By David Goldstein
October 20, 2023
RealClear Policy
Homeownership has long been fundamental to building wealth. That’s why the Biden administration’s focus on getting more Americans into homes is so laudable. But the road to bad policy is often paved with such good intentions.
To put homeownership in reach of more Americans, the administration is pressing to make buying a residence less expensive. It’s working to reduce barriers to building affordable housing for example. But some efforts across various agencies fall short.
Fannie Mae and Freddie Mac, the federally controlled mortgage lending giants, are accepting attorney opinion letters (AOLs) in lieu of a title insurance policy in certain circumstances.
All these letters state is that an attorney has reviewed public records, looked at the title, and approved it. That’s all. And that’s not enough.
Title insurance is a small upfront cost of buying a house. Homeowners pay this modest, one-time fee as protection against future claims on his or her ownership. Without it they are gambling that they won’t incur vastly higher costs correcting their home’s title – an expense that would undermine the desire to broaden homeownership.
Unlike title insurance, AOLs do not protect homeowners against fraud, forgery or other unknown risks not found in a public-records searches. Worse, AOLs don’t provide an incentive for lawyers to clean up the title as title insurance does.
AOLs, therefore, put homebuyers at great risk, thus hurting homeownership aspirations. That Fannie Mae and Freddie Mac are making such an error should come as no surprise. After all, the last time they messed around with risky businesses, they almost took down the global economy.
Back in 2008, these government sponsored entities (GSEs) tried to beef up their profits and stock prices by issuing riskier-than-normal mortgages. The U.S. Treasury had to give Fannie Mae and Freddie Mac nearly $200 billion to keep them afloat as a result.
Indraneel Chakraborty, a finance professor at the University of Miami, points out in a recent article: “The GSEs remain in conservatorship for their actions that led to the financial crisis….Cutting corners and taking on more risks to expand lending is precisely the same formula that led the GSEs into their insolvency in the 2000s.”
AOLs are unregulated title insurance alternatives that threaten the stability of the housing market and property rights. The federal government should not condone the use of this weak alternative to title insurance.
Lowering the cost of buying a home is table stakes for strengthening and expanding the American Dream. But the wrong move like AOLs could push this part of the dream further from the grasp of those who need it most.
To be sure, there are some ways the federal government can put homes within the reach of lower-income families. They could change the federal income-tax code so the poorest among us don’t pay high marginal tax rates. Washington lawmakers can also lower the cost of healthcare and prescription medications by using federal purchasing power. Even providing our kids a better education is a way to increase people’s income down the road so they can buy homes for their families.
Indeed, the goal of broad homeownership is welcome. The U.S. is driven by the American Dream, and our homes must continue their role in keeping the dream safe, attainable, and secure.
The federal government and its mortgage affiliates should not toy with alternatives to proven protections like title insurance even if its motivation is noble.
