Attorney opinion letters: The risk of not offering an alternative

Announcements by Fannie Mae, Freddie Mac, and the Veterans Administration over the past several months allowing for the use of an attorney opinion letter (AOL) as an alternative to traditional title insurance has led to the emergence of both instigators and imitators. Both of these signal one thing to the market: the AOL works.  

The title insurance industry has been extremely vocal in its opposition to the introduction of an alternative title product. The American Land Title Association, the national trade association for the title insurance industry, has actively lobbied against the use of AOLs for months. ALTA CEO Diane Tomb has indicated that advocating against the use of AOLs is a top priority for the trade group. 

Without a full understanding of the AOL product in all of its variations, this prioritization is misguided and shortsighted for several reasons.    

Reason one: Cost
ALTA has been quick to speculate about the potential long-term costs of using an AOL in lieu of title insurance, pointing to the perceived lack of coverage and detriment to the homeowner, including the potential loss of their home. Without having reviewed the leading AOL product in the market and the coverage behind it, ALTA's risk assessment is uninformed and inaccurate. If appropriately insured, as the Voxtur AOL is, there is no more risk with an AOL than there is with a title insurance policy.

The primary difference between the two is not in the risk profile, but in the cost structure. An AOL can save a homeowner hundreds or thousands of dollars at the closing table, whereas title insurance remains a burdensome cost that appears consistently from one transaction to the next, regardless of the risk being underwritten. 

Title issues have been substantially reduced over the past two decades, with approximately 75% of title searches revealing clean title. However, the cost of title insurance has remained steady and, in many jurisdictions, is no longer commensurate with the risk. Similarly, with access to better data and more robust technology products, the savings being realized by title agents should be passed on to the consumer. AOL is intended to do just that.  

Reason two: Coverage and Transferability
Traditionally, attorney opinion letters were not a viable alternative to title insurance because they were not scalable and didn't offer sufficient coverage to all parties in the transaction. With the data and technology to create consistency and scalability, an AOL can now be insured to provide protection comparable to title insurance. 

For example, the Voxtur AOL is backed by transactional liability insurance that protects the owner and lender, covers the full amount of the loan or purchase price, and follows the loan into the secondary market. 

Reason Three: Not all AOLs are created equal.
As the use of the AOL has gained traction, several versions of the alternative title product have emerged, both from service providers and lenders. A review of these products in any detail makes it clear that not all AOLs are created equal. For example, one of the more prominent versions on the market is sold in purchase transactions, but does not offer any protection to the homeowner, who is advised to obtain their own separate policy of title insurance. This provides great value to the lender, while leaving borrowers to fend for themselves. This is contrary to the spirit of responsibly reducing the cost of homeownership.  

The adversarial approach of the title insurance industry to the introduction of an alternative product makes it clear that accessibility and affordability of homeownership for consumers is not the driving force behind the messaging. As industry leaders with access to data and resources, we have a duty to support the homeowners that support us. That means providing alternatives to costly products when and where it is reasonable. It won't always be the case that an AOL is a suitable alternative for title insurance, but it will sometimes (maybe even often) be the case. When it is, we should err on the side of the consumer, not the 'Big Five' multi-billion dollar title insurer collective.  

Fannie Mae has identified closing costs as a barrier to homeownership, with a reduction as little as $150 being identified as meaningful enough to move the needle. Similarly, the current administration has identified affordability of homeownership as a priority. We have the resources to accomplish these goals. We just have to direct them appropriately. 

The title insurance industry has historically been controlled by a handful of title underwriters.  According to ALTA, five title insurers control nearly 80% of the more than $20 billion industry. Admittedly, providing access to an alternative product that is available in certain transactions may ultimately have a nominal impact on these insurers. The impact to consumers, however, will not be nominal and it is that meaningful impact that we, as an industry, should be focused on.