Opinion: Improving housing affordability without exposing homebuyers to more risk

ALTA's Diane Tomb on why title insurance is essential

It is no secret that there is a housing affordability challenge in the U.S. According to the National Association of Realtors’ (NAR) Housing Affordability Index, since spring of last year, a typical family with a median income have not been able to afford a median-priced home. 

While mortgage rates will likely fall this year, conversations about how to increase accessibility to homeownership are still top of mind — and should be top of mind — across the real estate industry. However, there is no one-size-fits-all approach to homeownership affordability. Any proposal to increase access to homeownership and improve affordability should be evidence-based, sustainable (avoiding quick fixes) and not come at the cost of consumer protection.

For example, recently, Fannie Mae has focused on expanding alternatives to title insurance as a way to supposedly increase homeownership affordability. However, Fannie Mae’s own research from 2022 found that title insurance is not a significant component of the overall closing costs when buying a home. Accounting for geography, differences in title and settlement costs across groups of borrowers were not “economically meaningful.”

Additionally, recent research by First American found that title and settlement fees account for less than 1% of a borrower’s total life-of-loan costs, indicating that title insurance fees are one of the smallest portions of the equation. A homeowner’s largest life-of-loan costs are property taxes and recording fees ($29,675), fees paid to the mortgage-backed security (MBS) investor ($28,779), fees paid to the lender ($14,026), homeowner’s insurance ($9,279) and GSE fees (7,705). 

Targeting title insurance as a way to cut costs not only fails to address real affordability problems, but it can actually leave consumers open to future title risks that can come with large price tags. As an example, attorney opinion letters (AOLs) are being touted as a substitute to title insurance, but they do not offer the same level of protection.

According to industry data, a third of all claims paid by title insurance companies are for issues that cannot be found in a search of the public records and would not be covered by an AOL. An opinion from an attorney based on a title search is not the same thing as insurance, which has statutory reserving requirements to protect against losses.

Additionally, in the majority of states – so-called “seller pay” states – AOLs 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 lender’s policy at a reduced cost at closing, oftentimes as little as $150.

The title industry embraces efforts to help increase homeownership accessibility. That’s why title companies are constantly innovating to drive down the cost of our policies. While the cost of other forms of insurance have steadily increased in recent years, thanks to industry innovations, the cost title insurance has decreased by 7.8% nationally since 2004, according to industry financial statements. Additionally, title companies offer various discounts – such as a simultaneous issue rate discount when owner’s and lender’s policies are purchased together – to help lower the cost of coverage.  

But while these improvements to reduce costs are important to addressing housing affordability, there are much bigger barriers to homeownership, especially for low- and moderate-income homebuyers. Instead of replacing longstanding products that have protected consumers for the last century and only cost homebuyers sometimes as little as a couple hundred dollars, both the private and public sector should focus on addressing the root causes of housing unaffordability.

As Fannie Mae’s Senior Vice President and Chief Economist Doug Duncan recently noted, “Until we see a meaningful increase in housing supply, we expect affordability will remain a significant barrier to homeownership for many households.” Increasing the supply of affordable housing is critical to bringing the American Dream of homeownership within reach for more Americans. According to NAR, elevated home prices, mortgage rates and a limited supply of homes are the top barriers to homeownership.

In order to fix the housing affordability crisis, the real estate industry and federal government must focus on the fundamental problems that keep home prices high. Replacing consumer safeguards like title insurance with unproven, unregulated alternatives will just expose homebuyers—especially first-time homebuyers who need it the most—to greater financial risk.

Diane Tomb is CEO of the American Land Title Association.

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