Raise the Bar across the Industry

There’s an active group on Facebook called Raise the Bar which discusses (for the most part) ways that agents can improve the overall service levels in the real estate industry and thereby raise the professionalism practiced by each individual agent or broker. The goal is admirable and the efforts sincere even if they do get off track from time to time. But they seldom discuss items outside of their limited purview, i.e. the brokerage of real property.keys-title-insurance

Perhaps it’s time to expand that horizon because it’s clear from the following article that something needs to be done with bad players in other sectors of the business, in this case one major player in the title insurance industry.

In an article entitled A Trusting Couple Now Thrown for Two Loops published in Sunday’s New York Times (12/1/2013, Business Section, page 1) and written by assistant business and financial editor Gretchen Morgenson, Stewart Title is pressing a lawsuit against a retired Florida couple who were swindled out of millions of dollars by an employee of Stewart Title itself.

If the story is accurate, and considering the source is The New York Times I have no reason to believe otherwise, Stewart Title should not only be ashamed of its collective corporate self, but real estate agents everywhere should know what this behemoth is capable of and ask themselves if they want to expose and entrust their future escrow closings to a company that would behave as egregiously as has Stewart. (Remember, you have not only an ethical requirement but also a legal fiduciary responsibility to advise your clients in the best way possible, lest you, too, become the target of litigation should things go south.)

Here are the details:

Ivor Rose and Rita Starr have been married for 38 years.

They lived modestly in Miami Beach, buying and renting commercial and residential properties there. Mr. Rose, 79, a child the Depression, had a strong distaste for debt, so. The couple never borrowed money but was able to buy the six warehouses and eight homes with cash. Those properties were worth around $15 million in 2006.

Miami businessman Michael Stern rented space from Rose/Staff for a shoe store. He became friends with the couple to gain their trust and then started investing with them in other commercial properties. What they didn’t know was that Stern was busy mortgaging their other properties without their knowledge by falsifying signatures and forging documents with the help of Stewart employee Arlene Raijman. Ms. Raijman issued title policies on all of the Stern mortgages despite having improper documentation to back up the insurance because the documents were forgeries.

Here’s where the irony comes in.

Stern stopped paying on the mortgages and skipped to South America. The lenders started foreclosing on the properties and when Rose/Starr received delinquency notices the alarms started sounding. Lenders looked to Stewart to make good on their policies and return all of the loan capital. From the article:

“Stewart Title, the company that insured the fraudulent mortgage loans — and whose policies require it to cover all the losses on the loans arising from forgeries and other defects — has refused to make a settlement on most of the properties.

“And Stewart Title is doing this at the same time it is asserting, in another court venue, that one of its agents helped Mr. Stern secure bogus loans. It is suing that agent.

“According to a lawsuit that Stewart filed against her, Ms. Raijman breached her duties at more than two dozen loan closings, issuing title insurance even though loan documentation was improper. Fifteen of those closings were for properties belonging to Mr. Rose and Ms. Starr.

“Chief among the improprieties, the documents show, was her disbursement of loan proceeds to Mr. Stern rather than to the couple, as the loan documents required.”

As I said at the top, if these allegations are true, this could turn out to be a huge black eye for Stewart and a red flag to agents or brokers thinking of using them in the future. John Arcidiacono, chief marketing officer for Stewart who was contacted by the reporter, declined to comment on specifics, citing the litigation. On the Stewart Information Services website, among the duties ascribed to Mr. Arcidiacono is “crisis management” so it would appear he is the right person to address this situation.

But Stewart is managing this crisis out of both sides of its mouth. In the Florida case against Rose/Starr, Stewart contends Ms. Raijman was not one of its agents or employees and that the company, therefore, should not be held responsible for her dealings.

But in Texas Stewart has sued the Great American Insurance Company, a reinsurer from which Stewart bought a $15 million insurance bond. Stewart bought the bond in April 2009 to protect against losses resulting “directly from dishonest or fraudulent acts committed by an employee acting alone or in collusion with others,” its lawsuit says. Stewart says Ms. Raijman was indeed its agent. As such, it hopes to collect on the bond and to recoup roughly $10 million in losses it has incurred so far over her work.

So which way is it? Was she an employee in Texas, but not in Florida? Doubtful! Is Stewart walking a fine line between the cases in hopes of minimizing their financial exposure? For sure! But how much is that exposure? According to the article it’s in the vicinity of $10 to 15 million.

To put that into perspective, Stewart Information Services (STC: NYSE parent of Stewart Title) racked up over $2 billion in revenue last year, up 17% from the year before. Stewart carries a loss contingency fund on its balance sheet of $140 million. They could easily pay in full on these policies and tap that fund for less than 10% of its allocation, so they would not materially affect the balance sheet (or the shareholders).

And they would be off the hook in the arena of public opinion, and in the minds of the real estate agents and brokers upon whom they depend for a great majority of their revenues. As it stands now, Stewart looks like the greedy corporate giant stepping on the “little guy” or in this case, considering the age and stamina of the victims of this fraud, just waiting for them to give up.

That’s not a pretty picture, and certainly not one that Stewart Title officers would like to promote. Perhaps they’re hopeful that real estate professionals don’t read The New York Times. That would be misplaced optimism since Times articles are syndicated in hundreds of local papers across the country. Surely more industry observers than just I have seen the article somewhere.

Which leads me back to my original conjecture that by pursuing this case Stewart stands to make more enemies than friends, particularly among the thousand or more agents who funnel closing and title service business to them. I ask the Raise the Bar group, again – Would you want to expose your real estate clients to this kind of potential abuse? If not, Stewart customers, instead of raising the bar perhaps it’s time to lower the boom and take your next closing elsewhere.

For this post:
Cause: You’re never too small to be crushed.
Effect: You’re never too big to be scolded.