The Federal Housing Finance Agency's (FHFA) Equitable Housing Finance Plans announced earlier this year are aimed at lowering closing costs and making home ownership more accessible for low- to moderate- income and minority homebuyers.
The title insurance industry is eager to work with FHFA to ensure that equitable access to sustainable homeownership opportunities is available for all Americans, including minority and underserved communities.
The title industry plays a critical role in the ability of American households to build wealth through homeownership by ensuring the proper transfer of real estate from seller to buyer and securing property rights.
Lower protection alternatives to title insurance, such as the use of an attorney opinion letter (AOL) under limited circumstances, will make homeownership less sustainable and increase unnecessary risk for more vulnerable, low- and moderate-income consumers.
Some of the requirements for using an attorney title opinion letter include:
- The attorney issuing the title opinion letter must be licensed to practice law in the jurisdiction where the subject property is located and must be insured against malpractice in rendering opinions of title in an amount commonly prevailing in the jurisdiction.
- The attorney title opinion letter must also:
- Be addressed to the lender and all successors in interest of the lender,
- Be commonly accepted in the area where the subject property is located,
- Provide gap coverage for the duration between the loan closing and recordation of the deed of trust or mortgage,
- List all other liens and state they are subordinate, and
- State the title condition of the property is acceptable, and the mortgage constitutes a lien of the required priority on a fee simple estate in the property
As a whole, the title industry believes it runs counter to FHFA's mission and the intent of the Equitable Housing Finance Plans to encourage lenders to accept, and to promote to borrowers, alternatives to title insurance that provide less coverage and introduce more risk to both lenders and homebuyers.
In fact, the American Land Title Association (ALTA) published these reasons why alternative products increase lender risk:
- Lenders considering the use of attorney opinion letters or other alternatives must understand the risks they are taking on by not getting title insurance. Attorney opinions, in providing more limited coverage of risks, represent a shifting of risk to the lender, not an elimination of the risk.
- Title insurance provides an underwriting service to mortgage lenders to ensure the borrower has clear ownership rights to the property, free of any other claims to ownership.
- Historically, lenders have preferred the protection of a title insurance policy because it provides strong protections and mitigates risk. In fact, the protections afforded by title insurance actually replaced attorney opinion letters as the realities of risks experienced from a static examination of the title records became clear.
- 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 attorney opinion letter, 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.
- Importantly, title insurance policies are also backed by statutorily required financial reserves to cover future claims risks.
These reasons are meant to be shared with your lender customers considering an AOL over a lender's title insurance policy.