First American Financial Corporation (FAF) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us for our final session for Title Day. My name is Bose George, I cover the mortgage finance sector here at KBW. We have the management team from First American, there's Ken DeGiorgio, the CEO; Mark Seaton, the CFO; and Craig Barberio, the Head of Investor Relations. It's going to be a fireside chat. But first, let me just hand it over to Ken to make a few introductory remarks, and then we can go from there.

Great. Thanks a lot, Bose, and good morning to everyone, and thanks again, Bose, for inviting us. We've been doing the KBW Title Insurance Day for probably more than a decade. And we think it's a great opportunity to tell our story, which we think is really unique in our industry, and I assume that will -- over the course of this conversation, that will come to light. I want to hit a few topics in my intro that I know are top of mind, and I expect we'll go deeper on these and obviously, into some other areas. First and foremost is the market. I mean, we've seen difficult conditions in this market since at least mid-2022. And I'll note that we saw it coming in early 2022 and started adjusting. And what's been the drivers of this? Well, on the residential purchase side low affordability; rising prices; high mortgage rates; low inventory, which is by and large, been a product of a lock-in effect. I note that as of now, roughly over 80% of mortgaged homes have a rate less than 6%. So that lock-in effect has been profound. On the residential refi side, I mean, that's an easy one. It's correlated with mortgage rates, so it's just been high mortgage rates. On the commercial side, similarly, interest rates and then uncertainty have impacted that market as well. But we're seeing some improvements in the market, and we're cautiously optimistic that next year will be better. Housing inventory should continue to grow, though still at historically low levels. House price growth should continue to moderate in prices, they might actually decline in some markets. Rates should drop, which would help both the residential market and the commercial market. Though rates, I think, as we all know, is hard to predict -- they're hard to predict, and the magnitude of any rate adjustment is obviously always uncertain. And then also on the commercial side, price discovery seems well underway, which will help the commercial market. We're seeing some encouraging signs in our own business that's reflective of the market. As we mentioned in our last earnings call, Q3, we saw the first year-over-year revenue growth since Q2 of 2022. Year-to-date, in our refinance and purchase business, we have seen some modest revenue growth. Commercial has been a bright spot. In Q3, as we mentioned, we saw 19% growth, and that continues into Q4, which we expect to be strong, if not very strong. And that's a critical -- Q4 is a critical quarter for our commercial business. And then we see that actually continuing on into next year, given what we have in the pipeline. These factors also will help us grow our investment income, which I assume we will probably get into later given the importance of investment income to our story. The issue, of course, with all of this, again, what we see, we're optimistic about improvement. It's the magnitude of improvement, and that's going to be hard to predict. Let me talk a little bit about our strategy and our approach to the market. By and large, unlike some of our competitors, we're a pure-play in title and settlement. We participate in all 3 key real estate markets: commercial, purchase, refi. We do have some adjacent businesses. We have a data business. Now data is the lifeblood of the title insurance business, but it's also -- we also license data to others, and we are the leader in title data because it drives our traditional title business. It also drives innovation. Data is critical to automation and digitization efforts our own and in the industry. We have a bank. So it gives us the opportunity to monetize escrow and other deposits. And I'll note, we're the only title company with a bank. And then lastly, on these adjacent businesses, we have a home warranty company. It's a settlement services, but we're focusing on direct-to-consumer efforts. And we like this business because the penetration rate for home warranties in the United States is pretty low. Another big part of our strategy is innovation. Because of the strength of our operations and our balance sheet, that allowed us to continue to innovate -- continue to invest in innovation throughout the extended downturn. I mentioned earlier that we adjusted when we saw the market turning in early 2022. This is one thing we didn't adjust. We did not compromise, and we were very transparent with the shareholders. We were not going to compromise on our innovation efforts. And these efforts, among others, enable us to reimagine the closing process and automate underwriting for purchase transactions. And those things enable us to improve the customer experience and they make our business more efficient. The last thing I want to comment on our -- in my intro is capital allocation. Well, our focus has been, as I mentioned early on, investing back in the business -- back in making the closing process more efficient and automating underwriting. We're also actively looking for acquisition opportunities. Acquisition opportunities that meaningfully impact our business. So far, we haven't seen anything of the size and quality of Mother Lode, which we purchased in 2022, but they could come available when we remain actively interested in that. And then lastly, we're committed to returning capital to shareholders, which we've done throughout the downturn. Since the beginning of 2022, we've repurchased over $575 million in shares, and we -- our repurchase program remains active. And we've also increased the dividend by 6% over that time. So with that, Bose, I'll again, thank you for inviting us and giving us the opportunity, and I'll turn it back to you.

