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The debate over a pilot program that’s letting some homeowners refinance their mortgage without paying for title insurance flared up again this week, with Republican attorneys general from 14 states urging Fannie Mae and Freddie Mac’s federal regulator to kill the program.
The July 22 letter to Federal Housing Finance Agency (FHFA) Director Sandra Thompson alleges:
- The FHFA approved the program without seeking public input
- The program only benefits homeowners with “lower risk” refinance loans, and doesn’t serve first-time and low-income homeowners
- Waiving title insurance exposes homeowners to potential fraud and abuse
- The program allows Fannie Mae to sideline small businesses
Jonathan Skrmetti
“The affordable housing crisis demands meaningful bipartisan solutions, not shortsighted regulatory overreach,” Tennessee Attorney General Jonathan Skrmetti said in a statement.
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The letter was also signed by attorneys general Steve Marshall (Alabama), Tim Griffin (Arkansas), Chris Carr (Georgia), Todd Rokita (Indiana), Kris Kobach (Kansas), Liz Murrill (Louisiana), Lynn Fitch (Mississippi), John Formella (New Hampshire), Gentner Drummond (Oklahoma), Alan Wilson (South Carolina), Marty Jackley (South Dakota), Ken Paxton (Texas) and Jason Miyares (Virginia).
“FHFA has received the letter and will respond directly,” was the agency’s only comment to Inman Thursday on the allegations raised by state attorneys general.
One of several housing initiatives unveiled by President Biden during his State of the Union address in March, the FHFA pilot program allows lenders to sell some of the mortgages they refinance to Fannie Mae without having to provide independent verification that there are no clouds on the property’s title through a legal opinion or a lender’s title insurance policy.
The FHFA estimates the title acceptance pilot program will save eligible homeowners $500 to $1,500 in closing costs when they refinance by eliminating the need to purchase lender’s title insurance.
In a website FAQ, the FHFA says it approved a “small-scale, limited duration pilot” allowing Fannie Mae to use an automated title review process “to assess title risk during loan manufacturing and prior to loan purchase.”
For now, the title acceptance pilot program is limited to lenders refinancing loans in select geographies, and only mortgages with loan-to-value ratios of less than 80 percent will be eligible for title insurance waivers.
“Pilots, often small in scale with limited duration, are meant to inform longer-term policy one way or the other,” the FHFA FAQ states. “Pilots are a vital tool to test, learn, and in some cases, be scaled towards permanent policy.”
The title acceptance pilot is part of a broader push to allow mortgage borrowers to bypass the expense of title insurance through alternatives like attorney opinion letters.
Fannie Mae in 2022 began allowing lenders the option of using an attorney opinion letter instead of traditional title insurance for some loans, a practice allowed by Freddie Mac since at least 2008. Fannie Mae said in February that it’s purchased more than 10,000 mortgages with attorney opinion letters “and has not experienced losses from title claims on these loans.”
The American Land Title Association (ALTA), an industry trade group, has been engaged in a public relations and lobbying campaign opposing such “unregulated title insurance alternatives.”
ALTA weighed in again Thursday, claiming the title acceptance pilot — which lets lenders refinance some borrowers without obtaining title insurance or an attorney opinion letter — has faced “bipartisan backlash from state and federal lawmakers.”
Diane Tomb
“An attorney general’s role is to enforce state consumer protection laws, and we at ALTA share the concerns raised by the 14 state attorneys general about the pilot program’s lack of transparency, the shift of title risk from state-regulated title insurance companies to Fannie Mae, and the impact on local economies,” ALTA CEO Diane Tomb said in a statement. “We applaud their call to terminate the pilot program.”
Rep. Wiley Nickel, D-North Carolina, and 17 other Democrats wrote Biden in April to oppose the pilot program, citing ALTA statistics that over 90 percent of the title industry is comprised of small businesses.
“We’re very concerned with the notion of empowering two large corporations [Fannie Mae and Freddie Mac], currently under federal conservatorship, to push aside small businesses in our communities that take pride in helping their neighbors protect their homes,” Nickel and his colleagues wrote.
Battle over attorney opinion letters
As part of its parallel campaign against attorney opinion letters, ALTA is backing legislation in the House and Senate which would require title insurance on mortgages purchased by Fannie and Freddie.
Legislation introduced in the House in September by New York Republican Rep. Andrew Garbarino, H.R. 5837, would effectively ban the use of attorney opinion letters for clearing title on conventional mortgages by requiring lenders selling mortgages to Fannie and Freddie to obtain title insurance. The bill has attracted 11 Republican and four Democratic co-sponsors, including Nickel.
