Why ALTA fears title insurance alternative use could go too far

As more large players like United Wholesale Mortgage and the government-sponsored enterprises launch efforts aimed at reducing title insurance costs, a trade group has issued new warnings about the potential risks.

The American Land Title Association — whose market share could be reduced by the increased use of alternatives to traditional coverage — asks whether the closing cost savings available to borrowers outweigh a potential increase in risk that ownership rights on mortgaged homes could be forfeited.

"The reality is you might be saving them a few bucks on the front end, and costing them a lot more on the back end," said Steve Gottheim, general counsel of the American Land Title Association.

Risks ALTA sees in title insurance expansion
Attorney title opinion letters that serve as alternatives to traditional insurance in this area have long been used on a contingency basis, and ALTA officials said they aren't so much concerned about that as they are about efforts for broader use.

The fact that Fannie Mae, an influential government-sponsored enterprise, joined smaller competitor Freddie Mac in allowing limited use of alternatives earlier this year was the first initiative in 2022 that raised ALTA's hackles. The association said its alarm escalated after GSEs' equitable housing plans made mention of title-related pilots structured to "take this a little further than what they've done in the past," Gottheim said. Further adding to concern about growing risks in this area was UWM's rollout.

Retreating from title insurance is a backwards move that's been proven not to work in the past, according to ALTA CEO Diane Tomb.

"Lenders typically have not relied upon written attorney opinions in title matters in most instances due to a variety of risks," Tomb said in an emailed comment last week. "In fact, the protections afforded by title insurance actually replaced attorney opinion letters as the realities of risks experienced from a static examination of the title records became clear."

ALTA also enumerated other risks in an analysis done earlier this year in conjunction with law firm Greenberg Traurig after the trade group raised concerns with Fannie and Freddie's regulator. The Federal Housing Finance Agency reportedly responded by asking the association to detail them. (The FHFA did not have a response to ALTA's letter available at deadline.)

"Fraud is probably the biggest risk that would kind of be transferred over to the lender and the borrower…as opposed to the insurance company," said Gottheim.

The analysis finds traditional insurance covers several risks that title opinions would not, as certain contingencies would not be visible in the research done to produce a letter. That work is typically protected by an errors and omissions insurance policy. Fannie requires attorneys who produce title opinions to carry a certain amount of malpractice insurance.

An attorney opinion letter "really only covers things that could be discovered in that public record search, and so it's really only giving a lender one view of what might be their potential exposure and what might be the things that could kick their mortgage down from first to second priority," said Gottheim.

ALTA officials also noted that counterparties offering alternatives might not have the same strength as regulated insurers if states deem that classification unnecessary. Or conversely, a state could deem providers of alternatives as regulated entities, the way an attempt by Radian to launch a title insurance alternative was in 2002. At that point providers could be held to certain standards they may not have to decide whether or not they can meet.

"There are certainly some states where the laws are much more clear that these types of alternative products are probably going to be considered title insurance and need to be regulated like title insurance," Gottheim said.

Title insurers have extremely strong finances, bringing in billions of dollars of premiums compared to hundreds of millions of dollars in claims, ALTA data shows.

Analysts do expect the industry to come under relatively more strain, but not so much because of alternatives, but rather due to the reduction in originations seen industry-wide.

"Despite a significant slowdown, the title segment should remain profitable," A.M. Best said in a report issued last week.

Lender and vendor perspectives
United Wholesale Mortgage CEO Mat Ishbia, whose company rolled out a title-insurance alternative program last week, said Fannie and Freddie's requirements as secondary market loan buyers mitigate risk, and the potential savings can be significant in some situations.

"We're meeting the guidelines, and we're saving consumers up to $2,000," he said, noting that those requirements do continue to put some restrictions on the use of alternatives. "Fannie, Freddie and the FHFA have done a good job."

Lenders using alternatives and vendors providing them still see a need for title insurance, but think its use could be reduced.

The industry's low claims rate is evidence traditional coverage may not always be needed or easy to collect on, said Theodore Sprink, managing director at iTitle Transfer. Sprink previously worked in the title industry. Today, he offers a broad suite of products that include attorney opinion letters, and provides scores for properties based on the amount of title risk they have, deeming the insurance necessary in some instances but not others. Even traditional title insurance has limits to what it covers, he noted.

Ultimately Sprink expects the use of letters won't spread in a way that unduly increases risk, and traditional insurers will remain active, eventually embracing the use of attorney opinion letters themselves.

"The title industry's going to have…the same product," he predicted, noting that he expects further change could also come much further down the road as the use of blockchain to record real estate transactions spreads.

Ishbia also said he expects attorney opinion letter use will likely have to expand to some degree due to the financial pressures consumers are facing and the growing demand for it.

Title insurance companies are "doing a good job, but just like with appraisals and everything we're doing in the industry, we need to constantly push them to make things better for consumers," Ishbia said. "If you don't make things better for consumers, you will be disrupted."