Fannie Mae Wants To Pedal An Alternative To Title Insurance

In 2007, Salon predicted the sub-prime financial crash with its cleverly named “Implode-O-Meter” – if they brought it back today would anyone notice this time?

While the housing market was insanely hot at the top of the year, things cooled off so fast it could kill wooly mammoths. Last month, National Association of Home Builders CEO Jerry Howard admitted the housing market is in a recession and will “stay at bottom” for the foreseeable future. The National Association of Realtors (NAR) said existing home sales were down 20.2 percent from 2021. Layoffs in the industry are described as alternatingly between massive or sweeping.

And, in the middle of this housing market – more volatile than it’s been in, say, 15 years – Fannie Mae has taken a move to make home buying even more dangerous: get rid of traditional title insurance. This is a move bound to produce the same benefits to society as making car insurance optional and lowering the driving age to 6.

In April, the government sponsored enterprise Fannie Mae announced it would be accepting written attorney opinion letters in lieu of a title insurance policy “in limited circumstances,” a move that should scare anyone who hopes to invest with confidence in the real estate market for the foreseeable future.

Title insurance is a policy that covers potential third-party claims on properties that might arise after a real estate closing – something missed by the mortgage lender when they did their title search of public records related to the property. Some of the issues this can protect people from, as Forbes was kind enough to put together for us, include:

• Property survey errors
• Boundary disputes
• Errors on the property deed
• Prior building code violations
• Conflicting wills
• Claims by an ex-spouse who didn’t sign off on the sale
• Forged documents
• Liens from contractors, taxing entities, or others.

Buying title insurance is not the same as when airline companies trick you into buying worthless flight insurance. There are a lot of things that can go wrong. Given that a home is the largest purchase most people make in their lives, it’s probably best to insure them in case disaster strikes. Critics of title insurance throw out stats that “insurance companies only pay 3 to 5% of the time!” but – spoiler – that’s how insurance works. We might not need to to use it right away, but we pay it for the rare times that it’s needed. And in the case of title insurance, these stats do not account for all the upfront work title professionals do to clear up any issues before the transaction closes.

Now back to the news hook: Fannie Mae would like to swap this out for the AOLs – no not the 1990s Internet service, the aforementioned attorney opinion letters.

An AOL is a legal document that showcases a formal piece of advice or an expression of judgment. The writing attorney looks at the facts and makes an educated guess on how the law would play out in this instance. Historically, the market moved away from attorney opinions because they didn’t meet the needs of lenders, and title insurance emerged to provide more robust lender and consumer protection.

In the case of home ownership, AOLs have no substantive weight behind them. They’re not subject to the same rigorous state level insurance regulatory oversight or consumer protections as title insurance. Under state insurance laws, only licensed title insurers are permitted to underwrite specific coverages provided by title insurance.

While Fannie Mae insists the use of AOLs will be “limited,” the enterprise specified that the only transactions ineligible for an AOLs will be those that involve loans secured by a unit in a condo project, co-op share loans, loans secured by a dwelling on a leasehold estate, loans executed using a power of attorney, and a few other exceptions. This hardly constitutes “limited.”

So, should we really go forward with this now? Or can we just jump ahead 10 years and watch Margo Robbie or Selena Gomez explain why this was a terrible idea in The Big Short II?

Title insurance is a one-time expense at closing and protects the policyholder for as long as they or their heirs own the property. Even if alternative products look appealing in the short-term, homeowners will probably pay more in the long run by taking on additional risk by sacrificing the legal defense obligation of a title company in case of the worst.

Given Fannie Mae’s history of making bad loans to people buying homes before they were ready, it seems foolish for them to go down this path again. As we’ve already reported on here, the GSE’s book of business is growing at a sluggish 1%, so they may be looking to make some quick cash – which is inexcusable.

Investors would do well to avoid Fannie Mae at this time. An enormous organization that uses the public purse as its insurance policy putting short-term profits over long-term viability. What could go wrong?