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A move by the Biden administration to allow some homeowners to refinance their mortgage without paying for title insurance has raised the ire of the title insurance industry, which has fought previous initiatives to relax title insurance requirements.
The pilot program announced Thursday would allow lenders to sell some of the mortgages they refinance to Fannie Mae and Freddie Mac without having to provide independent verification that there are no clouds on the property’s title through a legal opinion or a lender’s title insurance policy.
One of several housing initiatives unveiled by President Biden during his State of the Union address Thursday, The White House estimates it will save thousands of eligible homeowners an average of $750, and up to $1,500.
Sandra Thompson
“For many aspiring and current homeowners, closing costs represent a substantial affordability barrier to purchasing or refinancing a home,” Sandra Thompson, the head of Fannie and Freddie’s federal regulator, said in a statement. “Homeowners who want to refinance their mortgages are often surprised to learn that the out-of-pocket costs can make that difficult. One of those costs is a new lender’s title insurance policy that covers the lender, but not the homeowner.”
Thompson said the program will apply only to “low-risk refinance transactions where there is confidence that the property is free and clear of any prior lien or encumbrance,” and is designed “to test whether allowing lenders to sell these refinance loans is a responsible approach to reducing the closing costs incurred by existing homeowners.”
The American Land Title Association (ALTA), the title industry’s Washington, D.C.-based advocacy group, dismissed the pilot program as a “purely political gesture offering a false promise of savings for homeowners while exposing consumers, lenders, and taxpayers to greater financial risk.”
ALTA has been engaged in extensive public relations and lobbying campaigns opposing “unregulated title insurance alternatives” such as attorney opinion letters, which threaten to cut into the business of the association’s members.
ALTA hired a public relations firm, Marathon Strategies, in 2021 to conduct “a corporate rebranding campaign” around the theme “Our Title Is Protection.” The campaign was aimed at “educating consumers and policymakers and shaping public perceptions of the industry,” according to an ALTA webinar.
But Fannie Mae and Freddie Mac in 2022 began allowing lenders the option of using an attorney opinion letter instead of traditional title insurance for some loans, to the consternation of title insurers.
Last year ALTA boosted spending on lobbying by 61 percent, to $1.34 million, according to records tracked by OpenSecrets.
In December, Fannie Mae expanded the use of attorney opinion letters to include loans secured by condominiums and properties subject to restrictive covenants.
Diane Tomb
“Fannie Mae’s decision to expand the allowance for attorney opinion letters in lieu of title insurance to loans purchased on condominium units will expose additional consumers and lenders to unneeded risk and weaken protection of property rights,” ALTA CEO Diane Tomb said in a statement at the time. “Title insurance provides more comprehensive coverage, particularly related to risks not easily discoverable by a simple public records search.”
Tomb also called it “troubling” that Fannie Mae’s decision to expand the use of attorney opinion letters in December was made “without engagement with the title insurance industry despite ongoing outreach from the ALTA and its members” to Fannie Mae and its federal regulator, the Federal Housing Finance Agency (FHFA).
ALTA took a similar stance Thursday.
“By announcing this only hours before the State of The Union address, without outreach to, or engagement with, the title insurance industry, the [Biden] administration has reduced the crucial role of the industry to nothing more than a politicized talking point,” ALTA said in a press release.
Analysts at Fitch Ratings said they don’t expect the title acceptance pilot will impact its ratings of title insurers given that the program as approved “would initially apply to a very limited number of refinance transactions, while still allowing lenders to ensure clear title through a title insurance policy or AOL [attorney opinion letter].”
“The ultimate usage of this product and the impact on title insurance policy issuance and premium volume remain uncertain,” Fitch analysts said in commentary released Friday.
In a November 2023 analysis published by the Mortgage Bankers Association, attorneys at the law firm Blank Rome concluded that “there is room for both types of products [title insurance and attorney opinion letters] to exist in today’s market.”
“Enhanced” attorney opinion letters that are coupled with insurance “offer more coverage than their traditional AOL predecessors,” Blank Rome attorneys wrote. Although “enhanced AOLs” can’t insure against unknowable risks, “title defects are relatively rare, and some consumers and lenders may be willing to assume these risks where cost savings can be achieved through purchasing an enhanced AOL in lieu of a title insurance policy.”
Another recent analysis by the Urban Institute noted that while providers of traditional forms of insurance pay out 70 percent of the premiums they collect as claims, title insurers pay just 5 percent. Title insurers point out that much of the cost of providing title insurance is wrapped up in researching and clearing clouds from titles. But the Urban Institute put the cost of title searches at less than $200.
“If title insurance were similar to other types of insurance, the premium the homeowner pays could be dramatically lower,” Urban Institute researchers concluded in their analysis, “Rethinking Title Insurance Could Dramatically Lower Costs for Homebuyers.”
Alita Group, a startup that’s building a platform to allow service providers to issue insured title opinion letters, estimates homebuyers can save $1,500 on average.
An insured title opinion letter “combines the strength of a legal opinion, the efficiency of a data-driven title review, and the protection of comprehensive liability insurance to provide an alternative to title insurance that meaningfully reduces closing costs for consumers,” the company claims.
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