in the housing sector to feel the reverberations of a Congress that ""is failing the American people,"" as Thomas E. Mann and Norman J. Ornstein of the ""Brookings Institution"":http://www.brookingsinstitution.com so frankly put it.
[IMAGE] Title insurers are sensitive to macroeconomic factors such as employment levels, consumer sentiment, and interest rates, and therefore the duration of the shutdown is a vital factor in determining its affect. The longer the government shutdown lasts, the bigger the potential profitability impact to title insurers.

Fannie Mae and Freddie Mac operations have been largely unaffected. However, to the extent that these agencies rely on verifications and other functions from other government agencies (notably the Internal Revenue Service, Social Security Administration, and HUD), title closings could be delayed or cancelled, Fitch explained. The Federal Housing Administration is more directly affected by the slowdown.

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As the shutdown duration increases, these government entities--the largest home financiers in today's marketplace--will not be adequately able to process demand for their services, thereby decreasing mortgage originations and title orders, Fitch warns.

From a broader economic perspective, ""Goldman Sachs"":http://www.goldmansachs.com estimated that if the shutdown had ended Sunday night, lasting only one week, fourth-quarter GDP growth would have been cut by 0.2 percent in Q4 on an annualized basis. Should it extend for two weeks, expect a 0.4 percent reduction in GDP growth. Fitch says Goldman Sachs is predicting a bounce-back of equal magnitude in the first quarter of next year _if_ the shutdown is resolved shortly.

It is more difficult to quantify how the shutdown will affect broader consumer economic sentiments about the housing market. However, Fitch believes that as long as the shutdown is brief, consumer confidence will likely not be materially affected.

The housing market has improved over the past several quarters, but tepid economic recovery and continued uncertainty has slowed momentum. The largest variables influencing title orders, in particular, are increasing interest rates, tighter lending standards, and low housing inventory in certain markets, according to the ratings agency.

At this time, Fitch does not anticipate the government shutdown to affect ratings, as near-term pressure will come from a reduction in title orders that will strain title insurers' fourth-quarter margins. But Fitch says the title insurance industry's capital position ""remains adequate.""

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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