Great. Thanks, Ken, for the update. So actually, yes, let me kick it off. I've got a few things. First, just in terms of the monthly, just the volume expectations for. I know you guys put out your monthly numbers, I would assume next week. But just any color you can give us on how things are trending in terms of volumes.

I'll start with that. November, we had an update at the Stephens Conference a couple of weeks ago, but we're near final on November. And the good news, even though we had a backup in rates, that the purchase market open orders are kind of coming -- came in at about -- up 3% year-over-year. And significantly as well, the commercial market opened orders up 5% year-over-year. And of course, refi while slowing is still up about 20% year-over-year, opened orders. So those -- all those indicators are -- they're good relative to the early parts of the year.

Okay. Great. And those -- that's the number -- that's the November number or the quarter-to-date you said?

Say that again?

That was for November?

That was for November, the month of November.

Perfect. Okay. Great. And then looking out to next year, could you just talk about your latest expectations for market activity now that we're almost into the end of the year? I mean, is the run rate that you're seeing now, kind of what you think persists unless we see a big move in rates?

Yes. I mean I'll comment, I guess, first on the residential market. I mean, as I sort of alluded to in my intro, I mean, we expect some modest improvement. Obviously, recent rate increases haven't helped. But we expect to see affordability improve, inventory should continue to grow, price appreciation should continue to moderate. And as I mentioned, in some markets, it might actually decline. And I think rates will come down, at least the prognosticators think that rates will come down. And as we know, they're always right. So again, we're hoping for rates to come down. The other thing I'll point out is wage growth should help, too. If the broader economy grows and wages grow, that increases the buying power for potential home purchasers, so that should help. As far as the outlook on the commercial market, I'm encouraged about the commercial market. I'm very encouraged about it. I mean, in our own business, as I mentioned, we saw 19% revenue growth in Q3. And we see that trend continuing into Q4. It's going to be a strong Q4. November, our revenue is up over 20%, and that's with 1 less business day. And the pipeline is really strong, which tells us that that this momentum is going to continue into next year.

And actually, then on the commercial side, the open orders that you're seeing now, will they generally close before year-end? Or are these orders that also sort of feed into the strength of the next year?

Craig, do you want to talk about the open orders?

Yes. I mean the thing about commercial orders, it's -- the commercial market has been driven more by average fee per filed and the absolute level of orders. So orders can close week out or it can take a year. So it's really kind of a hard question to answer. But really, what's been driving is the quality of the deals that we're seeing. We're seeing higher quality deals, and the large deals are also coming back into the picture.

Okay. Great. And then actually, just within the commercial subsectors, can you -- any sort of color on pockets of strengths and where you're seeing the most strength?

Yes. I think the most strength we're seeing is probably in multifamily and industrial, lots of data centers. The opposite of that, obviously, office continues, particularly the CBD continues to be under pressure. But it's by and large in industrial and multifamily, some development site and a little bit of retail, but I think the focus is on multifamily and industrial. But I'll take the opportunity to point out one thing about our business is we're sort of a microcosm of the broader commercial business. If one sector does well, we do well in that sector. If another sector does well we do well in that sector, we're pretty broad-based and diversified. So one, the strength or weakness in one sector typically tends to get offset by strength or weakness in another.

