Industry News

We send out this update to keep you informed on the latest activity from the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac under their Equitable Housing Finance Plans, including developments related to unregulated title insurance alternatives and other issues that could imperil the stability of the housing market and property rights of the homeowners we serve.

 

In another move that increases unnecessary risk to consumers and lenders, Fannie Mae updated its Selling Guide on Wednesday expanding the use of attorney opinion letters (AOLs) in limited circumstances for loans on condo properties and those subject to restrictive agreements or covenants.

 

ALTA has maintained that unregulated title insurance alternatives, including certain AOLs, do not provide the same ongoing protections for homeowners or lenders, exposing consumers to potential risk and unforeseen financial costs.

 

Condos account for roughly 9% of mortgages sold to Fannie Mae each year. According to HOA-USA, there are over 370,000 homeowner associations in the United States, representing 30% of all homes. The states with the most condos are California, Texas and Florida.

 

There are many critical title issues presented by condos versus standard single-family home transactions. The first issue is if a condo isn’t built correctly based on the declarations and doesn’t comply with state law. The second issue is the potential superiority of a condo lien for assessments. Finally, title agents regularly obtain estoppel letters and payoffs for transactions. If there are outstanding covenant violations, fines or assessments pending with the seller, title professionals resolve these prior to or at closing. This gives the HOA an opportunity to raise any issues—such as unapproved or recent improvements—before a new owner purchases the property. Importantly, only the first item can be determined from a public records search. The other issues could not be addressed with an AOL product.

 

Making condos even trickier is the fact that HOA dues data is not widely available from a single source and more than 30% of HOAs are self-managed, meaning there is no professional company from which to obtain data.

 

Further troubling with Fannie Mae expanding the use of AOLs is the fact that this change came without engagement with the title insurance industry despite ongoing outreach from the ALTA and its members to FHFA and Fannie Mae on thoughtful approaches to housing opportunity and affordability challenges. Housing policy has always worked best as a public-private partnership, and that is how these decisions should be made, with the opportunity for collaboration with experts from affected industries to ensure the best outcomes for consumers.

Increasing housing affordability and sustainability is a vital goal, but taking shortcuts that cost more in the future due to increased risk is penny wise and pound foolish. Analysis from First American Chief Economist Mark Fleming shows that fees for title insurance and settlement services are well below all other costs charged to borrowers over the life of the mortgage loan.

 

According to First American’s data, a borrower’s largest life-of-loan costs are property taxes and recording fees paid at closing plus the accumulated cost of annual property taxes paid over the life of the loan. The fees paid to the mortgage-backed security (MBS) investor and lender are next with the accumulated cost of the annual interest payments made to the investor(s) that purchased the MBS bond containing the mortgage, and the lender’s net origination charges at closing plus the accumulated value of the excess interest the lender charges for profit. Homeowner’s insurance, the servicer, and even the GSE (the actual holder of the default risk on the mortgage), represent small overall costs by comparison. The title insurance premium and settlement costs (collectively title and settlement fees), along with the accumulated costs of the annual mortgage insurance premium, barely equate to 1% of the borrower’s total life-of-loan costs.

 

Additionally, updated research published in December 2022 by Fannie Mae, found that “differences in title and settlement costs across borrower race and ethnicity groups, once accounting for geography, were not economically meaningful.” Any differences that do exist are very small, Fleming said. Asian borrowers pay $13 less than non-Hispanic white borrowers (the control group); low-income borrowers pay $14 more; and first-time home buyers pay $11 less than repeat buyers.

 

In exchange for the promise of a small savings at the front end, the AOL experiment jeopardizes low- and moderate-income homeownership over the long haul. This kind of extreme risk is fundamentally antagonistic to our shared goal of increasing homeownership.

 

There is a reason why Fannie Mae has been in conservatorship since 2008. It is imperative that consumers, taxpayers and the housing market are not put at risk by ill-informed policies like those we’ve seen in the past.