A companion bill in the Senate, S. 2687, introduced in July 2023 by Sen. John Kennedy, R-Louisiana, has two Republican co-sponsors but no Democrats.
According to OpenSecrets, ALTA boosted spending on lobbying by 61 percent last year, to $1.34 million, and has contributed $777,000 to candidates and party committees in the current election cycle, with slightly more (54 percent) going to Republican candidates and committees.
But attorney title opinion letters could still be on the cusp of widespread adoption, as new technology promises greater efficiency and scale.
In May, the nation’s largest mortgage lender, United Wholesale Mortgage, expanded its Title Review and Closing (TRAC) program, which it launched in 2022 to dispense with lender title insurance policies in favor of attorney title opinion letters issued by in-house lawyers who review title documents.
This month technology provider Alita Group launched a platform that lets title providers produce a “modernized” attorney opinion letter that’s also “wrapped” with an errors and omissions insurance policy.
Alita claims its insured attorney opinion letter, AOLPro, addresses the most commonly encountered title risks, and is “poised as a viable option” for lenders looking to help borrowers avoid the cost of obtaining title insurance.
The company is pointing its title industry critics to an analysis of AOLPro conducted by the law firm Bradley Arant Boult Cummings LLP.
“Alita’s modernized version of the AOL relies on the same title search and exam process that underlies a title insurance policy and is presented in a format that lenders are accustomed to seeing,” the law firm found. “It also has the added benefits of an attorney review and a carefully considered E&O policy issued by AM Best A-rated insurance carriers.”
An insured attorney opinion letter “cannot provide coverage for title defects that are not discoverable from the public records,” attorneys with Bradley’s Title Insurance Claims & Title Defect Curative Practice Group acknowledged.
A previously forged deed in the chain of title that can’t be detected by an examiner, “would not typically be covered by the AOLPro,” Bradley attorneys wrote. “However, when fraud, forgery, incapacity, impersonation, improper execution of documents or improper recording are discoverable by a title examination or preventable in connection with the current transaction, we would expect the AOLPro claim outcomes to track title insurance claim outcomes.”
Ultimately, it will be up to lenders and borrowers to engage in a cost-benefit analysis and choose what coverage they want. But, “for the first time in 150 years, there is a [Fannie Mae and Freddie Mac] vetted and approved alternative that allows for that consideration and provides optionality beyond traditional title insurance,” Bradley attorneys Hallman Eady and Spencer Mobley concluded.
Fannie Mae and Freddie Mac explored title insurance alternatives as one way to reduce closing costs in their 2022 Equitable Housing Finance Plans.
“We believe more common use of attorney opinions could lead to savings for some borrowers,” Fannie Mae officials said in publishing the mandated plan detailing ways the mortgage giant intends to “knock down barriers within mortgage, rental, and ownership processes that unnecessarily challenge consumers, especially those that disproportionally burden Black families.”
The Consumer Financial Protection Bureau also highlighted title insurance in May when it launched an inquiry into “junk fees” in mortgage closing costs.
“Title insurance is another major fee paid at closing,” the CFPB noted in announcing the inquiry. “Most commonly, lender’s title insurance is paid by the borrower to protect the lender against problems with the property. Consumers typically have limited options to shop around for title insurance.”
The Mortgage Bankers Association (MBA) bristled at the CFBP’s characterization of fees for required services like appraisals, credit reports, and flood certifications as “junk fees,” and warned that the bureau “may be planning to force lenders to absorb these costs.”
Bob Broeksmit
“According to the White House, a junk fee isn’t disclosed to consumers,” MBA President and CEO Bob Broeksmit said in May at an industry conference. “But everything the CFPB mentioned is thoroughly disclosed early in the loan process. And in a supreme irony, these fees are disclosed because of CFPB regulations, on forms designed by the CFPB itself. If these are ‘junk fees,’ then the word junk has no meaning.”
Broeksmit complained that the CFPB’s campaign “began a day after President Biden floated a proposal to scrap title insurance. But again, clear title protects borrowers, lenders, and investors and is required by Fannie and Freddie before they purchase a loan.”
The FHFA pilot program allows Fannie Mae to refinance some borrowers without obtaining title insurance or an attorney opinion letter. But the agency says that if title defects are discovered after a loan is refinanced, the “homeowner is not responsible for curing the defects. The cost of curing title defects is expected to be low and will be offset by a lender fee applied to each loan sold through the pilot.”
While critical of the FHFA’s pilot refi program, the MBA is supportive of attorney title opinion letters.
In November the trade group published an analysis by attorneys at the law firm Blank Rome that concluded “there is room for both types of products [title insurance and attorney opinion letters] to exist in today’s market.”
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