Yes. Okay. Makes sense. And then switching over to margins. So you guys recently provided an updated view just on longer term margins. Can you just walk through that and then also discuss sort of this -- the impact of Sequoia and Endpoint how that sort of plays out over time as well?

Yes. So long-term margins, yes, it's always a tough thing because we don't know what the long-term market is, what the normalized market is. I mean so the way we think about it is the best margins we ever had in title segment was 15%. 2021, $4 trillion origination market, we had 15% margins. That's the best we ever had. Last year, we hit basically 10% margins, 9.8% or 9.9%, basically 10% margins. And it is a trough year, right? There's no question in our mind that last year was a trough. So you take the midpoint between the peak of the trough for those 2 numbers, you get 12.5%. Now the other thing is we've had roughly 100 basis points of margin drag for the last couple of years because of these innovation efforts. And we kind of exclude that, right? Because eventually, that's going to dissipate. So you add 100 basis points of margin, you get to like a normalized margin of 13.5%. But there's a few things I'd say for that. The first thing is whether it's last year or whether it's 2021, we don't think we were very efficient with our technology. I'm not talking about innovation. I'm just talking about just technology. And we're in the process of cutting our technology expenses. And so I think there's upside to that 13.5% because we can get more efficient than we were in those 2 markets. The second thing I'd say is the 13.5% also doesn't assume we get any benefit for the innovation that Ken talked about either on the escrow side or the title side. That assumes we get no drag, but also no lift. And so there's upside with that. It's going to take some time, but we feel like there is upside. That's the sole reason why we're doing it. And the last thing I'd point out is back in 2015, when we have the highest margins we've had, the Fed funds was at 0. And I don't think anybody thinks we're going to go down to 0. What's the normalized Fed funds and there's a debate about it, but somewhere between 2.5% and 3%, let's say, is a normalized Fed funds, right? So in a normalized environment, we're going to have better investment income, everything else being equal than we've had. And so I would say 13.5%, but there's reason to believe because of those 3 reasons I gave, we could be higher. We just need a little bit more time to get there.

Okay. Great. And then actually, specifically, just in terms of Sequoia and Endpoint and the timeline to that dissipating, is it kind of too early to tell? Or what's kind of the best way to think about that?

We take them into two different pieces. On the Sequoia side, we've got pilots going on, which we've disclosed in the Riverside County and Maricopa County, which is Phoenix. And the pilots are going well. What we're doing is we're trying to really perfect it. We're trying to get our 50% hit rates operationally done. We know we can get 50% hit rates because of our models, but we need the production wise. We actually need to achieve it. And then once we achieve it, we'll start spreading it. And so that's really on Sequoia. And on Endpoint, the technology, whenever you build a system like you're never done, I mean, you're constantly improving things, but it's ready to be rolled out broader and we're working on a plan to get that done. So we've got our teams working together to basically infiltrate our Endpoint technology through the broader residential business. So I think that one will take maybe a little bit longer, but probably more upside on that one. And so we're anxious to talk to the market and put some more numbers to what we think the benefit is going to be. But what we want to do before we do that is to test it. Like we want to roll out Sequoia, we want to roll out Endpoint in a few markets and say, listen, our efficiency went from X to Y and you extrapolate that, and you get Z, we just don't -- we don't have that quite yet, but we'll get that at some point here.

Okay. Great. And then actually one more on margins. If 2025 ends up being sort of just modestly better than '24 on volumes, could we expect kind of a modest uptick in margins with bigger improvements occurring once volumes recover more meaningfully, is that kind of a good way to think about it?

Yes. No, I think that's right. I mean we feel like we'll get margin improvement next year for a few reasons. Ken talked about 3 major markets: commercial, refi, purchase. They're all -- we all think -- we think they're all going to be up next year. There's debates about the slope of the growth, but we think they're all going to grow next year, particularly commercial. So that's a tailwind. We all -- I talked about these tech expenses. I mean, we're going to be cutting expenses on technology specifically. And that will be a tailwind going into next year. We talked about this tax loss harvesting last quarter, that's going to add $69 million of investment income next year. So that will be a big -- I'd say a big tailwind. The one headwind we have is the Fed. Every time the Fed cuts, this $15 million of annualized investment income. So that's probably the one headwind we have. But when you wrap all those together, we're going to have better margins next year. Now I don't think there'll be to our normalized margin because we don't think next year is going to be a normalized market. It's still going to be a tough market. But we'll get improvement for sure over this year.

