Good morning, everyone. Thanks for joining us for our final session for Title A. 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'll come to light. I wanted 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. It started adjusting. And what's been the drivers of this?
On the residential purchase side, low affordability, rising prices, high mortgage rates, low inventory, which has, 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. 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, are 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, a critical quarter for our commercial business. And 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, while we see, we're optimistic about improvement; it's the magnitude of improvement. And that's going to be hard to predict. We'll 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 three 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 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 in our intro is capital allocation, well, our focus has been, as I mentioned earlier, on investing back in the business, in making the closing process more efficient and automating underwriting.
We're also actively looking for 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 become available while we remain actively interested in that. 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 our repurchase program remains active. We've also increased the dividend by 6% over that time. 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. And thanks, Ken, for the update. So actually, yeah, let me kick it off. I've got a few things. First, just in terms of the monthly, just the volume expectations for today, 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, the purchase market open orders kind of came in about up 3% year-over-year. And significantly as well, the commercial market open orders up 5% year-over-year. And of course, refi while slowing is still up about 20% year-over-year open orders. So all those indicators are good relative to the earlier parts of the year.
Okay. Great. And 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.
Oh, perfect. Okay. Great. Thanks very much. And then looking at it to next year, can you just talk about your latest expectations for market activity now that we're almost into the end of the year? I mean, it's a run rate that you're seeing now, kind of what you think persists unless we see a big move in rates.
Yeah. 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. In November, our revenue's up over 20%, and that's with one less business day, and the pipeline is really strong, which tells us that this momentum is going to continue into next year.
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 next year?
Craig, do you want to talk about the open orders?
Yeah. I mean, the thing about commercial orders, the commercial market's been driven more by average fee profile than the absolute level of orders. So orders can close a 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.
Great. And then actually, just within the commercial subsectors, can you give any sort of color on pockets of strengths where you're seeing the most strength?
Yeah. 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 in 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 the strength or weakness in one sector typically tends to get offset by strength or weakness in another.
Yeah. Okay. That 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 the impact of Sequoia and Endpoint, how that sort of plays out over time as well?
Yeah. So long-term margins, yeah, 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 the 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 was 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 and the trough for those two 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 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 two 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 whole reason why we're doing it. And the last thing I'd point out is back in 2015, when we had the highest margins we've had, the Fed funds was at zero. And I don't think anybody thinks we're going to go down to zero. What's the normalized Fed funds rate? I know there's a debate about it, but somewhere between 2.5%-3%, let's say, is a normalized Fed funds rate. 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 three 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 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 to productionize it. 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're building a system, 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. 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 then you extrapolate that, you get Z. We don't have that quite yet, but we'll get that at some point here.
Yeah. Okay. Great. And then actually, one more on margins. If 2025 ends up being sort of just modestly better than 2024 on volumes, could we expect a 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?
Yeah. 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 our three major markets: commercial, refi, purchase. We all 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. I talked about these tech expenses. I mean, we're going to be cutting expenses on technology specifically. And that'll 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'll be, I'd say, a big tailwind. The one headwind we have is the Fed. Every time the Fed cuts, well, there's $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 it'll be to our normalized margin because we don't think next year's 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.
Yeah. Okay. That makes sense. And then I wanted to ask about the title plants. So I mean, you've mentioned in the past, I mean, you guys are a leader in terms of title plants 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?
Yeah. 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 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 plants.
The next largest owner of title plants 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 it, 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 plant 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 transactions. This is what we call Sequoia. And Mark talked about it earlier in one of your earlier questions. And 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 it. 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, switching back to a 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. Yeah, just kind of a good way to think about that.
Yeah. So yeah, it's something we track on a continuous ongoing basis. The rule of thumb, just numbers you can remember, for personnel expenses, about 25% is strictly variable, and for other operating expenses, the two 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 two together, that's like a 35% variable rate, 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. Basically, in personnel, it's incentive compensation and related payroll burden goes down.
And in other operating expenses, it's the production-related costs that go up and down automatically. But to get to the 60, 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 profile moves relative to home prices? And then how does that and just how it works on the commercial side, whether there's a similar thing?
Yeah, 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 profile. So if rates go up, if HPA is up 10% in a period, we'll be up, we expect to be up 6% in terms of our fee profile. Now, on the commercial side, it's a little different. There, you're charged kind of, the fees are kind of on a fee per thousand dollars of exposure. So they tend to move more directly with appreciation or the average value of a property. So they're more directly related than is residential.
Okay. Great. And then actually, a different topic. We just wanted to ask the data from Alta. It looks there like the agent share went up during COVID, and it went down. Since then, are agents stronger in the refi channel? Or just curious, is there anything else to read from that data?
Yeah. I'll say they're not stronger, but I think agents, and in particular, large agents 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 competitors 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.
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?
Yeah. I mean, I do think prices are going to soften a bit. 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 yeah, I do think irrespective even of rates, I do think as more and more inventory comes onto 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. And 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 this sector? Do you think the large companies are kind of locked out of it, and it's more buying smaller names? Or just how do you feel like M&A kind of plays out over time?
