Founder and CEO of World Wide Land Transfer, Inc.
Recently, Fannie Mae announced its plans to develop a pilot program to bypass traditional title insurance. Since the announcement, there has been a lot of talk about attorney opinion letters (AOLs) and comparing them to American Land Title Association (ALTA®) title insurance policies. I felt compelled to dive a bit into the different aspects of coverage.
Fannie Mae’s Pilot Program
Fannie Mae, the U.S. government-sponsored mortgage finance company, launched a pilot program in 2022 that allows lenders to use attorney opinion letters to replace certain title insurance requirements. This program is thought to have the potential to reduce closing costs for borrowers.
Traditionally, lenders have required title insurance to protect against potential title defects, but this can be a costly expense for borrowers. The pilot program allows lenders to rely on an attorney’s opinion instead of requiring title insurance in certain circumstances, such as when the real estate has a long chain of title or is being sold by a government agency.
Coverage And Limitations Of Attorney Opinion Letters
By using attorney opinion letters, lenders would save money on title insurance and related fees, which could be passed on to borrowers. However, there are potential drawbacks to the program, such as increased liability for lenders if an issue arises with the property’s title. It is also unclear whether the program will be widely adopted by lenders or if it will only be available in certain markets.
An attorney opinion letter is a legal document that outlines an attorney’s professional opinion on a particular matter such as the legality of a real estate transaction. Attorneys are only responsible for their negligence, however, and an attorney opinion letter is not an insurance policy that would cover hidden defects and mistakes in the public records, which may lead to potential fiscal cures.
AOLs are oftentimes used in business to help an investor or company determine what the most likely outcome will be in a particular scenario. Even in housing, a real estate owner or investor may get an opinion letter on how a potential zoning case may turn out. However, AOLs used in regard to acquisitions and financing is brand new territory.
Differences Between Attorney Opinion Letters And Title Insurance
On the other hand, an ALTA® title insurance policy is a type of insurance policy that protects a buyer and lender against any title defects or claims that may arise during the real estate transaction.
While an attorney opinion letter provides legal advice on the transaction, it is limited in scope and does not provide a guarantee or assurance of the property’s title. It relies heavily on the attorney’s professional judgment and may not cover all possible risks that could arise from the transaction. Additionally, an attorney opinion letter only protects the client who requested it and does not extend to heirs or third parties.
In contrast, an ALTA® title insurance policy provides broader protection to both the buyer and lender by insuring the title against potential defects, liens or encumbrances that may arise in the future. It provides an assurance that the title is free and clear of any issues that could impact the buyer or lender’s ownership or investment in the property.
There are specific scenarios where an attorney opinion letter may not provide adequate protection, but an ALTA® policy would. For instance, if the property has been transferred multiple times, there may be undiscovered defects in the title that an attorney may not have been aware of. One example might be smaller municipality rules and potential violations that can accrue monetary damages if not paid.
If a title issue arises after the transaction, the buyer may face costly legal fees to resolve the issue, which may not be covered by an attorney opinion letter. In contrast, an ALTA® policy would cover such issues, and the insurer would bear the cost of resolving any title defects or claims. In fact, members of Congress have warned Fannie Mae of this potential outcome.
Other examples of matters in which an AOL would not cover a real estate owner or lender, thus potentially creating an unnecessary financial burden, could include the following.
• Undisclosed federal, state and municipal tax, sewer and nuisance abatement liens.
• Undisclosed mechanics liens.
• Undisclosed real estate owners’ assessment and real property tax liens and lease options.
• Encumbrances caused by forgeries or mistakes in the form of ownership.
• Defective judicial proceedings.
• The validity, enforceability and priority of the lien of the insured mortgage coverage.
• The priority over mechanics liens.
• Special coverages in endorsements, such as special access coverage and many more specialty coverages within the landscape of title insurance.
Regulatory Considerations
Despite similarities to title insurance, providers of AOLs are not subjected to the same regulatory oversight as licensed insurers. There is no clear regulatory authority at the state or federal level allowing these unregulated title insurance alternatives. Title insurance is highly regulated and has stringent oversight by state regulatory agencies and insurance commissioners, including assurances that pricing is fair, adequate and nondiscriminatory.
The point here is that an attorney opinion letter provides legal advice on a specific matter, while an ALTA® title insurance policy offers broader protection against potential title defects or claims. While an attorney opinion letter may be useful in some situations, an ALTA® policy protects real estate owners, investors and lenders should a dispute arise in the future.
Real estate investors will need to consider the pros and cons of accepting potential unknown financial risks by using an AOL. Will Fannie Mae’s pilot program prove to have savings in the long run, or will an insurance-related product still be the choice by default?
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