Yes. Okay. That makes sense. And then I wanted to ask about the title plans. So I mean you mentioned in the past, I mean, you guys are a leader in terms of title plans and data collection. Can you just speak to what you think sets you apart in this area? And just the benefits of that now and down the road?

I'll take that one, Bose, and thanks for the question. It's a great question. I appreciate the opportunity to talk about it because our data is really one of the major differentiators for our business. Let me talk first about the importance of data and I alluded to this a little bit earlier, but data drives the traditional title business. Underwriters look at it, examiners look at it. And as a result, we sell this data to our competitors and other -- and our agents and others in the industry because it's the lifeblood of the industry. But it also drives automation. And you can't automate, you can't digitize without the data. So for us, the big thing we have is we have more title data than anyone. We have 1,800 title plans. The next largest owner of title plans is a very, very small fraction of that, which means we have a substantial lead. And really, it's probably next to impossible to catch us. The other thing I would add is that we are really the best at acquiring the source data. We have the expertise to acquire that source data. And even more importantly, we're the best at extracting it. And to extract that, we leverage proprietary data extraction technology that utilizes machine learning and AI. And we've been using machine learning and AI long before those terms became part of the lexicon of everyday business. So why does this set us apart? I mean foremost, we're largely not dependent on others for this critical component. I mean there are some instances where we buy a title plan access from our competitors or from third-party providers. But by and large, we're not dependent on others just to do the traditional title business. And then secondly, as I suggested, we're able to use this data to train our machines, to automate title decisioning for purchase transaction. This is what we call Sequoia and Mark talked about it earlier -- on one of your earlier questions. Automating title decisioning for purchase transactions is tough. Refi is easy. Refi is easy. It's low risk, and it's rules-driven, and everyone does it. Everyone has that there's third-party providers for refi, but you have to have the data to do purchase. And you have to have the data in bulk to do automated underwriting for purchase transactions. And we don't allow anyone to access our data in bulk other than our own company, obviously.

Okay. Great. And then actually, I wanted -- switching back to the margin-related question. Can you talk about fixed versus variable costs? Just how much operating leverage? I guess, I mean you guys use success ratios just kind of a good way to think about that.

Yes. Bose, so yes, it's something we track on a continued ongoing basis. The rule of thumb is numbers you can remember, for personnel expenses, about 25% is strictly variable. And for other operating expenses, the 2 major buckets of controllable costs, it's about 50%. The actual numbers for the last quarter were 23% variable for personnel and 44% for other operating. And then just to kind of take it one step further. If you kind of blend those 2 together, that's like a 35% variable rate, then you got -- then we set out the 60% success ratio. And that entails additional management actions to match our resources to the order flow. So -- because the first -- the numbers I mentioned on variable, those are strictly variable. Revenue goes up or down, we -- basically in personnel, it's incentive compensation and related payroll burden goes down. And in other operating expenses, it's just -- it's the production-related costs that go up and down automatically. But to get to the 60%, we have -- management has to take actions to manage costs to the level of activity.

Okay. Great. Actually, just wanted to remind investors, if you want to ask questions, please submit it through the chat. Actually, so switching over to a couple of other topics. Can you remind us how much the residential fee per file moves relative to home prices? And then how does that -- and on the come -- and just how it works on the commercial side, whether there is a similar thing?

