The title insurance industry is often bemoaned for being antiquated and making minimal changes, but that has not been the case for the past 12 months.
Nearly a year after announcing that it would begin accepting attorney opinion letters (AOLs) in lieu of title insurance in limited circumstances, Fannie Mae is yet again making waves in the title insurance industry.
According to a report from PoliticoPro, published last Wednesday, the government sponsored entity (GSE) is looking at piloting a program that would bypass traditional title insurance and AOLs all together. The program would grant certain mortgage lenders a waiver on title insurance requirements for loans sold to Fannie Mae and will be rolled out this spring, according to Politico.
Fannie Mae, which currently backs almost $9 trillion in U.S. residential real estate mortgages, would not confirm nor deny the rumors.
“We know that closing costs continue to be a barrier for homebuyers – especially among underserved populations and first-time homebuyers,” a Fannie Mae spokesperson wrote in an email. “We continue to research options that would lead to cost reductions in a safe and sound manner and help borrowers save money as part of our Equitable Housing Finance Plan. As we’re still in the research phase, we don’t currently have any additional details to share at this time.”
The GSE’s Equitable Housing Finance Plans were approved this summer by the Federal Housing Finance Agency.
“The intent was to promote affordable and sustainable housing opportunities for more households nationwide,” Diane Tomb, the CEO of the American Land Title Association, told HousingWire late last year. “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 the introduction of AOLs frustrated ALTA, Fannie Mae’s latest move has caused major concern for the trade organization.
“We are extremely concerned about the reported Fannie Mae pilot program to waive title insurance requirements for certain transactions. It appears Fannie Mae is moving beyond its charter and mission directly into the title insurance business. It should raise significant alarm bells,” the trade group wrote in an email. “If the 2008 financial crisis taught us anything, it is that shortcuts to well-established processes pose great risks to our sound, dependable, and trustworthy real estate system, homeowners, and taxpayers. FHFA should halt this activity.”
Howard Turk, the founder and managing director of Turk & Co, who helped Big Four title insurer First American launch in Canada in the 1980s, is also wary about what this could mean — especially for lenders.
“The real risk here is to the lender. If there is a problem, Fannie will most likely simply avail themselves of their rights under typical repurchase agreements and send the deal back to where it came from,” Turk wrote in an email. “The real question is to Lenders who do these deals. For them — they have to determine whether or not they are feeling lucky. Title insurance is there for very good reason. Going without it involves an assessment of risk.”
ALTA has also raised concerns over how what the trade group feels is a lack of coverage will impact homeowners if a claim on the title of their home ever does arise.
“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.”
Proponents of the GSE’s Equitable Housing Finance Plans, however, highlight the disparity between title insurance premium revenue generated compared to how much title companies pay out in claims.
According to ALTA, title insurers brought in $17.6 billion in title premiums during the first nine months of 2022, while paying out just $438.7 million in claims during that time period.
For its part, ALTA said it is working on lowering closing costs where it can, and it believes the increase in automation and improved technological capabilities within the title industry will lower costs even further over the next few years.
“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,” Steve Gottheim, ALTA’s general counsel, told HousingWire last November. “These technologies come with a cost at the front end, but over time, they bring that efficiency and bring the price down.”