President Biden and a growing number of members of Congress, faced with inflation and higher interest rates, have correctly made increasing access to affordable homeownership a public policy priority. The pursuit of the American Dream of owning a home is as important now as it ever was. But achieving that goal is ever more difficult, especially for low- and moderate-income families.
The Biden administration should be commended for working to make homeownership more affordable, accessible, and equitable. It has focused on solving the main challenges to affordability, including lack of housing supply and regulatory barriers to housing development at the local level. But it is off base on one initiative that would hurt homeowners by allowing certain home purchases to occur without the protection of title insurance.
The Federal Housing Finance Agency has opened the way for mortgage-finance giant Fannie Mae to expand the use of attorney opinion letters (AOLs) instead of title insurance on certain loans it purchases, including mortgages on condominiums and in homeowners’ associations. This is a short-sighted program that adds unnecessary risk to homeowners and U.S. taxpayers.
AOLs are legal opinions prepared by attorneys who do public-records searches that assert that properties are not subject to title impediments, which can impact ownership of the property. Title insurance includes that basic search and also provides extra protection by providing coverage for title difficulties that would not be found in public records alone.
For example, AOLs do not protect against fraud and forgery, which are growing concerns and major causes of claims. They also do not cover legal costs for title problems, which title insurance does. AOLs leave homeowners vulnerable to significant attorneys’ fees if they are forced to defend their ownership rights.
Expanding the use of attorney opinion letters instead of title insurance for condominium loans exposes consumers and lenders to a range of unnecessary risks. Issues such as unpaid condominium or homeowners’ association dues and assessments that could lead to liens are not found in public records searches. With an AOL, lenders and homeowners would be left holding the bag if these items are not rectified before a property is sold. Title insurance protects homeowners in such circumstances.
In addition, title insurance is regulated by states. AOLs are unregulated and lack basic consumer protections provided by that kind of oversight including requirements for title insurers to protect consumers and hold reserves to pay claims.
Title insurance is a small, one-time cost that provides protection to property rights for as long as a family owns their home. Homeowners pay this modest fee as protection against future claims on their ownership. Without it, they are gambling that they won’t face steep costs if their right to own their home is challenged. In too many cases, that is not a safe bet.
Without a title insurance backstop, both lenders and property owners are left to fight over the consequences if their attorney’s opinion turns out to be inadequate to protect their interests. Title insurance protects against losses or damages from both known and unknown title defects.
Substituting AOLs for title insurance will not accomplish the goal of putting affordable homeownership in reach of more Americans. Fannie Mae’s action hurts rather than helps American families and first-time homebuyers, especially the lower income families that Fannie Mae is supposed to help.
According to a recent study, title and settlement fees are less than 1 percent of the borrower’s total life-of-loan costs.
President Biden and his appointees are wise to try to expand affordable homeownership opportunities. But permitting Fannie Mae to take a shortcut and abandon title insurance even in limited circumstances increases risk on average American households. It is a mistake that will endanger property rights and do little for long-term housing affordability and sustainability.
Congress should pass the bipartisan Protecting America’s Property Rights Act cosponsored by Reps. Vicente Gonzalez (D-Texas), Wiley Nickel (D-N.C.), and Brad Sherman (D-Calif.), which would protect homebuyers by requiring the proven coverage of title insurance on mortgages purchased by Fannie Mae and Freddie Mac.
David Goldstein heads the American Consumer Alliance and chairs the Alliance to Defend Affordable Homeownership.
