As part of Uncle Sam's efforts to make housing more affordable, some lenders are starting to accept alternatives to expensive title insurance. But at what price?
The new products -- which include attorney opinion letters, or AOLs -- are sometimes cheaper. But they may not afford the same protections as more expensive title insurance. Among numerous other things, AOLs don't cover undisclosed tax liens, homeowner's association assessments or liens for unpaid child or spousal support.
Nobody disputes the need to make ownership more affordable. But Steve Gottheim, general counsel at the American Land Title Association, says alternatives to title insurance "might be saving (borrowers) a few bucks on the front end, but costing them a lot more money on the back end."
First, a quick primer. Before closing, all lenders order a search of the property records to determine if there is anything to infringe upon the homebuyer's ownership. And they require title insurance to protect against the possibility that the search failed to uncover something that would place a cloud on the title: Perhaps an unrecorded easement allows your neighbor access to the property, for instance, or the previous owner's long-lost heir shows up with a claim to the property. Or maybe a previous deed was forged.
Title insurance protects the lender, not you, in such cases. But you pay for it at closing as part of your settlement costs. At that time, you'll also be asked if you'd like to purchase an additional policy that protects your rights -- including legal assistance, if it comes to that. Together, both policies can cost $1,000 or more, depending on numerous variables.
Roughly 80% of all borrowers opt for an owners' policy, according to ALTA, the trade group for the title business. That's why Fannie Mae recently joined Freddie Mac in accepting AOLs in lieu of title insurance "under limited circumstances."
Fannie and Freddie are government-sponsored enterprises that buy loans from lenders and combine them into securities that are sold to investors. Together, they touch at least half of all mortgages.
It's difficult to get a handle on what AOLs cost. United Wholesale Mortgage recently announced its new Title Review and Closing system, or TRAC, which removes the need for a lender policy altogether. UWM will review the title and closing docs, make sure the title is clear and help facilitate the closing process. The cost: a flat $350.
Meanwhile, vendor SingleSource offers a standardized AOL that it says is scalable and affordable. It charges a flat fee for refinances, and a fraction of the cost of title insurance on purchase money loans.
A closing platform offered by iTitleTransfer runs about $1,500 for a $411,000 loan -- eliminating the need for $3,085 in title coverage and related costs, says Managing Director Theodore Sprink. This platform also extends law firm protections to buyers, sellers and lenders for defects and related issues affecting clear title, he says.
Making comparisons even harder, it's impossible to name an average cost for title insurance because rates depend on state regulations and local jurisdiction rules -- not to mention the amount of the mortgage and the value of the underlying property.
In Massachusetts, a lender's policy on a $250,000 mortgage would run $625, according to Nathan Bossers of Boston National Title. But if the borrower also bought their own policy, the total cost would be $1,088. On a $250,000 house with a $200,000 mortgage, the approximate combined cost of lender's and owner's policies is $1,700 in Texas, $1,350 in Florida and $1,440 in New York, according to ALTA.
The difference in costs can be striking. But in some states, the seller pays for the owner's policy; in other places, the cost of coverage is rolled into the cost of the loan. In those cases, there's no difference at all, except that you end up paying interest on it for as long as the mortgage is in force.
For example, in Florida, where the seller pays for the owner's policy, the buyer pays only a small amount for the lender's coverage -- sometimes far smaller than the cost of an AOL. Elsewhere, the buyer could lose the benefit of a simultaneous issue rate discount if an AOL is used.
"We support the idea of making houses more affordable," says ALTA spokesman Jeremy Yohe, "but you have to be able to make the payments every month."
Beyond that, though, is the lack of protection afforded by an AOL. "Should a title issue arise on a property covered by an attorney opinion," Yohe told me, "the homeowner would need to prove negligence on the part of the attorney to pursue the claim. If not proven, a claimant would likely need to pay for the legal costs involved to litigate the matter."
On the other hand, owner's title insurance includes legal representation. And it covers numerous items AOLs do not: undisclosed liens and encumbrances, fraud, forgery, defective judicial proceedings, boundary line disputes and numerous other items, according to a list compiled by the Greenberg Traurig law firm.
But here's the rub: According to ALTA, the claims ratio -- claims paid divided by total title insurance premiums -- was only 2.4% in 2020 (the last year for which claims data is available). Most claims involve fraud, forgeries, mistakes in public records and liens overlooked by the examiner.
Moreover, 3 out of every 4 title searches and examinations find no issues -- a fact that "renders coverage unnecessary," argues Sprink. He spent 25 years in the title insurance field and says he believes the business is "a dinosaur ripe for disruption."
The bottom line: If you want to save money, roll the dice with an AOL. But if you want extra protection, opt for traditional title insurance.
And remember, it's the buyer's choice, not the lender's. If you are not offered options, ask for them.