Yes, Bose, on that area, it varies depending on what market conditions are. But in general, for the residential market over the long haul, we say that about 60% of home price appreciation gets reflected in our fee to file. So if rates go up, if HPA is up 10%, then period will be up -- we expect to be up 6% in terms of our fee per file. Now on the commercial side, it's a little different. We -- there, you're charged kind of -- the fees are kind of on a fee per $1,000 of exposure. So they tend to move more directly with appreciation or the average value of the property. So they're more directly related than is residential.

Okay. Great. And then actually a different topic. I just wanted to ask like the data from ALTA, it looks here like the agent share went up during COVID and it went down. Since then, just -- are agents stronger in the refi channel? Or just curious what -- is there anything else to read from that data?

Yes. I'll say they're not stronger, but I think agents -- and in particular, large agents are most -- are probably more focused on it. And again, these tend to be larger agents because it can be -- the refis can be centralized, it's less capital intensive. They don't spend the money that we spend, and our largest competitor spend to maintain offices throughout the country because they can have this singular focus on refi. So again, not stronger. I just think they're probably just more focused on it. It's more focused on it.

Okay. That makes sense. Actually, we have a question from the audience. It says, do you believe home prices will soften as existing home sales come back on the market with or without a decline in interest rates?

Yes. I mean I do think prices are going to -- in the very least, the rate of growth in prices is going to come down, and we're already seeing that a little bit. And as I mentioned earlier, in some markets, I think we actually expect to see and maybe already are seeing some price decreases. So yes, I do think irrespective of even if rates, I do think we're -- as more and more inventory comes on to the market because people have to move. I mean, despite the rate lock-in effect I mentioned earlier, people do have to move so that inventory is going to grow. We're already seeing the inventory grow a bit. And as a result, I do expect prices to moderate and perhaps even decline. Not decline on the whole in the short-term, but over the long-term.

Okay. Great. Can you talk about potential M&A in the sector? Do you think the large companies are kind of locked out of it and it's more buying smaller names? Or just how you feel like M&A kind of plays out over time?

Yes. Well, as I mentioned earlier, we're focused on M&A opportunities, but there's just not that many large impactful opportunities. We probably did the last major one, which was the acquisition of Mother Lode, and that was in early 2022. We just don't see as many -- certainly in the title space of the reach and quality of Mother Lode. I mean they're out there, but they're just -- we don't see them for sale. So I don't think the big 4 underwriters are locked out of acquiring companies like Mother Lode or the size of Mother Lode. I just -- I don't -- the opportunities aren't there yet. They'll come, but they're just not there yet.

Okay. Great. Actually, then I want to switch over to the loss provision. So your loss provision has been 3% for some time, I guess, since mid-'23. Can you just talk about the outlook for the loss provision? Any reason that should go higher or lower? And also just how it varies on commercial versus residential?

It's -- our expectation, it will be similar going forward. We were surprised. I mean this last downturn, we thought, hey, maybe our claims are going to go up now just because of the surge in interest rates and the collapse of the mortgage origination volumes. And claims never did. Claims has been very, very strong. For reasons that such as our underwriting standards have been really good through the cycle, there's still a lot of equity in homes. There haven't been many foreclosures. I mean housing prices have been -- continue to be strong. So all those reasons you kind of look back and we wouldn't expect any pickup in claims. But claims ratios have been really good, and we think they'll be in the 3% range going forward. And then the commercial loss ratios are little bit higher, not much. I mean it's not dramatically higher, but when you take the 3%, commercial is a little bit higher, maybe in the low 4s and residential is a little bit lower, but they're not drastically different.

Okay. Great. And so let me switch over to investment income. So you guys had escrow deposits. I guess, it was $9 billion at the end of the third quarter. What was the rough breakout just between residential and commercial?

Roughly, it's about 60%. Commercial is a lot less in terms of -- I mean we don't -- 60% of our revenue is not commercial, but you get these big commercial deposits. And a lot of times, they'll sit there. We just got -- just this week, we got $195 million commercial deposit, and they said we're going to hold it for 16 months. So some of these commercial deposits will close like in 30 days or 40 days or 55 days like a residential transaction, but some of them last for a few years or certainly could last several months or a year. So because there's just less velocity, it just means that we have higher commercial deposits. So it's about -- the rough number is about 60% commercial.

