Recently, Fannie Mae has decided to take aim at title insurance – an often-misunderstood, but critically important product that ensures that borrowers have clear ownership rights to a property.
Back in April of 2022, Fannie Mae revised its selling guide, allowing the use of unregulated title insurance alternatives – so called attorney opinion letters (AOLs) – in lieu of title insurance policies in limited circumstances. Since then, Fannie Mae has reaffirmed that it is exploring programs to promote these title insurance alternative products, with a desired goal of reducing costs for underserved borrowers and homebuyers of color. Just a few weeks ago, Fannie Mae announced that it was allowing AOLs on “loans secured by a unit in a condo project” and “loans secured by a property subject to restrictive agreements or restrictive covenants.
While Fannie Mae likely has positive intentions in trying to reduce housing costs, it is critical for homeowners and lenders to understand the increased risks associated with these products. Firstly, these products are not regulated by state insurance and consumer protection regulators and information about coverage is not readily available to the public. While title insurance policies are backed by statutorily required financial reserves to cover future claims risks, attorney opinion letters are not. A typical attorney opinion letter also does not provide any duty to defend the lender in the event of claim. Simply put, these products lack the oversight and transparency that consumers and lenders deserve.
Additionally, despite claims that certain attorney opinion letters provide a “full coverage” alternative, they do not provide the same amount of protection that would normally be available with title insurance. Title insurance covers title risks not easily found by a simple public records search. Attorney opinion letters do not do so, and many defects are not often discoverable in the public records, including federal tax or Homeowner Association liens. Approximately one-third of all claims paid by title insurance companies cover issues that are not discoverable by a public records search.
Another important example of the difference in coverage is fraud or forgery of title documents. Title insurance provides coverage when a seller’s deed was forged or there was fraud with the previous owner’s will. An attorney opinion letter does not.
While the GSEs and some AOL providers have claimed that AOLs can reduce costs, in the long run, consumers could end up paying more if a title dispute were to occur on an uncovered issue.
Additionally, an AOL can simply be the more costly option at the onset. For instance, in the majority of states, a seller pays for the homebuyer’s owner’s title insurance policy. This is often coupled with discounts for purchasing both an owner’s and lender’s policy at closing, leaving the homebuyer to only pay for a lender’s policy at a cost much lower than that of an AOL – sometimes as low as $150.
Is title insurance a barrier to homeownership for low- and middle-income homebuyers and homebuyers of color? The answer is a resounding no. A recent report found that title insurance premium and settlement costs make up less than one percent of a borrower’s life-of-loan costs. Fannie Mae’s own research states that “differences in title and settlement costs across borrower race and ethnicity groups” are not “economically meaningful.” If Fannie Mae wants to help underserved borrowers purchase homes, it should focus on the true barriers to homeownership that exist in low-income communities and communities of color – not title insurance.
Ultimately, the Federal Housing Finance Agency is responsible for regulating Fannie Mae and should carefully consider the potential consequences of the government-sponsored enterprise’s decision to expand attorney opinion letters. After all, they are in conservatorship from risk-taking that put taxpayers on the hook to the tune of $200 billion in the last financial crisis.
Fortunately, there is now bipartisan legislation that has been introduced in Congress – the Protecting America’s Property Rights Act – which would require title insurance from state licensed and regulated title companies on mortgages purchased by government-sponsored enterprises (GSEs). Congress should act swiftly to pass this legislation and affirm the critical role of title insurance in a healthy housing market.
