Attorney Opinions Don’t Count

Title waiver pilot, unregulated title alternatives a risky game for lenders and taxpayers

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Founder and Managing Member

The federal government continues to push proposals that would dangerously expose lenders and taxpayers to additional risk.

In March, the Biden Administration released plans during the State of the Union to revive a previously discredited and shelved pilot program that would waive the requirement for lender’s title insurance on certain refinances. Additionally, unregulated products such as attorney opinion letters (AOLs) have been promoted in the marketplace, branded as “full coverage” alternatives to title insurance. Fannie Mae recently expanded guidance to permit the use of AOLs for additional types of transactions.

It is critical that lenders and consumers understand the significant risks of the title waiver pilot on refinances and unregulated alternative title insurance products.

Under the pilot, lenders will pay Fannie Mae a fee to cover the risk if there is an unexpected title defect. Basically, Fannie Mae will become a primary market insurer, expanding beyond its mission and charter. The last time Fannie Mae engaged in significant risk taking, it, along with Freddie Mac, imploded the American economy in 2008 to the tune of $200 plus billion in taxpayer dollars. We can’t allow this pattern to repeat itself.

The title industry isn’t alone in voicing concern about the pilot. Ed DeMarco, who was acting director of the Federal Housing Finance Agency (FHFA) during the Obama Administration and now heads the Housing Policy Council trade group, in a letter to the FHFA implored the agency to “approach this issue with caution and a sensitivity to the role title insurers and title insurance plays in lowering risk for lenders and consumers alike.” U.S. Reps. Andrew Garbarino, Bill Huizenga, and Warren Davidson wrote in a letter to the FHFA that a change like this “requires rigorous scrutiny.” Additionally, 18 House Democrats recently signed a letter to President Biden stating, “ … allowing the GSEs to assume unnecessary risk outside their core mission, possibly violating their charters, is not the path we should take.”

Title insurance is necessary for refinance transactions

On a refinance, lenders require title insurance to ensure the new loan is protected. If not done correctly, a lender could risk not having lien priority. Risk of fraud is another reason why lenders need title insurance on a refinance. After a couple purchased a home, the husband attempts to refinance and take his wife off the title and mortgage ahead of a pending divorce. The lender would be protected from any claims made by the wife down the road. Additional examples of title claims on lender’s policies include the failure of a prior lender to properly close a HELOC after settlement, boundary line disputes, and invalid mortgages because documents were executed with an improper power of attorney.

The title industry has a lower claims rate than other lines of insurance because of the curative work title professionals perform. Preventing claims is the title industry’s goal. It’s why 70 cents of every dollar in premium the industry collects are spent acquiring and analyzing public real estate records data. Further, while rates for other forms of insurance have increased in recent years, the cost of title insurance coverage has decreased 7.8% since 2004, based on recent industry financial statements.

Despite being promoted as a cost-savings over title insurance, alternatives can be more expensive for homebuyers, while at the same time exposing them to more risk.

Title insurance is a well-known, established step in the homebuying process and is regulated by state insurance and consumer protection regulators. AOLs don’t have similar oversight. Title insurance companies must maintain financial reserves to cover future claims risks. AOL providers do not. Additionally, AOLs typically do not provide an unlimited duty to defend the policyholder in the event of a claim, leaving homeowners open to future financial burden.

Despite being promoted as a cost-savings over title insurance, AOLs can be more expensive for homebuyers, while at the same time exposing them to more risk. In most states, the seller pays for the homebuyer’s title insurance policy. This means homebuyers only pay a reduced fee for the lender’s policy at closing. This often can cost the homebuyer as little as $150. When combined with other discounts, title insurance is not only less expensive, but more protective, than AOLs.

Policymakers have concerns about the title waiver pilot and AOLs

When the FHFA considered this pilot concept last year, several members of Congress from both sides of the aisle asked FHFA Director Sandra Thompson about it during a House Financial Services Committee hearing. The legislators expressed concerns that Fannie Mae would be expanding outside their charter by operating in a primary market business with this pilot program. Additionally, U.S. Reps. Young Kim (R-CA) and Brad Sherman (D-CA) sent a letter on Feb. 27 to the FHFA sharing concerns over the promotion of unregulated AOLs in place of title insurance.

These risks are why Reps. Andrew Garbarino (R-NY) and Vicente Gonzalez (D-TX) have introduced the bipartisan Protecting America’s Property Rights Act to require title insurance from a state-licensed title insurance company on all loans purchased by Fannie Mae and Freddie Mac. Garbarino called the Administration’s pilot proposal “a misguided reversal of a decision made by FHFA and Fannie Mae last year after bipartisan disapproval.”

Without understanding the full extent of risks that are associated with the title waiver pilot and AOLs, lenders may find their lien priority in jeopardy while consumers may face increased threats to their ownership rights. When it comes to one of life’s greatest investments, lenders and consumers should protect that investment the absolute best way they can — with the proven security of title insurance.