Fannie Mae generated some buzz last week when it announced it would be accepting written attorney opinion letters in lieu of a title insurance policy “in limited circumstances.”
HousingWire wondered: just what were those limited circumstances?
According to the government sponsored entity, the only transactions ineligible for an attorney title opinion letter are those that involve loans secured by a unit in a condo project, co-op share loans, loans secured by a dwelling on a leasehold estate, including leasehold estates on property owned by a community land trust, loans secured by a manufactured home, HomeStyle Energy and HomeStyle Renovation loans, Texas Section 50(a)(6) loans, loans secured by property subject to restrictive agreements or restrictive covenants, and loans executed using a power of attorney.
“This update aligns with industry policy and gives lenders an option, typically used for refinance transactions,” Fannie Mae wrote in response to HousingWire’s query.
In May of 2020, Freddie Mac announced it would be accepting attorney opinion letters in lieu of title insurance policies under similar circumstances and with similar requirements for the letter and the attorney writing it.
In an email, Fannie Mae confirmed that the impetus for this change was that the use of AOLs could potentially reduce title costs for borrowers. The GSE plans to track outcomes from AOLs to better understand the savings realized.
“Depending on the state, potential borrower savings using an AOL in lieu of lender title insurance can range significantly, and AOL usage is largely driven by state-specific laws and practices,” a Fannie Mae spokesperson wrote in an email. “We continue to look for ways to support lower origination costs for borrowers and lenders.”
Despite Fannie Mae’s optimism and the apparently large number of circumstances in which AOLs may be used, Bud Moscony, the president of Inspired Title Services, LLC, does not believe this announcement will result in any significant changes to the title industry.
“What is interesting to me is that it appears that Fannie Mae has gone back to what was prevalent before title insurance; namely, an attorney opinion of title,” Moscony wrote in an email.
“Title insurance came to be because attorney title opinions were not adequate for the marketplace. Attorney opinions do not insure against undisclosed title claims, nor cover a situation where the attorney was not negligent but the county indexed the document improperly and hence it was missed and not excepted from coverage, among other reasons. So one can issue the attorney opinion product but it will NOT be a substitute for title insurance,” Moscony wrote.
The American Land Title Association, the primary trade organization for the title industry, expressed a similar view. “We strongly believe that title insurance is, and always will be, essential,” the organization said in a statement to HousingWire. “For over a century, title insurance has provided reassurance that a title is clear of defects and offers lenders and borrowers the highest level of confidence in ownership. Historically, lenders have overwhelmingly preferred the protection of a title insurance policy, and Fannie Mae itself has acknowledged that there may be additional risk in accepting attorney opinions.”
Like Moscony, ALTA advised home buyers and lenders to consider the potential risks involved when using an AOL in lieu of a title insurance policy.
“We have a dependable and trustworthy real estate system in the United States, and any shortcuts to these well-established processes should be examined thoroughly,” ALTA wrote in an email.
Theodore Sprink, the managing director of iTitleTransfer, a Scottsdale-based proptech company, does not feel that title insurance is necessary.
“Title insurance is a $25 billion revenue per year monopoly controlled by four title insurance corporate conglomerates, which pay only 3-5% in claims,” Sprink wrote in an email. “ALTA has also published statements that traditional SFR search and examination functions reveal that 75% of residential properties are deemed ‘clean title,’ which renders title insurance unnecessary.”
Given that Freddie Mac’s AOL announcement nearly two years ago has not greatly impacted the title industry, it is doubtful that Fannie Mae’s recent move will have large ramifications for title purveyors, at least until lenders use the AOL option consistently.