Don’t be penny-wise and dollar foolish when it comes to protecting what may be the largest financial commitment of your life!
The situation: ‘Fannie Mae and Freddie Mac are now accepting written Attorney Opinion Letters (AOLs) in lieu of a title insurance policy under limited circumstances as a result of Equitable Housing Finance Plans announced earlier by the FHFA earlier this year.’
Comparing title insurance and AOLs, one protects property buyers while the other kinda/sorta protects them in some instances!
Risks to Homebuyers
– Should a title issue arise on a property covered by an attorney opinion only, the buyer would need to prove negligence on the part of the attorney to pursue the claim with them.
– If not proven, a claimant would likely need to pay the legal costs involved to litigate the title matter, posing a financial burden and a significant risk.’
A report from the American Land Title Association (ALTA) spells out the issues and risks facing homebuyers who opt for the Attorney Opinion Letter or AOL.
- Fannie Mae and Freddie Mac are now accepting written AOLs in lieu of a title insurance policy under limited circumstance as a result of Equitable Housing Finance Plans announced earlier by the FHFA earlier this year.
- Since before the announcement, ALTA has engaged with the FHFA and government sponsored entities (GSEs) to help them understand the differences between title insurance and alternative products in the coverage and protection they provide.
- ALTA continues to work with the GSEs to ensure that access to sustainable homeownership opportunities is available for all Americans in a way that does not increase risk or undermine the property rights of homebuyers, particularly low- and moderate-income and first-time homebuyers.
- ALTA believes it is misguided for lenders to offer title insurance alternatives that provide less coverage but introduce more risk to lenders and consumers.
Who’s at Risk
Alternative Products Increase Lender Risk
- Historically, lenders have preferred the protection of a title insurance policy because it provides the best mix of strong protections and low cost. Lenders considering the use of AOLs or other alternatives must understand the risks they are taking on by not getting title insurance since they will be on the hook given Fannie Mae and Freddie Mac’s life of loan representations and warranties related to title.
- One sizable risk is related to items not discoverable in a public records search like federal tax liens, mis-indexed items or HOA liens. An attorney opinion letter does not cover items not shown in a public records search.
- Another important example of the difference in coverage is fraud or forgery of title documents. Title insurance provides coverage when a seller’s deed was forged or there was fraud with the previous owner’s will. An attorney opinion letter does not.
- Unlike an AOL, title insurance provides lenders with a defense—including all attorneys’ fees and costs—in a lien priority dispute or other matter covered by the policy.
- Lastly, unlike title insurance, AOLs might push more consumers into foreclosure since that is a condition to making valid claim under the service provider policy wrapper.
Risks to Homebuyers
- Should a title issue arise on a property covered by an attorney opinion only, the buyer would need to prove negligence on the part of the attorney to pursue the claim with them.
- If not proven, a claimant would likely need to pay the legal costs involved to litigate the title matter, posing a financial burden and a significant risk.
Information courtesy of ALTA here: https://www.alta.org/advocacy/risks-of-alternatives-to-title-insurance.cfm
For more information about title insurance, read the article ‘Are New York Title Insurance Providers All The Same?’ here, https://lnkd.in/gps-dGc8.
Hallmark Abstract Service…You Buy, We Protect!
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