When Qualia’s CEO Nate Baker was beginning his initial deep dive into the complexities of the title industry, he found one resource that stood out among the rest. “The single most useful thing I listened to during this time were interviews with Patrick Stone on the incentives of everyone in the real estate transaction,” Baker said.
Stone is known for his extensive knowledge of the title insurance and mortgage lending industries. His career includes time served in executive management positions at multiple public companies and as president and COO of Fidelity National Financial. In late 2009, he founded Williston Financial Group (WFG) with a goal of bringing together isolated elements of a real estate transaction to create efficiencies and improve costs.
At the Future of Real Estate Summit, Baker sat down with Stone to discuss Stone’s past predictions, his thoughts on how the title insurance industry has evolved over the years, and his predictions for the future.
Predictions and decision making rooted in history
Throughout Stone’s career, he led the purchase of 79 companies. At WFG, he has continued the trend, and has acquired various businesses in the title insurance and real estate settlement services industries. Stone said his business acquisition philosophy is a combination of vision, history, and opportunity.
“If you’re trying to put a company together, a lot of people just grab opportunity,” Stone noted. “Opportunity is ok, but it really helps to have an underlying plan of where you want to be, where you want to go, and why.” This approach not only guides businesses away from merely collecting “shiny objects,” but it also gives them credibility and validity when securing capital for these types of transactions.
When evaluating businesses, Stone noted that financial models alone are not enough to make a decision. He also looks at the history of the company. “I look at how the business got to where it is today,” he said. “This will tell you a lot about the talent, capability, and culture of the organization so you can make solid assumptions about where the business can go and whether it can adjust to what you need.”
Building a more adaptable title insurance business
After the economic downturn in 2008, Stone saw an opportunity to create a new title insurance business that could better respond to technological changes and future economic uncertainty. This business was WFG.
“[After the economic downturn], most of the real estate industry realized that there would be monumental change and there was a lot of awakening,” Stone said. “But the title insurance industry did not awaken. The big title insurers who are very hierarchical in nature didn’t change—they just shrunk the base of their pyramids.”
Stone decided to create a new national company that minimized the amount of FF&E (furniture, fixtures, and equipment), people, and fixed costs. By leveraging technology, he could ensure that it would be well-positioned for any significant economic change. “We don’t have 2,000 offices,” Stone noted. “We only have 81 offices and produce twice as much per office for high productivity and high return.”
Stone also focused on building out the lender facing side of the business to better manage order processing with lenders. “Lenders really drive the industry,” he said. “They decide how fast we go and how much change we undertake.” To solidify this arena, Stone worked to align his technology with the needs of lenders. Tasks requiring multiple data entry were one such area for disruption. With technology that cuts down on the amount of rekeying between title and lender files, businesses save time and reduce costs.
Past and future predictions: title agent consolidation and vertical integration
Baker also referenced Stone’s past predictions around title agent consolidation and whether he still believes it will occur in the future. “It didn’t happen as fast I thought it would,” Stone said, “but I still believe [consolidation] will happen.”
In fact, Stone expressed his belief that it would happen at a much faster rate going forward. “I thought cyber security requirements would cost companies and force many out of the business,” he said. “It hasn’t happened as quickly as I thought, but I think it will accelerate in the next downturn.”
Part of what drives Stone’s prediction is a growing trend toward increased state-level oversight. Under the Trump Administration, the level of enforcement undertaken by the Consumer Financial Protection Bureau (CFPB) waned, and as a result, many states have started to enter the regulatory arena. As an example, many states are considering enacting consumer data protection laws similar to California Consumer Privacy Act (CCPA). Additionally, experts cite increased state-level oversight of underwriters in 2020, which will cause them to dig more deeply into their agent’s files.
Further consolidation will also come from the vertical integration of brokerages and lenders. While we’ve seen a recent uptick in conversation within the industry around this topic, Baker pointed to the fact that it isn’t necessarily a new trend. Stone agreed, saying that the current focus on vertical integration stems from real estate agents who are looking for new ways to make money in an increasingly competitive business —especially as they lose control of other parts of the real estate transaction (such as the home search process) to online aggregators like Zillow.
While Stone expects that cyber security and other compliance requirements will eventually shrink the pool of title operations, he doesn’t believe the role of the title agent will be eliminated (as some predict will come out of the rise of automation) because title agents deliver exceptional value to homebuyers.
“A home purchase is one of the biggest decisions people make in their life,” Stone noted. He referenced recent studies which indicate that homebuyers still want face-to-face interactions with title agents at the closing table. “Title agents will always have value because of that,” he said. “But will there be as many title businesses in the future? I don’t think so.”
Looking ahead: surviving the next recession
“If you look at what’s going on in the economy right now, things are good; however we do have a tremendous bubble in the economy and it’s corporate debt,” Stone said.
According to Stone, the amount of risk in the system is staggering. Corporate debt is up 50% since 2009, and 43% of publicly traded companies did not show a profit this year. Additionally, Stone noted that “venture capital companies are giving out twice as much money as they did during the dot com bubble.”
All of this leads Stone to predict a recession in 6 to 18 months. The good news, according to Stone, is that real estate won’t take center stage. “This time, it won’t be real estate that brings down the house,” he said. “However, real estate will still be impacted slightly.” Instead, he anticipates that the demand for real estate will continue for the next 5-7 years, given that we are still running below long term potential.
That being said, he closed the session by imploring businesses to plan ahead for the coming downturn. “Ask yourself ‘what am I going to do if my volume slows down by 20 or 30%’ and make a plan,” he said. His strategic suggestions include moving fixed costs to variable costs when possible and leveraging technology to reduce costs and make efficiency gains.
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