By Michael Murray, MBA Newslink
Patrick Stone, president and CEO of Williston Financial Group’s WFG National Title Insurance Co., Lake Oswego, Ore., discussed with MBA NewsLink his outlook for the residential mortgage industry, the housing market, processing transactions and their impact on the title business.
MBA NEWSLINK: This is the title industry, but it reflects the residential mortgage market. Do you see uncertainty because of new financial regulations and upcoming housing reform? Is that going to slow the market? How do you see it moving forward?
PATRICK STONE: I don’t see any significant change in the market for a couple of years, and our business model and plans take that into account. My guiding principle in evaluating the market is in vacant dwelling units and the vacancy rate typically runs about 1.5 percent. These are homes that could be sold–not necessarily for sale–but vacant homes that are supply on the market. For 50 years, it has run about 1.5 percent. It went up to 3 percent, but it has not corrected very quickly and it is about 2.7 percent right now. That has to be worked off, and it is going to take about two to three years to work that off until you see the market dramatically change.
In our business plan, we assume 2013 would be the first time we see a noticeable improvement in the market. Having said that, there is still going to be $9 billion to $10 billion in title premiums written this year, which is comparable to 2000 to 2001 and significantly more than the amount I have seen in two-thirds of my career. There is plenty of business to be done. It just does not require all the capacity that has been in the market.
NEWSLINK: Your residential real estate career has been a lengthy one. Isn’t this the worst situation you’ve seen in residential real estate during your career?
STONE: On a national basis, it is. But, there are some interesting data points. From a bubble point of view, the rate of appreciation and the amount of appreciation was probably in the late 1970s. The real estate bubble, inflation-driven at the time, occurred more quickly and dramatically than it did this time. The difference is the amount of dollars and homes involved this time has been astronomically more. The underlying debt structure created a situation that [an industry] does not quickly rebound from. Yes, this is the most difficult.
On a personal level, no it is not. I was managing an operation in Portland, Ore., when Mount St. Helens blew and interest rates were at 16 percent. There were no transactions.
NEWSLINK: Do you think the tax credit had a lot to do with the purchase volume that has taken place year-to-date?
STONE: It just pulled sales forward. Over the total year, it will not make much difference in total volume of transactions. It did pull transactions forward from May and the first half of June or a large part of June was pulled into April. But there is some recovery now in the market. There is at least stability and more interest in the market. It had more effect on pulling deals forward than changing the actual volume.
NEWSLINK: [Some] real estate agents still say there is uncertainty about the economy, worries about increased spending and purchasing a house means spending some money for it. Is that a concern going forward for real estate volume?
STONE: What was term [Federal Reserve Chairman Ben] Bernanke used? “Unusual uncertainty?” That’s probably true. I do not recall a time in which there was so much uncertainty economically. That has caused a lot of people to become cautious about deploying capital. Now, I do think that uncertainty will abate. Getting the financial reform legislation done–I’m sure it will be modified after the first year–but [Congress] got it done. We will get some resolution on whether the tax cuts are extended or modified and to what extent. We will have that cleared up. It appears that the European situation is gaining clarity. There is growth around the world.
I hate to be “Pollyannaish,” but I am optimistic that we will get some resolution of the uncertainty. With that, people will make purchases. We are not talking about bouncing back to anything like we saw four or five years ago, but housing is shelter and if [someone] has an opportunity to get shelter to own at a comparable rate for shelter to rent, a young family will want to own. An existing or expanding family will want to move up. Some of the basic dynamics of shelter will reassert themselves in people’s behavior once the uncertainty abates.
NEWSLINK: How soon do we see that?
STONE: 2013. That’s my prediction.
NEWSLINK: You have mentioned in the past about the process of the real estate transaction and the unnecessary time and costs of a transaction. What do you think is wrong with the process?
STONE: I would still characterize it as being a terribly disjointed process. If you look at the cost of transferring a like-kind-dollar-amount of asset in real estate versus any other asset class, it takes infinitely longer and costs a lot more. Anybody will say that real estate laws differ in every state, business practices are different in every state and clarity or visibility to the underlying collateral is more difficult. But it is also because all of the participants have operated in a very independent manner. There have been varying attempts over time to change that, but nothing provides more motivation to change than economic stress.
The economic stress has caused [industry participants] to start looking at each other and see how they can do more to integrate their processes and exchange information without rekeying it. How can we push some of the processes to the front so that we can make decisions quicker and with greater clarity?
There are various initiatives by lenders, there are initiatives by realtors and initiatives by people in the real estate settlement services industry to attack this. I sense a growing focus on achieving greater efficiency. In our company, we are running a very flat organization. We consolidated all our lender services into two production centers. We are making sure each client has one contact person, and that one contact person is responsible for making sure that business is facilitated everywhere, problems are resolved and we have very strict service-level agreements to do that. Now, I don’t know if that is particularly unique, but we have management focused on not [messing] that up with layers of bureaucracy or competing territorial aims.
