There has been a lot of buzz surrounding the use of attorney opinion letters (AOL) in place of title insurance for lenders in recent months throughout the title industry. Fannie Mae took the title industry by surprise when they announced earlier this year that they would join Freddie Mac in allowing attorney letters to be used in lieu of title insurance in certain circumstances. Uncertainty and debate surround this decision, but ultimately it comes down to the question, does it provide the coverage that homebuyers and lenders need? Let’s discuss that issue.
A Quick Recap
Fannie Mae and Freddie Mac are federally backed home mortgage institutions created by the United States Congress. The Freddie Mac guideline to allow attorney opinion letters have existed since 2008, and Fannie Mae aligned its policy with Freddie Mac in April 2022. Fannie Mae’s rationale behind the decision is to lower the closing costs and limit the barriers to homeownership for first-time and low-income home buyers. Certain attorney opinion letter products emerging in the market are purported to be less expensive by those marketing the products, but there is limited information to confirm that assertion. In addition, while title insurance is a highly regulated product at both the state and federal level, it is unclear how, if at all, certain emerging attorney opinion letter product structures are regulated, if at all. With this new change, Fannie Mae believes homeownership 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:
- Level of risk
- Remedies offered to the homeowner
There are specific requirements for a title opinion to be allowed as a title insurance alternative. Lenders must use a unique code to flag loans 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.
Other requirements include that the title opinion letter must:
- Be addressed to the lender and all successors in the interest of the lender
- Be commonly accepted in the area where the subject property is located
- Provide gap coverage for the duration between the loan closing and recordation of the mortgage
- List all other liens and state they are subordinate
- 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
Lenders need assurance that their loan will have minimal liability. This policy change shifts more risk to the lender because opinion letters lack some key elements that title insurance offers.
❌No Underwriting Service
The lender is relying on the borrower’s attorney to perform due diligence on whether the necessary formalities by the borrower have been satisfied. Without underwriting service, the lender may not fully understand the financial risk they take on when approving the loan. An Attorney Opinion Letter:
- Does not guarantee the lender that the financial information provided by the borrower is accurate
- Does not guarantee that the borrower has good title to the property
- Does not guarantee the lender that the collateral has sufficient value
❌No Coverage of Fraud
Fraud and forgery are one of 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
Indemnity is not included as it would be in a title insurance policy. Reimbursement is only provided if a direct financial loss occurred as a result of the provider’s failure and is subject to various conditions, including:
- Lender must have foreclosed upon and sold the property
- Exhaust multiple efforts to collect mortgage balance
- Comply with the 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 like federal tax liens, misindexed items, or HOA liens.
⚠️ Responsibility for Legal Costs
The homeowner would likely need to pay the legal costs involved to litigate any title matter if the attorney’s negligence cannot 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.
Potential to Push More Consumers Into Foreclosure
If the buyer is unsuccessful in proving negligence on the attorney’s part, they may need to go to extra lengths to pursue the claim with them. With foreclosure as a condition to make a valid claim under the terms of these alternative products, title professionals are concerned that this may force homeowners to foreclose.