Great. And then how do you decide the balance between how much you keep at your bank, FA Trust? And how much of it ends up with third-party banks?

So there's a few different guidelines we look at. The first thing is there's -- we break it out savings deposits versus checking deposits. And this is really where we have an advantage with our bank. For -- if our customer wants to earn interest on their escrow deposit, and most of the time, these are commercial customers that have big deposits that they want to earn interest on. You've got to pay $50, you open up an account, and nobody can monetize those deposits. So if one of our competitors gets that deposit, they have to give the deposit to Wells Fargo or pick a bank and then Wells Fargo will pay that customer interest directly, and the title company can't really monetize it. Well, in our case, that's the big advantage of our bank is we can say, okay, great, we'll put it at the First American Trust and First American Trust will pay the customer interest, and we can earn spread on that. So it's a way for us to monetize savings deposits. For checking deposits, mostly on the residential side, where people don't want to earn interest for different reasons. Anybody -- all the title companies have ways of monetizing those deposits. So the way we think about it is if it's a savings deposit, we push all those to First American Trust that we can. Now every once in a while, a customer will say, "Well, we don't want to use First American Trust. We want to use Wells Fargo, and we will accommodate that." But we push all the savings deposits that we can into our bank. That's rule number one. In terms of the checking deposits, we try to -- we really try to balance it on a risk management perspective, right? So we don't want to put all of our deposits every -- all of the $9 billion at our bank because when the market falls, right, we don't want to have liquidity issues in our bank. So what we do is, generally speaking, we put roughly half at our bank and half at third-party banks. And that way, when the market falls like it did 2.5 years ago, then we can kind of peg our bank flat -- our deposits to the bank can stay flat. We don't have to worry about liquidity issues because we can always shift third-party bank deposits to our own bank. So we push all the savings deposits and then we pushed some checking, but we always want to make sure we have a buffer at third-party banks in case the market falls.

Yes. Okay. Great. That makes sense. And then how much of your investment income is coming out of the bank currently? And then with the restructuring, how much -- how is that going to look in 2025?

So when you just look year-to-date here, year-to-date, we've got -- our bank has generated $137 million of investment income. And the title segment has generated $379 million of investment income. So it's roughly 1/3. When we talk about the restructuring of the investment portfolio, all that benefit will accrue to the bank. So the $69 million, that's all going to be in the bank next year.

Okay. So that makes sense. And then actually, can you also walk through the tax benefit from the restructuring, just help us understand how that looks.

So one of the things that we think about is tax planning. I mean that's something that we always think about. And there's been a few initiatives we've had where we've saved a lot in taxes. And so it's just something that's always on our minds. And we did some tax loss harvesting in the insurance company last year. And when you -- look, harvest losses, at least in our insurance company, it's a capital loss. And so you have to have -- it basically offsets capital gains. So you can only realize the loss and get the tax benefit, if you've got a capital gain to offset it, right? So we went through that process last year. And then our bank is required to invest at least 65% of the assets in mortgages. We're required by a regulator to invest in mortgages. And of course, interest rates go up, mortgages go down. We've got a big unrealized loss. And so then we kind of shifted our attention to the bank, and we started thinking with our tax add on. And when you sell a bond at a loss at a bank, it's an operating loss. You don't need a capital gain to offset, it's an operating loss. You can deduct it immediately for tax purposes. And so we thought this is interesting. Our Tier 1 leverage ratio was 10.5% at the time, and we really needed it to be 7%. 7.0% is our target. As long as we're over 7%, we're in good shape. And so we decided to realize losses, take our capital ratio down to 7.2%. We realized about $345 million of losses because of this action. And we're going to save $90 million of cash taxes over the next 12 months. In Q3, we -- our estimated tax payment was 0. In Q4 here, our estimated tax payment was going to be 0. And so there's a short-term savings of $99 million. And then as we went through it, too, in addition to taxes, we were thinking about, okay, what are the unintended consequences of doing something like this? And going through it, when you sell bond A and buy bond B, they're similar, just for different financial reasons, your earnings actually go up. So our pretax income goes up $69 million, even though we're actually taking less risk in the portfolio.

