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Title Insurance Will NOT be Replaced by “Attorney Opinion letters’ in 2024?
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Title Insurance Will NOT be Replaced by “Attorney Opinion letters’ in 2024?
In recent months, there has been a lot of media buzz surrounding the use of attorney opinion letters (AOL) “in lieu of title insurance”.
Fannie Mae surprised the title industry when they announced earlier this year that they would join Freddie Mac in allowing attorney letters instead of title insurance in certain circumstances.
Uncertainty and debate have surrounded the decision about whether it provides the coverage that home buyers and lenders need.
A Quick Recap
Freddie Mac guidelines to allow attorney opinion letters has existed since 2008, and Fannie Mae aligned its policy with Freddie Mac in April 2022.
Both party’s rationale is home ownership will become more accessible, cheaper, and faster.
The title industry, however, is concerned that this opens the doors to increased risks that may counter the intended benefits of a cheaper alternative.
The main differences come down to three things:
Cost
Level of Risk
Remedies offered to the homeowner
Specific requirements must exist for
a title opinion to be allowed as a title insurance alternative.
Lenders must use a unique “code to flag loans” when using an attorney title opinion letter. Additionally, the attorney issuing the title opinion letter must:
(1) Be licensed to practice law in the jurisdiction where the subject property is located
(2) Must be insured against malpractice in rendering opinions of title in an amount commonly prevailing in the jurisdiction.
1) Be addressed to the lender and all (future) successors in the interest of the lender
2) Be commonly accepted in the area where the subject property is located 3) Provide gap coverage for the duration between the loan closing and recordation of the mortgage
4) List all other liens and state they are subordinate
5) State the title condition of the property is acceptable, and the mortgage constitutes a lien of the required priority on a “fee simple estate” in the property.
Problems for Lenders
An AOL shifts more risk to the lender because opinion letters lack some key elements that title insurance offers.
No Underwriting Service
The lender relies on the borrower’s attorney to perform due diligence on whether the necessary formalities have been satisfied.
vs.
Only by using a title insurer’s underwriting service – can the lender fully understand the financial risk they take when approving the loan.
An Attorney Opinion Letter:
Does not guarantee the lender that the financial information the borrower provides is accurate.
Does not guarantee that the borrower has a “clear” title to the property
Does not guarantee the lender the property has sufficient value
No Coverage of Fraud
Fraud and forgery are among the largest sources of claims paid in the industry. If a seller’s deed was forged or there was fraud with the previous owner’s will, this will not be covered in an Attorney Opinion Letter.
No Financial Reserves to Cover Future Claims Risks
An AOL does not include indemnity as it would be in a title insurance policy.
Reimbursement of a lender’s loss is only provided if a direct financial loss occurred because of the provider’s failure and is subject to various conditions, including:
* The lender must have foreclosed upon and sold the property.
* Exhausted multiple efforts to collect the mortgage balance.
* Complied with a strict claims process.
* Even if the lender meets the above criteria, the lender insurance policy requires regular renewals to maintain coverage.
*A lender may lose coverage if the insured attorney fails to remit their premium within 45 days.
Issues for Homebuyers
Attorneys are only responsible for their “negligence” (not hidden defects and mistakes in the public records), which may lead to issues including:
Search Doesn’t Go Beyond Public Records Search
An AOL discloses only defects that are found from a review of public records. The search may not uncover problems such as hidden federal or state tax liens, mis-indexed items, HOA liens, or buyer’s court judgments.
Responsibility for Legal Costs
The homeowner would likely need to pay the legal costs involved to litigate any title matter UNLESS the attorney’s “negligence/liability” can be proven.
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 the opinion letter was issued, not the date the issue arose.
So, if a homeowner had a 30-year loan and an issue was found in year five, that issue would not be covered.
In Conclusion:
Just because Fannie and Freddie accept “AOLs” doesn’t mean your lender will, as ultimately, the lender has the gold – and they make the rules, regardless of what Fannie/Freddie allows.
In other words, your lender will still require a standard title insurance policy, and the ‘buzz’ you see in the media won’t change that.
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A shout-out to Christy Coffey, Assistant VP at Pacific Coast Title, who contributed to the publishing of this post. You can follow Christy on Linked In or reach out to her via email at: CCoffey@pct.com 