This past April, news that Fannie Mae would begin accepting written attorney opinion letters as an alternative to title insurance policies in limited circumstances generated mixed reactions. Is this move too risky? Will mortgage lenders be comfortable?
Fannie created guidelines that the attorney opinion letter must be addressed to the lender and all successive owners of the loan, be commonly accepted in the area where the subject property is located, and provide gap coverage for the duration between the loan closing and recording of the mortgage. Freddie Mac announced its plan to accept attorney opinion letters in lieu of title insurance policies in May 2020.
The move could make for more affordable homeownership — and the importance of closing the affordability gap cannot be overlooked. Controlling costs is even more critical in a challenging market environment. Today’s higher mortgage rates have acted as a catalyst for lenders to look at alternatives that will reduce the cost of doing business and ultimately reduce costs for the consumer.
In contrast, the incredible volumes of purchase and refinance activity over the past couple of years has stifled innovation. But that is changing. Lenders are tuning into the fact that the use of an attorney opinion letter instead of title insurance could save consumers hundreds or even thousands of dollars.
Using legal opinions to confirm marketability of title is not new. In fact, it is a practice that existed long before title insurance. But with the growth of large title insurers that had the capacity to process high volumes while taking on the accompanying risk, attorneys who issued title opinions were priced out of the market. This market, one that has remained largely unchanged for the better part of 100 years, is long overdue for change.
Attorney opinion letters can be produced with consistency, scale and coverage comparable to that of a title insurance policy. Each attorney would need to act under the authority of the state supreme court with the protection of comprehensive liability insurance.
In this way, attorney opinion letters can be a truly viable alternative to title insurance in every way. With nationwide availability, these opinion letters should be available for purchase and refinance transactions, and for comprehensive coverage by homeowners and lenders.
Still, there are some misgivings over the potential risks involved in using an attorney opinion letter instead of a title insurance policy. The problem is that these risks are based on assumptions about attorney opinion letters as they existed a century ago.
One misconception is based on the notion that title insurance focuses on risk prevention rather than risk assumption, while attorney opinion letters only provide protection on a go-forward basis. This is inaccurate.
First, it helps to understand why title insurance came into existence. In the pre-title insurance era of attorney opinion letters, homeowners and lenders were often left without protection because they didn’t have privity of contract — the concept that a contract only binds parties that have signed it — with the attorney performing the review and issuing the opinion. That’s generally how professional liability insurance works.
It’s also why an attorney opinion letter program doesn’t rely on traditional liability insurance, or errors and omissions insurance. Each letter is backed by a transactional liability policy that covers the lender, the homeowner, the attorney and the title service provider. Each stakeholder in the loan origination process, and each successor in interest to these stakeholders, has privity to file a claim. In other words, the coverage is fully transferable in the secondary market.
A second common misconception is that an attorney opinion letter does not cover title curative work that may become necessary. Of course, this assumes that title insurance does provide this coverage.
Typically, when a title issue arises, to the extent that it can be remediated, the title insurer engages a third party to do the curative work. Similarly, the attorney opinion letter provides coverage for both curative work and payment of the diminution in value (in the event the issue cannot be cured).
Some naysayers assert that title processors are the only professionals solely focused on title and are therefore the only experts qualified to opine on it. This is an argument lacking in merit.
In addition to the post-graduate education aimed at honing a highly specialized skill set focused on inquisitiveness and meticulousness, attorneys also must approach this work practically and with professional responsibility in mind. The reality is that attorneys are held to professional standards that are necessarily higher than those applied to title processors, meaning that their work in the title review process and the issuance of an attorney opinion letter is not an exception to these standards.
One of the most important distinguishing traits of an attorney opinion letter when compared to title insurance is that it could substantially reduce the cost of closing a loan. Theoretically, it should be more expensive. Attorneys have garnered the distinction of being cost-prohibitive as opposed to cost-effective. Why is this different?
The cost of title insurance isn’t commensurate with the risk being covered. Title insurers have continuously increased their rates. And the current rate structure is simply inconsistent with the risk of transferring title.
In the meantime, attorneys have caught up. They have the data and technology to offer a comprehensive product with comparable coverage using an efficient process. They’ve seen the impact that rising title insurance rates have on a consumer’s ability to purchase a home and build wealth. They’ve heard the message from the Biden administration, housing agencies and consumer groups. And they’re stepping in to do their part to make homeownership more affordable. ●