Yes. Okay. Yes, that definitely makes sense. And then actually, on the taxes, it has no impact on the GAAP taxes. It's really just on the cash tax.

That's right. That's right.

Okay. Great. And then can you just remind us -- I mean, I think you've noted earlier today as well, just the impact on the revenue side with the Fed cutting at the $15 million. Can you remind us on the expense side again and what lines -- what's kind of driving the expense side, the reduction there as the Fed cuts?

There's really 2 drivers to the expense side of things. And we -- it's less than $15 million. I mean, we haven't quantified it specifically. But when you look at the volatility in our interest expense in the title segment, it's really 2 things. It's our first funding business, which is our warehouse lending business. And that's going to really just vary with volumes and rate. And the second thing is just the bank cost of funds, too. So our bank -- they pay interest to third-party customers. And that's the other major driver of interest expense in the time. Those are the 2 things that drive it.

Okay. Great. If you let me switch to a couple more topics. Actually, first, on the regulatory front. Can you just talk about the elections now behind us? Any updated thoughts on things like the title pilot and the CFPB efforts that were ongoing.

Yes. I mean I'll say first on the title pilot, which I guess the waiver pilot. We haven't heard a lot about it since the RFP went out. We think it's likely that it has been abandoned. I think the GSEs appreciate the value of our product. They likely don't want to have to take title risk, which is with a waiver involved, and they don't want to take responsibility for curative. I think lenders, the originators prefer title, there's less repurchase risk, more certainty. And I think it was probably ultimately a realization that didn't -- that the waiver didn't accomplish or wasn't going to accomplish the goal of helping affordability for the individuals they were hoping to help since it was limited to low risk, high FICO, and low LTV refinance transactions. I think the GSEs might have been pushed into it by the FHFA, which were themselves pushed into it by the administration, given that housing affordability was an election issue. On the CFPB efforts, they put an RFI out on the impact of disallowing lenders from passing through the cost of lenders' title. There could be a rush to get it done before the change of the administration. There often is a rush to get things done. I don't think from our understanding is this is not the highest priority for the CFPB, but we never really know. But my guess is that, ultimately, it will be -- that effort will be abandoned as well. I think the CFPB will ultimately appreciate. There's really less transparency with their -- with the approach that they were seeking to comment on. The cut we all know the cost will still be passed on. It will just be buried in the rate. And I note as well, it's been -- this has been tried before. This tried years ago when HUD was still running a show, and it didn't take then either.

Okay. Interesting. And then actually switching over to rates. So Texas, you could revisit rates fairly soon. They are promulgated state. Can you just remind us of the timing for anything that might happen there?

Yes, they actually are. They've actually scheduled a hearing on January 21. I guess it's a rescheduled here into January 21. And I think we're expecting a decision early in February, probably around February 6. Our expectation is there'll be a reduction probably in the 5% to 6% range. Over the last 20 years, they've -- the DOI -- the Texas DOI has reduced rates between 3% to 6.5% each time with sort of 2 to 6 years. Between each of those efforts, I think the one exception was just under a 4% increase in 2013.

Okay. Great. And then actually, on the broker commission, that change went into effect in August. Just curious if you're seeing changes there, if you expect to see changes and then how that kind of potentially plays into how you source or any other impact?

Yes. I mean we're not really seeing any changes to our business. I mean the one thing we are seeing is more disputes at closing over the buyer agent's compensation. It's not really impacting our business. And we're not seeing a lot of that. We're just seeing more of it than we've seen in the past. So I don't think it's really -- it's not really impacting our business, but it's something that has to get resolved, obviously, before we can close the transaction and pay out compensation, including our own, obviously.

