Unlike the title industry’s cybersecurity and wire fraud challenges, which are strictly 21st century issues, the recent interest and use of attorney opinion letters (AOLs) harkens back to an earlier era of homebuying.
Prior to the advent and widespread use of title insurance, before taking title to a property, the buyer required that the title be free of any rights, interests, liens or encumbrances of others for which the buyer would be responsible for. A title search would be conducted and then a conveyancer would issue an opinion on the title, an incredibly similar process to the AOL option which Fannie Mae announced it would start accepting this past April.
Since the government sponsored entity’s announcement, the American Land Title Association has taken a strong stance against AOLs and other title insurance alternatives. Now, thanks to United Wholesale Mortgage (UWM) CEO Mat Ishbia’s recent announcement that his company is hiring attorneys to review title and closing documents, AOLs and the risks associated with them, have been a hot topic at this year’s ALTA One conference.
“Since Fannie’s announcement earlier this year, ALTA has been out front opposing the irresponsible use of title insurance alternatives that provide less coverage and introduce more risk for the lenders and the consumers,” Diane Tomb, the CEO of ALTA, told conference attendees gathered in the historic Hotel del Coronado’s Ocean Ballroom Thursday morning. “This is a top priority for ALTA.”
Daniel Wold, ALTA’s president, added: “We will continue speaking out against alternatives to title, which pose an even greater risk to the housing finance system.”
The AOL battle heats up
Fannie Mae’s April announcement that it would be accepting AOLs in lieu of a title insurance policy “in limited circumstances,” was similar to the announcement by Freddie Mac two years ago, with similar requirements for the letter and the attorney writing it.
Over the summer, Tomb said the impact of this policy change was expanded when the Federal Housing Finance Agency approved the GSEs’ release of their Equitable Housing Finance Plans.
“The intent was to promote affordable and sustainable housing opportunities for more households nationwide,” Tomb said. “One of the goals they outlined in those plans is a push to reduce closing costs, especially for low-income borrowers. Based on those plans, both GSEs are pushing pilot programs promoting the use of attorney opinion letters, reportedly as an alternative to reduce closing costs.”
While some proponents of AOLs, such as Voxtur Analytics, claim that the savings generated by using an AOL product instead of a traditional title insurance policy could save consumers up to an “entire mortgage payment,” ALTA says it has not noted any considerable savings in using AOLs versus a traditional title policy. Instead, ALTA warns that due to the risks posed by AOL coverage, using an AOL may cost a consumer more in the long run.
“These products that are going into the market — it is confusing because they are giving people who need it the most, less coverage,” Tomb said. “We haven’t seen any real data based on the conversation that it is going to save money. In some ways it could cost them more. They might actually lose their home.”
Unlike AOLs, title insurance policies provide lenders with a defense, including attorney’s fees and costs, in any dispute or claim that may arise.
“It is so easy to spend $10,000 in court on anything and then your other option is to pay another $298 on an owners title policy,” Charles Cain, the senior vice president for the national agency division of FNF Family of Companies, said. “When they talk about reducing closing costs for underserved communities, these people need title insurance more than anybody else because while $10,000 in legal fees may be doable for someone who owns a $4 million house, it is a struggle for someone who owns a $140,000 house.”
Betting the farm
Aside from the financial burden AOLs could pose for homeowners, ALTA also takes issue with the numerous coverage gaps, especially when it comes to issues of forgery and fraud.
“Forgery and fraud are the biggest things not covered by any of those alternative products,” Steve Gottheim, ALTA’s general counsel, said. “It is also the third-biggest source of claims in our industry right now. So, it is hundreds of millions of dollars the industry pays out on those types of issues that lenders are not prepared to take on.”
According to ALTA, AOLs only cover things discoverable in a public records search, meaning that they would not cover things like federal tax liens, mis-indexed items or HOA liens. In addition, if a title issue arises on a property covered by an attorney opinion letter, the buyer would need to prove negligence on the part of the attorney to pursue the claim with them. If the buyer is unable to prove negligence on the part of the attorney, the claimant would likely need to pay the legal costs involved to litigate the title matter.
Cain said this can get even trickier in some states, where the statute of limitations on an attorney’s malpractice insurance is one year from the date of when the opinion letter was issued, not the date of when the issue arose.
“An AOL is not going to cover the period of a 30-year loan,” Cain said. “As an attorney, I don’t know how that is going to work.”
Finding savings and solutions
But AOL proponents have a different take.
“We created the attorney opinion letter as an alternative product not with the intention of completely displacing title insurance, but creating an alternative that could be used in certain situations, particularly those where the cost of title insurance is not necessarily proportionate to the risk that is being covered,” Stacy Mestayer, the chief legal officer of Voxtur, told HousingWire earlier this year.
Voxtur’s CEO Jim Albertelli added in an email: “The use of Attorney Opinion Letters as an alternative to title insurance is an established practice that provides security and coverage to the lender and borrower comparable to that of title insurance. As this alternative continues to grow in popularity, we anticipate that misinformation will continue to be released, particularly by those that see an alternative product as a competitive threat. The reality is that innovation like this leads to more efficient processes and lower costs that benefit homeowners, and that is exactly what we should all be striving to achieve.”
ALTA voiced its concerns about AOLs in a letter to FHFA director Sandra Thompson earlier this year and Tomb says she hopes the trade organization can be part of these discussions moving forward, as she said the group was not consulted prior to the GSE’s announcement.
While ALTA supports the FHFA’s mission to lower the cost of homeownership, it aims to do so in a way that protects both consumers and lenders.
“Over the last 10 years, rates have gone down 6% across the industry and that is important for homeowners and it’s because of the investment the industry has put into things around automation and using machine learning and AI to search title and come to a faster decision about the title,” Gottheim said. “These technologies come with a cost at the front end, but over time, they bring that efficiency and bring the price down.”
ALTA is also working with lenders, Realtors, the Department of Housing and Urban Development and down payment assistance programs to provide homebuyers with information on the differences between AOLs and title insurance, and finding ways to reduce costs.
“We are protecting the American Dream,” Tomb said.