Fannie Mae Broadens Acceptance of Attorney-Opinion Letters Over Title Insurance. What’s Causing Concern?
Fannie Mae announced in December, as part of its goal to expand affordable mortgage access for U.S. homebuyers, that it would accept attorney-opinion letters (AOLs) instead of title insurance on more mortgages. AOLs had already been allowed by Fannie Mae since 2022 for select mortgages; now however they could also include condo units and properties subject to homeowners association (HOA) restrictions, potentially helping more first-time homebuyers save up to $1,000 off their closing costs by opting out of title insurance costs altogether.
Community Home Lenders of America expressed support for title insurance alternatives as an approach to address homeownership affordability challenges, while the American Land Title Association (ALTA), the nation’s premier title insurance trade group, has persistently opposed any attempts to allow such alternatives, citing gaps in protection for both homeowners and lenders.
The association joined lawmakers from both political parties in opposing an earlier pilot program from Fannie Mae that may have entirely eliminated title insurance requirements on certain mortgage loans. Last year, however, after guidance from the Federal Housing Finance Agency (FHFA), this program was discontinued.
Fannie Mae’s decision has expanded access to alternative origination loans (AOLs) as an option for lenders offering government-backed mortgages; however, critics contend this will force lenders to reduce essential protections in order to make AOLs available to borrowers – potentially lessening its impact.
What Is Title Insurance? First and foremost, it’s helpful to understand what title insurance entails. This form of protection safeguards against defects in title that existed prior to purchasing a home but which could endanger ownership rights or lead to financial losses in the future.
Most mortgage lenders require that borrowers purchase a lender’s title insurance policy that fully protects the principal amount owed on the mortgage loan, with buyers typically required to pay an up-front premium that provides protection until either all debt has been paid off or until selling of the home takes place.
When title problems threaten a buyer’s right of ownership, such as boundary disputes, unpaid real estate taxes, contractor claims or errors in property records or fraud occur they put the lender’s security interest in the property at risk. Lender title insurance provides financial protection in case a third party claims ownership; it doesn’t cover legal costs or protect the buyer’s equity in their home.
As such, most attorneys recommend that buyers purchase an owner’s title insurance policy as part of a package deal. An owner’s title insurance policy typically provides protection to homeowners as long as they own their home.
