ALTA continues to take the lead in engaging with state regulators, the Federal Housing Finance Agency (FHFA), both Fannie Mae and Freddie Mac and lenders about the risks alternative title insurance products including certain attorney opinion letters (AOLs) present to lenders and consumers who need it the most.

Risks of Alternatives to Title Insurance

Overview

  • Fannie Mae and Freddie Mac are now accepting written AOLs in lieu of a title insurance policy under limited circumstance as a result of Equitable Housing Finance Plans announced earlier by the FHFA earlier this year.
  • Since before the announcement, ALTA has engaged with the FHFA and government sponsored entities (GSEs) to help them understand the differences between title insurance and alternative products in the coverage and protection they provide. 
  • ALTA continues to work with the GSEs to ensure that access to sustainable homeownership opportunities is available for all Americans in a way that does not increase risk or undermine the property rights of homebuyers, particularly low- and moderate-income and first-time homebuyers.
  • ALTA believes it is misguided for lenders to offer title insurance alternatives that provide less coverage but introduce more risk to lenders and consumers.

ALTA Activity

  • ALTA created a one-page summary outlining the risks of alternative title products for Lenders.
  • ALTA developed a comparison chart that highlights the more comprehensive protection an ALTA Loan Policy provides versus an AOL with a liability wrap.
  • ALTA sent a letter to FHFA Director Sandra Thompson outlining concerns about the gaps and inadequacies with title insurance alternatives currently under consideration as part of the Equitable Housing Finance Plans, especially as they relate to consumer protection risks.
  • ALTA CEO Diane Tomb spoke at HousingWire Annual on Oct. 5. about the benefits of title insurance versus the limited protection afforded by alternative products.
  • ALTA gave a presentation to the NAIC Title Task Force about title insurance and alternative products in August, highlighting a number of questions regulators should be asking about these products in the marketplace.
 

Who's at Risk

Alternative Products Increase Lender Risk

  • Historically, lenders have preferred the protection of a title insurance policy because it provides the best mix of strong protections and low cost. Lenders considering the use of AOLs or other alternatives must understand the risks they are taking on by not getting title insurance since they will be on the hook given Fannie Mae and Freddie Mac’s life of loan representations and warranties related to title.
  • One sizable risk is related to items not discoverable in a public records search like federal tax liens, mis-indexed items or HOA liens. An attorney opinion letter does not cover items not shown in 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.
  • Unlike an AOL, title insurance provides lenders with a defense—including all attorneys’ fees and costs—in a lien priority dispute or other matter covered by the policy.
  • Lastly, unlike title insurance, AOLs might push more consumers into foreclosure since that is a condition to making valid claim under the service provider policy wrapper.

Risks to Homebuyers

  • Should a title issue arise on a property covered by an attorney opinion only, the buyer would need to prove negligence on the part of the attorney to pursue the claim with them.
  • If not proven, a claimant would likely need to pay the legal costs involved to litigate the title matter, posing a financial burden and a significant risk.

Attorney Opinion Letter Articles

Recent 2022

A Letter from a Lawyer is No Substitute for Title Insurance
RealClear Policy  |  November 2, 2022

Eric Miller, a global fellow at the Wilson Institute Canada and president of Rideau Potomac Strategy Group, writes that it is unsettling to see Fannie Mae announce that it would be accepting written opinion letters from attorneys in lieu of a title insurance policy “in limited circumstances.” He says it was this kind of weakening of standards that put the U.S. on a path to a housing crisis that then metastasized into a global financial crisis. Strong underwriting protects consumers, and title insurance provides a key part of this due diligence.

Reps. Luetkemeyer, Sherman Express Concerns Regarding Title Insurance Alternatives
Financial Regulation News  |  October 26, 2022

U.S. Reps. Blaine Luetkemeyer (R-Mo.) and Brad Sherman (D-Calif.) recently forwarded correspondence to the Federal Housing Finance Agency (FHFA) Director Sandra Thompson, noting concerns regarding the potentially harmful impact of title insurance alternatives.

Fannie Mae Wants to Pedal an Alternative to Title Insurance: What Could Possibly Go Wrong?
Seeking Alpha  |  October 21, 2022

While Fannie Mae insists the use of attorney opinion letters (AOL) will be “limited,” the enterprise specified that the only transactions ineligible for an AOLs will be 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, loans executed using a power of attorney, and a few other exceptions. This hardly constitutes “limited.” So, should we really go forward with this now? Or can we just jump ahead 10 years and watch Margo Robbie or Selena Gomez explain why this was a terrible idea in The Big Short II?

ALTA Submits Letter to FHFA Regarding Role of Technology in Housing Finance
October 20, 2022

ALTA recently submitted a letter in response to a request for information (RFI) issued by the Federal Housing Finance Agency, which is focused on the use of technology in the housing finance space. ALTA recommended the FHFA put particular emphasis on innovation initiatives that address the needs of all homebuyers and protect the privacy of consumers. Innovation that evades established regulatory frameworks or compromises security or privacy should not be considered, according to ALTA. Promotion of using attorney opinion letters in lieu of title insurance in certain circumstances is one area that draws particular concern.

VA Requirements for Title Insurance and Attorney Opinion Letters
October 18, 2022

In its update, the U.S. Department of Veterans Affairs (VA) revised Subsection D to include attorney opinion letters. The handbook now notes that the VA does not require a lender making a VA loan or the Veteran-borrower to obtain title insurance or, where appropriate for the jurisdiction, an attorney opinion letter.

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