Okay. Great. Let me just remind investors, if you want to ask a question, please submit it through the chat. So actually I wanted to spend a few remaining minutes we have left just on some of the other areas. Actually, can you just speak to the potential opportunity in home warranty? You previously noted about sort of the white space in that market. Can you just provide some color and potential opportunity there?

Yes. Yes, I mean, we think there's lots of opportunity in the home warranty space. And -- because of that, we like the business. I mean, first and foremost, in the real estate channel, when we talk about the real estate channel and home warranty, that's when a home warranty is sold in connection with the purchase and sale of a home. So when the purchase market comes back, and as I mentioned, we're expecting it to, we're cautiously optimistic it'll be some -- a moderate rebound next year. But if that purchase market comes back, this channel will benefit from that. But putting that aside, we think the real opportunity is in direct-to-consumer. I mean a very small percentage of homes in the United States are covered by a home warranty. I think it's well under 10%. So we've increased our spend on direct-to-consumer to capture that. And the return on that investment, we think, is worth it. There's a higher customer acquisition cost in the direct-to-consumer channel, but there are higher retention rates. Now obviously, we have to watch that customer acquisition class closely because that can change the dynamic. But right now, the return on that DTC investment is well worth it.

Okay. Great. And then in terms -- I wanted to switch on ServiceMac. Can you just provide an update there, discuss kind of the growth prospects for that business? And also, actually, how much does that contribute to the escrow balances?

Yes. I'll take the first part of that, and Mark can cover the second part of it. But I'll say the ServiceMac business, we like it. I mean it's -- and keep in mind, in a matter of a couple of years, they went from nothing to the sixth largest subservicer. So they've been doing a great job. We like the business. We think we have the best team in the business. We think we have the best technology in the business. And it gives us an opportunity to sell more services to the mortgage industry. It creates retention work, which drives -- which can drive title orders. So when refinance comes back in earnest, it's obviously been rebounding a little bit. But when it really comes back in earnest, it will drive the retention work and then likely title orders as well. The other thing we like about it is it's not as cyclical as title. I won't call it countercyclical the title, but it's at least a cyclicality mitigant because as rates go up and the title business serves as a result, we obviously continue to service loans for our customers. And then as you alluded to, Bose, it does drive deposits to our bank. And Mark, do you want to comment on that?

Yes, there's different types of deposits. There's -- all the fiduciary deposits, we've moved to our bank. We probably got $300 million to $400 million of escrow deposits related to taxes and insurance at our bank right now that emanate from ServiceMac. There's a second type of deposit, which we call transactional accounts that are still at third-party banks. There's probably $400 million at third-party banks. Now those are harder to get. That's -- those are the accounts where consumers are sitting there. Their monthly mortgage payment in and there's -- they go to the 1 central account and a lot of transactions happening. So we're working on moving those over to the bank. So there's about $400 million that we have left. It's just harder to -- it's harder operationally to do, but we're in the process of moving those 2.

Okay. Great. And then can you talk about your warehouse lending business? What are you trying to do there in terms of the synergies, especially with kind of the -- with core title?

Yes. Also, when we got into our warehouse lending business, it was an experiment. We wanted to see if it would drive title orders we thought because of the relationship between our warehouse lending company, the originator and our title company would drive some more title orders. Now we also want to experience a product we called FlexClose, which allows for 24/7 closings. So on weekends, holidays, at 10 p.m., we can close a transaction because of this connection between the warehouse lender and our title and escrow company and the trusts. And that has worked. And it has -- as a result, this has been a good business. It's more than paid for itself and it's grown recently as others have left the business. I mean -- but the problem with it is it's small. It was small when we bought it. It's bigger now, but it's small. And to grow it, it would require a substantial capital investment or commitment. And that's something we're thinking about, but it's probably further from the core at this point.

Okay. Great. Okay. Well, actually, I think our time just ran out. So thanks, everyone, for joining us, and thanks a lot to the management team from FAF for joining us today as well.

Thank you, Bose. We appreciate the opportunity.

Thanks for everything, Bose. Take care.