We have warned about the risks of Fannie Mae actions before, but unfortunately, we have to do so once again. Fannie Mae, the mortgage finance giant, recently expanded its allowance for the use of attorney opinion letters (AOLs) instead of title insurance on certain loans it purchases, including condominiums. It’s a bad idea.
Fannie Mae wants to make homebuying more affordable, which is an important public policy goal. But substituting AOLs for title insurance won’t do that. It further endangers American taxpayers and the first-time homebuyers and low- and moderate-income families that Fannie says it intends to help.
AOLs are legal opinions prepared by attorneys that assert that properties are not subject to title impediments as a result of a public records search. Title insurance, by contrast, requires that search but also provides coverage for title problems that would not be found in the public records alone. For example, AOLs do not protect against issues of fraud and forgery, which are a growing risk and a large source of title claims, nor do they cover legal costs for title problems.
AOLs, unlike title insurance, are also not subject to comprehensive state and federal regulatory oversight, which is a problem on its face.
And then there’s the basic question: What is the cost of title insurance? The answer: Not much, certainly compared to its value. Title and settlement fees are less than 1 percent of borrowers’ total, life-of-loan costs, much less than other expenses involved in the homebuying process.
Simply put, Fannie Mae’s decision to expand the use of attorney opinion letters in lieu of title insurance for condominium loans it purchases exposes consumers and lenders to more unnecessary risks and weakens protections. There are much better ways to tackle housing affordability.
