Alternatives to Title Insurance Increase Lender Risk
October 18, 2022
As a result of Equitable Housing Finance Plans announced earlier this year by the Federal Housing Finance Agency, both Fannie Mae and Freddie Mac are now accepting written attorney opinion letters in lieu of a title insurance policy under limited circumstances.
Attorney opinions, in providing more limited coverage of title risks, represent a shifting of risk to the lender because they are responsible for representations and warranties for the life of the loan that pertain to clear title and first-lien enforceability. Title insurance protects a lender’s security interest in a property by ensuring that its lien has priority over others and is enforceable. Title insurance policies can insure against lien impairment caused by diversion of funds and similar risks while alternative products cannot.
Since the policy change, the American Land Title Association has engaged with FHFA, government-sponsored entities, lenders and state regulators to explain the risks alternative title insurance products including certain attorney opinion letters present to lenders and consumers.
“ALTA believes it is irresponsible for lenders to offer title insurance alternatives that provide less coverage but introduce more risk to lenders and consumers,” said Diane Tomb, ALTA’s chief executive officer. “We know that in some parts of the country and on limited types of transactions, other products such as attorney opinion letters have been used in limited situations. However, over the years, AOLs have been replaced by title insurance in most of the country because of the protections afforded by title insurance.
Unlike alternative products, including attorney opinion letters, title insurance goes beyond a public records search, providing the most comprehensive protection. Title insurance policies insure against unknown risks that are not discoverable during searches of public records. Some of these unknown risks could include fraud, forgery, false impersonation by someone purporting to be the owner of the property, mis-indexed items, errors in surveys, boundary disputes, undisclosed or missing heirs, errors on the deed, conflicting wills, unpaid child or spousal support, encroachments, liens from contractors, taxing entities or previous lenders, claims by an ex-spouse who didn’t authorize the sale or claims related to a falsified power of attorney, among other risks.
“What many may not realize is that the unknown risks are the most significant,” Tomb said. “A title search will reveal many of the known issues. It is the unknown risks that forms the reason for obtaining a proven product like title insurance.”
One sizable risk is related to items not discoverable in a public records search like federal tax liens, mis-indexed items or HOA liens. 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 a valid claim under the service provider policy wrapper in current versions of the product.
Lenders also can’t forget about the risk alternative products pose for consumers. “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,” Tomb said. “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.
“We continue 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,” Tomb continued
Earlier this year, 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.
“Historically, lenders have preferred the strong protection of a title insurance policy because it provides the best mix of strong protections and cost,” Tomb said. “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.”
During the financial crisis, the United States unfortunately witnessed several systemic financial problems caused by shortcuts to well-established processes. Throughout that time, the title insurance industry indisputably proved its ability to reliably resolve claims, many fraud-related, even in a severe recession.
“If that crisis taught us anything, it is that underwriting standards and risk-protection should be strong and well-tested,” Tomb said. “Strong underwriting protects lenders and consumers alike–and title insurance provides a key part of this due diligence. We have a very sound, dependable, trustworthy real estate system in the United States, and a home is the most valuable asset most people will ever purchase. Title insurance is the product that helps protects this system and that investment most comprehensively.”
Jeremy Yohe is ALTA's vice president of communications. He can be reached at jyohe@alta.org.
Contact ALTA at 202-296-3671 or communications@alta.org.