Over the last several years, high mortgage rates, lack of inventory and millennial demand to buy a home, have all converged to create a recipe for real housing affordability challenges. The problem is exacerbated due to the “lock-in effect” as nearly 60% of the 50.8 million active mortgages have interest rates below 4%.
While analysts expect mortgage rates to drop this year, they are also projecting housing prices will increase, by one estimate by 4%, amid rising demand. To effectively tackle these housing affordability challenges, however, thoughtful solutions must focus on the principal drivers of the problem — particularly the need for increased housing supply and reduced barriers and costs to development — rather than ill-informed, quick-fix policies that not only do little to address affordability but also increase risks for consumers on their largest and most important lifetime investment.
It appears that is the path the mortgage industry is heading down with some wrongly latching on to title insurance as a target. Title insurance has been reliably protecting the property rights of homeowners for decades from any defects or hidden risks that may appear later.
There are those who have called to eliminate or waive it in certain circumstances or expand the acceptance of less protective, unregulated alternatives. These include attorney opinion letters (AOLs), which Fannie Mae and Freddie Mac have pushed under the watch of their conservator, the Federal Housing Finance Administration (FHFA). That would put the American dream of sustainable homeownership in jeopardy.
Modest cost
The simple fact is that title insurance is not a barrier to homeownership. Recent analysis shows the two largest life-of-loan costs for the borrower are property taxes and recording fees, followed by fees paid to the mortgage-backed security investor, the lender, Freddie or Fannie, among others.
Title insurance, along with settlement fees, are two of the least expensive costs — equating to less than 1% of the borrower’s total life-of-loan costs combined. In fact, the cost of title insurance coverage, unlike most other forms of insurance, has dropped 5% in the last five years alone on a nominal basis.
In the majority of states nationwide — so-called “seller-pay” states — for instance, attorney opinion letters can increase expenses for consumers beyond what they would pay for title insurance. In these states, the seller pays for the homebuyer’s title insurance policy, and therefore, homebuyers only pay for a reduced cost lender’s policy at closing, often times as little as $150. Combined with other common discounts, title insurance is not only less expensive in such cases but also more protective.
Due to a variety of risks, lenders typically have not relied upon written attorney opinions in title matters. That is why lenders rely on the protection offered by a title insurance policy. 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.
Hidden defects
An attorney opinion letter is a legal document from a real estate attorney that provides an opinion on the status of a property that is in no way a substitute for title insurance and offers much more limited coverage in comparison. These documents only address those defects that are found in a public records search, leaving potential risks like fraud, federal tax liens or homeowner association (HOA) liens (typically not found in public records) undiscovered and uncovered.
About a third of all claims paid by title insurance companies are for risks not found in such a search, according to an analysis by consultant Milliman commissioned by the American Land Title Association. The average claim amounted to $143,000 — a figure that most homebuyers and homeowners would be hard pressed to handle and could result in the loss of their home.
At the end of the day, an attorney opinion letter is just that — an “opinion” of an attorney or firm. Unlike title insurance companies, which are comprehensively regulated at the state level by state departments of insurance and required to have financial reserves to cover future claims, attorney opinion letters have none of those requirements.
Furthermore, several courts have ruled that an attorney may not necessarily be liable if they make a mistake in these situations, leaving a consumer footing a hefty bill to hold onto their property. That’s in stark contrast to title insurance which covers all legal fees if an ownership dispute arises.
The benefits of, and security afforded by, title insurance provide consumers with assurances that their property rights are protected. That’s why bipartisan members of Congress and state insurance regulators have raised concerns about promoting risky alternatives.
There is an urgency to solve the housing affordability problem. But driving roughshod over title insurance won’t get policymakers any closer to a solution — and it risks creating even more challenges for homebuyers, homeowners and the entire housing market.
