Freddie Mac expands use of AOLs in selling guide update

Attorney opinion letters, rather than title insurance, may now be used on most mortgages purchased by the GSE, including condominiums

In an update to its selling guide, Freddie Mac announced Wednesday that it is expanding the use of attorney opinion letters (AOLs) in lieu of title insurance.

Under the new selling guidelines, Freddie Mac said it would allow AOLs to be used on “loans secured by a unit in a condo project,” on “loans secured by a property subject to restrictive agreements or restrictive covenants,” and on “loans secured by a property located in all U.S. jurisdictions, unless prohibited by law or identified as an ineligible transaction type.”

Ineligible transaction types include mortgage premises located in tribal areas, cooperative share loans, mortgages secured by a dwelling on a leasehold estate and mortgages secured by a manufactured home, among others.

The changes made by Freddie Mac mirror those made by Fannie Mae in December 2023, when the government-sponsored enterprise (GSE) announced that it would allow AOLs to be used on mortgages secured by a condo and mortgages secured by a property subject to restrictive agreements or restrictive covenants.

For the past two years, the American Land Title Association has been a vocal critic of AOLs.

“Freddie Mac’s new acceptance of attorney opinion letters on loans purchased on condominium units will not lead to cost savings in many, if not most, instances, but it will expose additional consumers and lenders to unneeded risk and weaken protection of their property rights,” Diane Tomb, ALTA’s CEO, wrote in an email. “Unregulated attorney opinion letters provide no coverage for some of the most frequent reasons for claims, such as fraud and forgery, and they are simply the more costly option in the majority of states. Freddie Mac’s decision to follow Fannie Mae’s lead in embracing this unregulated, less comprehensive, and short-sighted product is a mistake.”

The Community Home Lenders of America, however, are pleased with Freddie Mac’s announcement.

“CHLA applauds Freddie Mac for allowing the use of AOLs as an alternative to title insurance as well as aligning their practices more closely with Fannie Mae,” Scott Olson, the executive director of CHLA, wrote in an email. “CHLA has been an advocate for the allowance of AOLs, as such alternatives hold great promise in reducing mortgage closing costs and increasing affordability opportunities for low- to moderate-income, and first-time homebuyers.”

Fannie Mae first announced that it would accept loans secured with an AOL in lieu of title insurance, in limited circumstances, in April 2022, while Freddie Mac says it has been accepting AOLs for over 15 years. The moves by the GSEs are part of their Equitable Housing Finance Plans, which are required by their regulator, the Federal Housing Finance Agency (FHFA).

The initial version of the GSEs Equitable Housing Finance Plans were approved by the FHFA in the summer of 2022. The final rule was released on Tuesday, nearly two years later.

“Attorney opinion letters are an alternative, not a replacement, as traditional policies are always available for those that prefer title insurance. Based on Freddie Mac’s analysis, using an AOL could bring down borrower costs by hundreds of dollars, helping address housing affordability challenges. It’s important to point out that this expansion refers only to lender title insurance policies. Lenders have the option to choose the policy that works best for them,” a spokesperson for Freddie Mac wrote in an email. “If savings are achieved, those savings can be passed down to the borrower. And of course, lenders are incentivized to make sure title coverage sufficiently protects their own risk. We do not require borrowers to have title insurance or AOLs, so this announcement doesn’t affect their decision of whether or how to protect their title.”

Freddie Mac’s announcement comes as the title insurance industry is facing increased scrutiny from the Consumer Financial Protection Bureau (CFPB) and the Biden administration.

In early April, Bloomberg reported that the CFPB was considering a ban on mortgage banks charging homebuyers for the lender’s title insurance policy. A month prior, in conjunction with Fannie Mae and the FHFA, the bureau announced a pilot program to waive the requirement for a lender’s title insurance policy on certain refinance transactions.

In their first-quarter 2024 earnings calls, multiple title insurance executives told investors and analysts that they do not believe these pilot programs will have any material impact on the publicly traded title firms.

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