A few months ago – shortly before the COVID-19 pandemic changed the world as we know it – a husband and wife flew to California to close a cash-out refinance. The home was free and clear of any liens on the property, and the lender promised them a 21-day closing – so the couple anticipated a simple, straightforward transaction.
Unfortunately, the closing process that ensued was far from simple or straightforward. Early on in the transaction, the lender demanded a termite inspection and required roof repairs to be completed before funding. After complying with this requirement, the homeowners then encountered “delay after delay, mistake after mistake, wasting precious time,” which “ultimately sank this deal,” costing them an expensive trip to California.
So reads a consumer narrative recently filed with the Consumer Financial Protection Bureau’s (CFPB) Consumer Complaint Database, in which the homeowners note: “Every time we were told that all the documentation we needed to provide was accepted and we don’t need anything else, invariably someone remembers they need something else days or weeks later, leading to changing the loan amount and lender credits and delaying closing the loan.”
As reflected by the publicly available data in the CFPB’s database, consumers find the process to close a mortgage loan or refinance an existing loan notoriously onerous, confusing, and time-consuming. Despite efficiencies made possible by newly developed technology, the average closing time is 59 days for a purchase transaction, and 47 days for a refi, according to leading mortgage software company Ellie Mae. This not only frustrates buyers and homeowners, but it also costs lenders time and money – which has not escaped the notice of more forward-thinking title insurance companies seeking to streamline their part of the process.
“Traditional title insurance is fulfilled in a basic sequence of events,” explained Kirk Wells, Senior Vice President of Strategic and Enterprise Accounts for States Title. “The title order is placed, a search package is ordered, which returns with a preliminary report of some kind detailing any potential encumbrances or clouds to the title that could be there. Then you move to the curative phase, where these items are determined to be real, and there is an attempt to cure issues. Only after all of the issues have been cured or satisfied is a standard ALTA title commitment issued.”
To address these pain points, some title insurance companies are pursuing various ways to expedite the search and clear-to-close process and achieve an “instant title” experience. These methods typically use rules-based decision-making to pull in publicly available, electronic data to discover liens or encumbrances.
“What some title companies are doing is an expedited search process and returning clear-to-close commitments where there are no encumbrances or clouds found,” Kirk said. “This can often happen in a matter of hours.”
This form of instant underwriting can be attractive to lenders seeking to find operational efficiencies that allow them to have shorter rate locks and faster turnaround times – but it does have drawbacks, Kirk noted.
“In some cases where it is used, the curative process is still not eliminated,” he said. “What’s more, this method is extremely dependent on the availability of data in certain markets to discover liens and encumbrances. We are often told our ‘instant rate’ across some of the more challenging geographies is substantially higher”
In 2019, the U.S. Patent and Trademark Office issued to States Title a patent for “Machine Learning Using Multiple Data Types.” Our predictive analytics algorithms cull proprietary data sources on the property, and assign a risk score to determine how safe a property is in terms of potential liens and other liabilities that may cloud a property’s title. The solution can deliver a final title commitment, free of defects, in less than a minute for 80 percent of refi transactions.
But that’s just one aspect of the instant title solution States Title has developed, Kirk pointed out. In addition to automating much of the title search process, the instant underwriting model patented by States Title is also designed to accommodate risk-based decisions.
“We are in the business of insurance, and we believe that means handling claims expeditiously and completely,” Kirk said. “What we have found over the last few years is that a lot of the items that exist on a clear-to-close title commitment are not necessary to underwrite a title policy. Because we are making risk-based decisions rather than rules-based decisions, we are willing to accept risk and write over certain things that may be encumbrances on the title, but our models show we will have a low likelihood of a claim and will have no impact on lenders or consumers.”
The methodology is approved by state regulators, fully accepted by all key stakeholders in the public and private secondary markets, and 100-percent reinsured by SCOR Global, the world’s fourth-largest reinsurance company. This enables us to expeditiously process claims, Kirk said.
“If a claim is incurred, we do not deny or delay,” he said. “As a result, lenders do not need to change any of their processes, and they assume no increased financial risk because of the way we have architected our claims process.”
For these reasons, in contrast to the instant title solutions offered by other providers, States Title’s solution is “not just instant, but complete,” Kirk noted.
“Our title policy is just as broad, but can be delivered in a faster period of time, without exceptions,” he said. “For lenders who are looking to introduce speed in the time to close and achieve a higher likelihood of closing, our solution enables them to operate more efficiently, saving them money, and have shorter rate locks and increased turnaround times.”
In a recent Forbes Real Estate Council post, For the Mortgage Industry, There’s No Going Back to our Pre-Pandemic Ways, States Title CEO Max Simkoff pointed out that challenges associated with the COVID-19 pandemic spurred the mortgage, title and settlement services industries into a more technology-enabled way to do business after decades of slow adoption.
“Electronic communication, secure document transmission and virtual signatures via remote online notarization (RON) are just a few examples of the digital switches turned on in the face of the pandemic’s lockdown,” Max wrote. “In nearly every case, the technology was implemented out of sheer necessity, and it overcame years of inertia that had stood in the way just several months prior.”
As a result of these shifts, consumer expectations have “leveled up” across the board – from virtual healthcare visits to online grocery delivery – and mortgage lending is no exception, Max wrote. As a result, lenders now find themselves at a crossroad: Return to the way things were done pre-coronavirus, or continue to accelerate their adoption of modern-day technology to give consumers an easier, simpler, faster real estate closing process.
“The companies that slide back into the old ways of handling transactions – those that assumed that their ‘proof-of-concept’ technological processes implemented in the face of COVID-19 were just a temporary crisis response – won’t be able to take on the high demand, and will likely fade away as they steadily lose market share to companies that have stayed the course and can take advantage of the boom,” Max wrote. “As every mortgage lender knows, the competition in this space is fierce, and the margins can be thin. And when you get caught on the wrong end of the demand curve, it’s lights out.”