There is some outreach. Mortgage brokers I met with were wondering what kind of tools they could put on their web site to help them evaluate the personnel and collateral of a prospective applicant. These tools are available, but they are not easily available for people to use nor have they been consolidated in certain places. We will be working in a very compliant manner to see if we can do more integration and provide more information to the front end to help expedite the process.
NEWSLINK: You mentioned not having to rekey information. However, we now see technology in a tighter economic climate. What are you doing at WFG to determine how you use technology? Would you build it in-house or go to technology vendors? Do you have to be more cautious when you look at technology?
STONE: This is a lesson learned the hard way over many years–we will develop a minimal amount of technology. We will use established technology in place but we will be geared toward paperless technology, we will be geared toward technology that has established integrations or can be easily integrated. We have developed some proprietary systems for our agents, but our basic production systems and our vendor management systems will be modified existing systems that we will use because they are established; they are functional and we can add efficiencies to them without great capital expenditures.
NEWSLINK: In the past, so much money has been lost on technology that has not worked. How do you prevent that from happening where you are at now?
STONE: We will use established, existing technology to a large degree where we can cost-effectively add or modify that technology to gain value. I am not interested in reinventing the wheel or pioneering technology. I am interested in responding to needs and making modifications to meet those needs. There are some very good products out there that have a very low risk of failure or excess cost.
NEWSLINK: When you look at vendors, you’re looking at vendors from past experience?
STONE: From my own experience or, in one vendor, we did an extensive check with existing users to get a high level of comfort.
NEWSLINK: Then many of the processes at WFG will be streamlined?
STONE: One of the nice things about starting fresh is that we are not predisposed to maintain systems because it is always the way it has been done. We also have zero layers of management and we will do everything possible to maintain that absolutely flat management structure so that we can respond quickly.
NEWSLINK: Some of the work by title agencies today is in bankruptcy processes and trying to find different documentation. Do you see WFG playing a role in that?
STONE: As opportunities provide themselves, we will move into markets. Our main focus, right now, is principally a national lender and refinance work. In the Portland market, where we have a de novo direct operation, we are doing significant realtor work. One-third of the realtor work is distressed properties of one sort or another.
We will move into markets as we feel we can effectively capitalize on the opportunity. I am not anxious to try anything unless I am 100 percent sure that we can make money at them and that they are a logical next step for the company. One thing I said earlier about the market turning in 2013, to me that means we have three years to firmly establish our company. We are going to have a multitude of opportunities to do it. We need to be intelligent, logical, thoughtful and very methodical about how we go about it.
NEWSLINK: Do you see future consolidation in the title industry or is it as consolidated as it will be?
STONE: The market share in this industry is somewhat fluid. You will see more consolidation. There are probably 30 underwriters—second or third-tier underwriters. You will see some consolidation there. There will probably be consolidation of larger companies buying smaller companies. The market share is fluid because this is a service business. The pricing and products are essentially the same. While not completely a commodity, a company cannot differentiate itself by product and price. It differentiates itself by service and service is a fairly fluid market determinant.
NEWSLINK: When you speak of service, what are your top priorities?
STONE: At this company, we have tried formal and informal surveys to make sure that we align our priorities with our clients. We asked a group of clients about the most important factors they use to determine who they do business with. Number one was expertise and, only slightly behind, number two was responsiveness—that had double the importance of accessibility, adherence to agreements, common goals, alignment of purpose or anything else. What does that say? It says people are not getting their phone calls returned.
This is like Business 101. Return the phone calls. But, it is not happening. When digging down on it, because this is a difficult market and people have problems getting transactions done, there is no tolerance for waiting a day for someone to return a phone call. Everyone of my employees has heard this comment about 10 times now—you return the phone call at the earliest possible moment you can return the phone call.
The other question was: What are the points of pain? There are standard points of pain, but the one that was far and away the top was unexpected surprises. What does that mean? That means that every deal is difficult and because every deal is difficult, clients have a heightened degree of sensitivity for anything coming up at the last moment. Our job, then, is to anticipate any problems. We have our title department looking for anything they require or will be needed to issue a policy. We do not wait until closing to bring up these issues. The title department knows they have to alert the closing department to anything they see that may create a problem. The escrow officer closing the deal is required to look at the title report immediately upon receipt so that they know if there are any problems.
This sounds really basic but it all goes to not having unexpected surprises whenclose with us. Will they happen? Sure, they’ll happen occasionally, but we can mitigate that problem, and that problem is a real pain point right now because deals are difficult.