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Do Attorney Opinion Letters Provide the Coverage that Homebuyers Need?
Industry News Title Agent Tips

Do Attorney Opinion Letters Provide the Coverage that Homebuyers Need?

Mariah McQueen

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:

  • Cost
  • Level of risk
  • Remedies offered to the homeowner

Requirements

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.

Efforts Being Made

“We will continue speaking out against alternatives to title, which pose an even greater risk to the housing finance system.” – Daniel Wold, President of ALTA

 

Public opposition has been expressed throughout the title industry, including ALTA and government officials. ALTA has reached out to FHFA, government-sponsored entities, lenders, and state regulators regarding their AOL concerns.

Legislators from both parties have sent a letter to FHFA, the agency that regulates federally backed home mortgage companies regarding AOL concerns.

Rise of Title Insurance Alternatives

Many companies are already taking advantage of the policy change by creating their own products that will be a “fully compliant alternative” to title insurance, including  Voxtur Analytics and SingleSource. These products are advertised to save consumers up to an “entire mortgage payment, but ALTA argues that any considerable savings in using AOLs versus a traditional title policy have not been noted.

 

What Can Title Professionals Do?

While lenders and homeowners have the ultimate say in which product they wish to use, title professionals are not without influence. Title professionals may:

  • Acknowledge that shortcuts to well-established processes are not the solution. 
  • Advise homebuyers and lenders to consider the potential risks involved when using an AOL in lieu of a title insurance policy.
  • Stay informed on alternate products and understand what they do.

 

Title professionals want to provide the best product for their customers and do what they can to protect lenders’ security interests and homeowners’ investments. Many title professionals are urging both groups to avoid cutting corners and provide the utmost due diligence.

 

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Mariah McQueen Marketing Generalist

Mariah McQueen is a Marketing Generalist at PropLogix who enjoys using creative outlets to break down intricate concepts to easier to understand the material. She currently lives in Orlando and enjoys rollerblading, documenting her travels across the US, and playing the piano.