The truth about attorney opinion letters

In a challenging time for the mortgage industry, there is some good news: The FHFA, Fannie Mae and Freddie Mac continue to advance important initiatives to give every renter, homeowner and homebuyer access to affordable and sustainable housing.

But while well-intentioned for its goal of helping lower-income and other underserved borrowers, one program in particular that's on the table could exacerbate the very problem it's trying to solve while potentially increasing borrower and lender risk. 

The case in point is the GSEs' decision to allow attorney opinion letters to replace title policies for purchases and refinances in limited circumstances. One rationale is that these policies pose cost barriers for lower-income borrowers. In actuality, though, the cost is nominal compared to the hundreds of thousands of dollars lenders and consumers could lose if titles, along with errors in the conveyance, go unprotected. 

The simple fact is that AOLs do not cover many of the risks that could lead to this degree of loss — with potentially devastating consequences for individuals who are already at a financial disadvantage. Lenders, too, face substantial new risks as a result.

Comparing Costs
What are the upfront costs that are engendering so much debate? 

For a purchase at $250,000 or less, the average cost for title insurance (owner's with simultaneously issued lender's policy and settlement), comes in around $1,400 when using a national title agent, with consistent all-inclusive settlement fees. When using attorney services including the attorney title opinion, the cost is about equal.  

For a $250,000 refinance, prices are often much lower than the attorney title opinion and settlement. A common price from national title companies is $850, including the lender's policy, closing protection, and related search and settlement services. The settlement services from an attorney alone are usually more than $800, in addition to the costs of an attorney opinion letter.  

A Multitude of Coverage Gaps
Recently, the law firm Greenberg Traurig compared the coverage of an ALTA 2021 loan policy against an attorney's opinion with a liability wrap, and found many differences. For starters, only the loan policies covered forgery, fraud, impersonation and duress.

Other areas that they covered, and that the opinion letters did not, included (among many):
"Improper execution of documents (including remote online notary)"
"Defective judicial proceedings"
"Enforceability of the lien of the insured mortgage"
"Validity of the lien of the insured mortgage"
"Enforceability of PACA/PST Trust"
"Back-chain creditors' rights …"
"Risks uniquely associated with the sending of funds by warehouse lenders …"
"Preferential transfer for non-timely recording or non-constructive notice …"

When it came to coverage of undisclosed liens and encumbrances, the differences were also significant. Just a few of the risks covered only by an ALTA 2021 loan policy of title insurance included undisclosed child and spousal support liens, mechanics liens, and tax, sewer and nuisance abatement liens at the federal, state or municipal levels.

Imagine a lower-income borrower facing these claims months or years after moving into their home—with limited funds to engage an attorney to settle or litigate their case and potentially have them indemnified for damages. 

And imagine if the borrower claimed that the lender incorrectly steered them to this product as a means of qualifying for the loan purchase. One could easily see class action suits against lenders who subscribe to this practice. 

These are the very real consequences of forgoing a title policy.

Other Lender Risks 
The use of AOLs has other serious ripple effects for lenders.

When these replace title policies, banks lose this coverage as well as essential closing protection. But it's at closing and post-closing that the majority of problems with titles tend to materialize. Unless lenders purchase their own title policies, they, too, will be left unprotected and exposed.

Moreover, banks that choose to sell loans without title insurance to servicers are venturing into a new frontier without a roadmap to resolution should there be an issue. In these situations, Fannie and Freddie's policies are unclear, meaning that originators are not protected from buybacks related to title matters that would commonly be cleared using a title company. 

Compounding the problem: When banks hold onto loans that lack title protection for years, and finally choose to unload them, investors may reject them. This threat to their secondary market strategy is causing serious concern among mortgage bankers.

In conclusion, this is not the time to experiment with lower-income borrowers' — or their lenders' — financial health. In this extremely challenging marketplace, everyone committed to making homeownership more accessible must exert extra care. Title policies are important safety nets that have served borrowers and lenders well. Now is the time to educate everyone in the housing finance ecosystem about how to leverage them for best advantage.