Whose land is it anyway? Stewart Title provides new level of security in land purchases.

A few years ago a bitter land dispute erupted in northern Baja California. About 150 U.S. retirees had purchased beachfront property near Ensenada from a local indigenous community--so-called ejido land. Some had built expensive retirement homes there.

Meanwhile, the parties whose land had been expropriated and given to the ejido in the 1970s were engaging in a lengthy court battle. In 2000, they won. The Supreme Court ruled that the expropriation had been improperly handled, and the land was still theirs.

The controversy got nasty, even violent, but in the end the retirees, who had bought in good faith believing they were dealing with the rightful owners--as did the sellers--were evicted.

Altogether, the U.S. investors lost an estimated US$25 million. This was not a land fraud. It was an administrative fiasco that even the government admitted was a "bureaucratic error."

Those land dispute victims could have at least been compensated for their financial losses if Stewart Title Guaranty de Mexico had been around at the time. Unfortunately for them, Stewart didn't arrive on the scene until 2001.

The parent company, Houston-based Stewart Information Services Corporation, has been in the title insurance business in the United States for more than a century. In recent years, it has expanded into about 30 other countries, including Mexico.

As the name implies, Stewart Title Guaranty de Mexico provides its customers with a guarantee that the title to the land they have purchased is valid. If there is a dispute, Stewart will take legal steps to defend the title on behalf of its customer. If it loses, the customer will be compensated the purchase price of the property.

Title disputes are not rare in Mexico, and even governments can get mired in a messy dispute. In 2003, the Federal District became involved in one that involved a 298-hectare parcel of land when the descendants of Fernando Arcipreste came forward, claiming that Arcipreste had purchased the property in the 1940s. Had the city lost the court battle, it would have had to pay about US$160 million to the family.

Barrier To Wealth

Peruvian economist Hernando de Soto believes land titles that lack absolute certainty of ownership are a major barrier, perhaps the major barrier, to prosperity for the world's poor countries. In his groundbreaking book, The Mystery of Capital, he says there are trillions of dollars' worth of what he terms "dead capital" throughout the world.

He defines "dead capital" as land that cannot be used as loan collateral because potential lenders, quite correctly, fear that a title dispute could prevent them from taking possession of the land should they have to foreclose. As a result, he says, millions of small landholders are unable to secure credit to start a business.

De Soto believes the solution is for national governments to establish a clear definition of title ownership and transparent procedures for registry. He argues that transparent title ownership was the springboard to prosperity for the world's industrialized nations.

But even in these countries, title disputes still arise. In 2003, Stewart Title's parent company reported it paid out US$95 million in claims.

By carrying out due diligence and providing an underwritten guarantee of title ownership, Stewart Title enables lenders to accept collateral with confidence, while providing security for those who buy investment or retirement property in Mexico.

The range of potential clients is breathtakingly broad. Even Gerardo Martinez, general manager of the Mexico operation, admits: "At the moment, we don't know how big the market is, but we see a big opportunity providing ... a product that will enhance the value of the transaction."

In general terms, he says, it is "anyone who is doing a real estate transaction and who wants ... assurance that the property has been correctly transferred to the individual or corporation."

Property owners seeking mortgages can use title insurance to guarantee to lenders the validity of their titles.

"At the present stage ... the mortgage side of the banking business hasn't noticed our services," says Martinez. "I believe that in the near future the title insurance will be a requirement as the market matures."

'Great Market'

Yet another exciting development for the title insurance business is the development of mortgage bursatilization--the bundling of small mortgages into packages of several million dollars and buying or selling the entire package.

"It's a great market!" says Martinez. "No strong bursatilization could be performed if there is no title insurance attached to the mortgages."

Martinez, a youthful-looking 40, took over the top job at Stewart Title, Mexico in January. He earned a degree as a Certified Public Accountant, or CPA, from the Instituto Tecnologico Autonomo de Mexico (ITAM), then worked as a consultant with Egon Zehnder before earning an MBA from Darden Business School at the University of Virginia. He spent six years in banking with Bilbao Vizcaya, and then switched to the chemical industry, before moving over to Stewart Title from Shell Oil Company.

Stewart Title has another advantage over current and potential competitors: to date it is the only title insurer registered with the national commission of bonded insurance, or Comision Nacional de Seguros y Fianzas.

Title insurance costs between 0.6 and 0.7 percent of the value of the property being insured plus the cost of the title search, which ranges from US$1,500 to US$3,000, depending on the jurisdiction in which the property is located.

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"It's not an expensive product if you consider the fact that the protection you are receiving is that you are absolutely sure that the property is yours," says Martinez.

Simple Process

The insurance procedure is straightforward. The applicant fills in a form and provides identification and a photocopy of the title of the land he wants to insure. One of Stewart Title Mexico's seven U.S.-trained underwriters then conducts a title search, including physical inspection of the property, which takes two to five working days.

If the underwriter detects a potential problem--such as a rival claim, which is called an "exclusion"--Stewart will insert a caveat into the contract (a policy limitation). Once the claim has been recorded, if the applicant learns of any other claim of ownership, the Insurance Contract Law requires the applicant to notify the company in writing within 30 days. Martinez says that to his knowledge, Stewart has never rejected an application for title insurance in Mexico.

When the search is completed, the company provides a commitment letter. With that letter, the applicant goes to a public notary, who will record the transaction contract and send the document to the public registry.

The client officially takes possession of the property when the document is recorded in the public registry, a process that can take six to eight months in Mexico City, but elsewhere can be completed in a matter of weeks.

"With that (registry confirmation) note, we emit our policy and with the policy we send you an invoice for immediate payment," says Martinez. The policy remains in force until the property is sold or until the death of the policyholder.

Though Stewart Title has been in Mexico only three years, it has already underwritten policies with a total value of US$1.7 billion--and there's lots of room for future growth.

"We're new in town," says Martinez. "The mortgage business in Mexico has a different maturity level than the one in the United States. Consequently, we will see more hunger for our product as the market matures."

With the explosion of homebuilding and mortgages, the coming boom in bursatilizing mortgage securities, and the continuing influx of foreign investment into Mexico, it's small wonder Martinez is already shopping for more office space.

Kenneth Emmond ([e-mail]) is a journalist and economist who has lived and worked in Mexico since 1995.