Unregulated Alternatives to Title Insurance Protection

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.

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.

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 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.

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.

ALTA sent a letter on to Federal Housing Finance Agency (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.

U.S. Reps. Blaine Luetkemeyer (R-Mo.) and Brad Sherman (D-Calif.), sent a letter to the Federal Housing Financial Agency (FHFA) outlining questions and concerns on the potential harmful impact of attorney opinion letter alternatives on consumers, lenders, Fannie Mae and Freddie Mac. ALTA commended the lawmakers for sharing their concerns about broadening the use of attorney opinion letter alternatives in lieu of title insurance.

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.

The American Land Title Association has taken a strong stance against attorney opinion letters (AOLs) and other title insurance alternatives since Fannie Mae announced it would start accepting AOLs in lieu of title insurance in "limited circumstances."

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.

As more large players like United Wholesale Mortgage and the government-sponsored enterprises launch efforts aimed at reducing title insurance costs, a trade group has issued new warnings about the potential risks. The American Land Title Association — whose market share could be reduced by the increased use of alternatives to traditional coverage — asks whether the closing cost savings available to borrowers outweigh a potential increase in risk that ownership rights on mortgaged homes could be forfeited.

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.