Yeah. 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 we don't see them for sale. So I don't think the big four underwriters are locked out of acquiring companies like Mother Lode or the size of Mother Lode. The opportunities aren't there yet. They'll come, but they're just not there yet.
Okay. Great. Actually, I did want to switch over to the loss provision. So your loss provision has been 3% for some time, I guess, since mid-2023. 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.
Our expectation, it'll 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 have been very, very strong for reasons such as our underwriting standards have been really good through this cycle. There's still a lot of equity in homes. There haven't been many foreclosures. I mean, housing prices have continued 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 a 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 fours, 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, 60% of our revenue is now commercial. But you get these big commercial deposits. And a lot of times, they'll sit there. I mean, we just got, just this week, a $195 million commercial deposit, and they said, "We're going to hold it for 16 months." So some of these commercial deposits will close 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 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 at third-party banks?
So there's a few different guidelines we look at. The first thing is we break it out, savings deposits versus checking deposits. And this is really where we have an advantage with our bank. 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 to First American Trust, and First American Trust will pay the customer interest, and we can earn a 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, 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 to our bank. That's rule number one.
In terms of the checking deposits, we really try to balance it on a risk management perspective, right? So we don't want to put all of our deposits, all the $9 billion, at our bank because when the market falls, right, we don't want to have liquidity issues at 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 two and a half years ago, then we can kind of peg our bank flat. Our deposits at 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 push some checking, but we always want to make sure we have a buffer at third-party banks in case the market falls.
Yeah. 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's that going to look in 2025?
So when you just look year-to-date here, year-to-date, our bank has generated $137 million of investment income. And the title segment has generated $379 million of investment income. So it's roughly a third. 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 works.
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 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 what the tax impact 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. 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, our estimated tax payment was zero. In Q4 here, our estimated tax payment is going to be zero. And so there's a short-term savings of $90 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 that are similar just for different financial reasons, your earnings actually go up. So our pre-tax income goes up $69 million, even though we're actually taking less risk in the portfolio.
Yeah. Okay. Yes, that definitely makes sense. And actually, on the taxes, it has no impact on the gap taxes. It's really just on the cash tax, right?
That's right. That's right.
Okay. Great. And then can you just remind us, I mean, I think you 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's kind of driving the expense side, the reduction there as the Fed cuts?
There's really two drivers to the expense side of things, and 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 two 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 title segment. Those are the two things that drive it.
Okay. Great. Actually, let me switch to a couple more topics. Actually, first, on the regulatory front, can you just talk about the election is now behind us? Any updated thoughts on things like the title pilot and the CFPB efforts that were ongoing?
Yeah. I mean, I'll say first on the title pilot, which I guess is 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 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, this is not the highest priority for the CFPB, but we never really know. But my guess is that ultimately, that effort will be abandoned as well. I think the CFPB will ultimately appreciate there's really less transparency with the approach that they were seeking comment on. But we all know the cost will still be passed on. It'll just be buried in the rate.
I note as well, this has been tried before. This was tried years ago when HUD was still running the show, and it didn't take then either.
Okay. Interesting. Thanks. And then actually, switching over to rates. So Texas, you could revisit rates fairly soon. They're a promulgated state. Can you just remind us of the timing for anything that might happen there?
Yeah. They've actually scheduled a hearing on January 21st. I guess it's a rescheduled hearing to January 21st, and I think we're expecting a decision early in February, probably around February 6th. Our expectation is there'll be a reduction, probably in the 5%-6% range. Over the last 20 years, the Texas DOI has reduced rates between 3%-6.5% each time with sort of two to six 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.
Yeah. 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 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 would ask a question, please submit it through the chat. So actually, I wanted to spend the 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 on the potential opportunity there?
Yeah. Yeah. 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 there'll be a moderate rebound next year. But as 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. We think it's well under 10%. So we've increased our spend on direct-to-consumer to capture that.
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 cost closely because that can change the dynamic. 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?
Yeah. 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, and keep in mind, in a matter of a couple of years, they went from nothing to the sixth largest sub-servicer. 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 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'll drive 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 counter-cyclical to title, but it's at least a cyclicality mitigant. Because as rates go up and the title business hurt 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, would you want to comment on that?
Yeah. There's different types of deposits. All the fiduciary deposits we've moved to our bank. We've probably got $300 million - $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. Those are the accounts where consumers are sending their monthly mortgage payment in, and they go to the one central account, and a lot of transactions happen on it. So we're working on moving those over to the bank. So there's about $400 million that we have left that are. It's just harder operationally to do, but we're in the process of moving those too.
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 core title?
Yeah. I'll say 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, and then we also wanted to experiment with a product we called FlexClose, which allows for 24/7 closings, so on weekends, holidays, at 10:00 P.M., we could close a transaction because of this connection between the warehouse lender and our title and escrow company and the trust, and that has worked, and 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.