The mortgage industry continues to navigate what some have called an “unprecedented housing market,” fueled by a perfect storm of factors, including elevated interest rates, low housing supply and inflated pricing. At the same time, potential homebuyers have watched the rising cost of homeownership erode the affordability of the American dream.
If these market conditions are in fact unprecedented, it is only logical to consider that unprecedented conditions may call for unprecedented solutions. In a move that continues to spark much public debate, Fannie Mae and Freddie Mac approved the use of an attorney opinion letter (AOL) as an alternative to traditional title insurance on certain loan types, a bold step in furtherance of their stated affordability goals. Now, with market share at stake, lenders are beginning to follow suit.
In a down market, it is common to see process changes, and even new technology, implemented for the sake of efficiency gains. It is less common to see a new product disrupt the way things have always been done. That is the embodiment of innovation — seeing change as an opportunity instead of a threat. In a market like this, innovation is not optional.
Expanded use
On average, closing costs in a residential mortgage transaction are between 3% and 5% of the total purchase price. On a $300,000 mortgage, that ranges from $9,000 to $15,000. Fannie Mae and Freddie Mac, in their respective 2022 Equitable Housing Finance Plans, identified title insurance premiums as one of the largest closing costs paid by borrowers and announced their goals to reduce those closing costs.
To that end, Fannie Mae amended its Selling Guide in April 2022 to allow for the use of AOLs in lieu of title insurance on certain loan types, tracking language already included in Freddie Mac’s Seller Servicer Guide. More recently, both government-sponsored enterprises (GSEs) amended their guidelines to allow for the use of AOLs on additional property types, including condominium units and properties subject to homeowners’ associations. In the release announcing a recent Selling Guide update, Fannie Mae noted that refinancing borrowers have saved an average of over $1,000 per transaction when using an AOL in lieu of title insurance.
In seeing the introduction of a risk-neutral alternative as an opportunity to impact affordability, the GSEs took an important first step, presenting a unique opportunity for lenders. With housing prices having outpaced wages in recent years, potential homebuyers are increasingly cost-conscious and many shop for mortgages primarily by comparing the annual percentage rate (APR) on available mortgages.
A lender offering lower closing costs, and a lower APR as a result, has a competitive advantage. Even a small difference could drive business in a competitive market. By offering borrowers the option to lower their closing costs by using an insured AOL, lenders create a competitive advantage that allows them to market their products more effectively and highlight their commitment to providing their clients with the lowest cost options available. This enhances the overall borrower experience, which leads to increased borrower satisfaction and more referrals.
Affordability solution
As should be expected with the introduction of an alternative product in an established market, the title insurance industry has raised concerns over the differences between an AOL and title insurance. Although traditional attorney opinion letters have inherent limitations, there are modern, insured versions of the attorney opinion letter that have resolved those limitations.
Recently, Bradley Arant Boult Cummings LLP (Bradley), a prominent national law firm, did a deep dive into the differences between the insured AOL and title insurance to determine the effectiveness of the alternative in the modern mortgage market. The firm concluded that the insured AOL reviewed “addresses significant title-related risks, including the most commonly encountered title risks, and is poised as a viable option in the modern real estate and mortgage lending landscape.”
“Although traditional attorney opinion letters have inherent limitations, there are modern, insured versions of the attorney opinion letter that have resolved those limitations.”
Notably, Fannie Mae also cited in its December 2023 release announcing expanded availability of AOLs, that it has purchased more than 10,000 loans with an AOL used in place of traditional title insurance and that it has not experienced losses from title claims on those loans. As the mortgage industry continues in a state of uncertainty, more lenders are compelled to find new ways to attract and retain clients. The insured AOL is an innovative, cost-neutral option that aligns with the market’s demand for cost-effective solutions to improve affordability.
As Bradley notes in its white paper, “in the same way that title insurance resulted from a need in the market and the ingenuity of market participants, the demand in the current market for more affordable homeownership presents a similar opportunity for ingenuity and a new option for addressing title-related risk, like an insurance-backed AOL.” A $1,000 difference in closing costs, and lower APR, is meaningful to most potential homebuyers today and could be the difference in attracting a new client. For mortgage lenders looking to gain market share, the insured AOL presents a compelling opportunity to drive new business and improve retention.
