At a time when housing prices remain stubbornly high, Fannie Mae and Freddie Mac, at the direction of the Federal Housing Finance Agency (FHFA), are proposing new initiatives to make housing more affordable for everyday Americans. But while many of these initiatives propose thoughtful solutions to the nation’s housing affordability challenges, there is one proposed initiative that has been flying under the radar with tremendous negative implications for the broader housing market and particularly underserved communities.
Last year, Fannie Mae updated its Selling Guide to align its policy with Freddie Mac, accepting title insurance alternatives, so-called attorney opinion letters, in lieu of a title insurance policy “in limited circumstances.” This change is part of a broader attempt to reduce closing costs and consider pilot options to reduce title insurance costs for people of color and low- and moderate-income populations. However, while well-intended, this initiative would be catastrophic and threatens to fall into the same traps of the 2008 financial crisis – a shortcut to a well-established and regulated process.
While there is a critical need to continue to work on affordable homeownership solutions, especially at a time of record inflation and housing price escalation, unproven shortcuts like accepting unregulated attorney opinion letters in lieu of a title policy could ultimately expose both consumers and lenders to greater financial challenges.
Title insurance is a proven and well-regulated product that remains essential to fully protect homeowners and lenders alike. The promise of title insurance is simple: it provides protection to covered defects if property rights are challenged. If there are defects, the title company provides coverage and assurance to mitigate those risks, whether discovered in a public records search or outside of that process.
For example, some homebuyers may be surprised to find federal tax liens, fraud, title document forgery, and other threats to property rights on the title of the home they would like to purchase. But when homeowners have title insurance, they are guaranteed protection from these potential issues that could result in expensive attorney fees and loss of property.
Importantly, these newly introduced title insurance alternatives do not cover many of these common title issues. They only cover title defects uncovered by a public records search, not other known and unknown risks that title insurance protects against.
If title insurance alternatives are promoted by Fannie Mae and Freddie Mac, many homebuyers may choose to purchase them simply because they are claimed to be the cheapest option. However, even if these alternatives could generate some cost savings at closing, consumers may end up paying much more in the long run. If a title issue does appear and a homeowner does not have title insurance, they would have to pay additional fees out of pocket to fix any problem and protect their property – a large sum that many low- and moderate-income Americans should not have to worry about.
Additionally, while title insurance is a highly regulated product – subject to state and federal regulatory oversight – title insurance alternatives are unregulated with no clear oversight. There is a reason that under state insurance laws, only licensed title insurers are permitted to underwrite specific coverages provided by title insurance. We cannot ignore these alternative products’ lack of regulatory oversight just because we think it might save some consumers money in the short term.
Title insurance alternative products are unproven, unregulated, and lack transparency. They are not in the best interest of lenders, consumers, and the broader marketplace.
As we learned from 2008, our dependable and trustworthy real estate system can quickly become fragile once we start creating shortcuts to well-established processes. Any shortcut – especially those impacting low- and moderate-income individuals and people of color – should be thoroughly examined and scrutinized.