ALTA on New Fannie Policy: Title Insurance “will always be essential”
Fanny Mae caused a stir last week when it announced it would accept written legal opinions in lieu of title insurance “in certain circumstances.”
HousingWire wondered: What were those limited circumstances?
According to the government-sponsored entity, the only transactions not eligible for an attorney’s opinion are those involving loans secured by an entity in a condominium project, co-op loans, loans secured by an apartment on a leasehold including leaseholds on land owned by a community land trust, loans secured by, for example, a manufactured home, HomeStyle Energy and HomeStyle Renovation loans, Texas Section 50(a)(6) loans, property secured loans subject to restrictive agreements or restrictive covenants, and loans executed using a power of attorney.
“This update is consistent with industry policy and gives lenders an option typically used for refinancing transactions,” Fannie Mae wrote in response to HousingWire’s request.
In May 2020, Freddie Mac announced that it would accept attorney opinions in lieu of title insurance policies in similar circumstances and with similar writing and writing attorney requirements.
In an email, Fannie Mae confirmed that the impetus for this change was that using AOLs could potentially lower borrower’s cap costs. GSE plans to track AOL’s results to better understand realized savings.
“By state, potential borrower savings from using an AOL in lieu of lender title insurance can vary significantly, and use of AOL is largely governed by state-specific laws and practices,” a Fannie Mae spokeswoman wrote in an email. “We continue to look for ways to support borrowers and lenders with lower origination costs.”
Despite Fannie Mae’s optimism and the seemingly large number of circumstances in which AOLs can be used, Bud Moscony, President of Inspired Title Services, LLCdoes not believe this announcement will result in any material changes in the title industry.
“What’s interesting to me is that Fannie Mae appears to have returned to what was prevalent before title insurance; namely, an attorney’s opinion on the title,” Moscony wrote in an email.
“The title insurance came about because legal opinions were not sufficient for the market. Attorney reports do not insure against undisclosed title claims, nor do they cover a situation where the attorney was not negligent but the district failed to properly index the document and therefore, among other things, overlooked it and did not exempt it from coverage. So you can issue the Attorney Certificate product, but it will NOT be a substitute for title insurance,” Moscony wrote.
That American Land Title Association, the major trade organization for the title industry, expressed a similar sentiment. “We truly believe that property insurance is essential and always will be,” the organization said in a statement to HousingWire. “For over a century, title insurance has provided assurance that a title is free from defects, providing lenders and borrowers with the highest level of confidence in property. In the past, lenders have overwhelmingly preferred the protection of a title insurance policy, and Fannie Mae itself has recognized that accepting legal opinions can pose an additional risk.”
Like Moscony, ALTA advised home buyers and lenders to consider the potential risks associated with using an AOL in lieu of a homeowners insurance policy.
“We have a reliable and trusted real estate system in the United States, and any shortcuts to these established processes should be thoroughly examined,” ALTA wrote in an email.
Theodore Sprink, the managing director of iTitleTransfera Scottsdale-based proptech company, does not believe title insurance is necessary.
“Homeownership insurance is a $25 billion-per-year monopoly controlled by four property insurance business conglomerates that pay only 3-5% of claims,” Sprink wrote in an email. “ALTA also released statements that traditional SFR search and review capabilities show that 75% of residential properties are considered ‘clean title,’ making title insurance unnecessary.”
Given that Freddie Mac’s AOL announcement nearly two years ago didn’t have a major impact on the title industry, it’s doubtful that Fannie Mae’s latest move will have much of an impact on title suppliers, at least until lenders give the AOL option use consistently.