In 2022, in an effort to reduce closing costs, Fannie Mae announced plans to create a pilot program that would bypass the use of traditional title insurance.
This pilot program allows mortgage lenders to rely on attorney opinion letters instead of traditional title insurance in certain circumstances. For example, if the property has a long chain of title or if the property is being sold by a government agency.
But is it a good idea? We take a deeper look.
Attorney Opinion Letters: What are They? What Do They Cover?
Using attorney opinion letters (AOL) would be a cost saver for lenders, even though those costs are passed on to the borrower, costing the lender nothing.
An AOL is not an insurance policy that would cover mistakes in public record, hidden defects, and the like. All of which could lead to incurring deep legal fees to resolve.
In short, an attorney opinion letter provides no legal protection for the lender.
That’s why, typically, AOLs are used in business to help an investor determine the outcome of how a potential zoning case may turn out.
However, using attorney opinion letters for financing and acquisitions is brand new
The Big Difference Between Title Insurance and AOL
It is limited in scope and provides no guarantee of the property’s title. Instead, it relies on the attorney’s professional judgment and may not cover all the possible risks included in a real estate transaction.
Further, it does not protect the heirs of the property; it only protects the client that requested the letter.
With traditional title insurance, legal protection for both buyer and lender are comprehensive. The job of title insurance is designed to protect against title defects, encumbrances, and liens that may arise in the future.
Title insurance gives both the buyer and the lender a powerful assurance that the title is free and clear. If issues occur in the future, the insurance is there to protect the lender and the buyer.
As an example, an attorney opinion letter would not provide adequate protection for a property that has been owned multiple times. In such an instance, there could be undiscovered defects that an attorney would be unaware of.
If such a case were to arise, the buyer would face costly legal fees which may not be covered in the AOL. In fact, congressional members of have warned Fannie Mae of this potentially disastrous outcome.
Other examples in which an attorney opinion letter would not cover either the lender or the borrower are:
- Undisclosed mechanics liens
- Defective judicial proceedings
- The priority over mechanics liens
- Encumbrances caused by forgeries, mistakes in ownership
- Undisclosed assessment and real estate property tax liens and lease options
- The validity, enforceability, and priority of a lien on the insured’s mortgage coverage
- Undisclosed state, federal, and municipal tax, sewer, and nuisance abatement liens
- Special coverages in endorsements
Regulatory Considerations of Attorney Opinion Letters
Title insurance companies are tightly regulated with stringent oversight by insurance commissioners and state regulatory agencies. This ensures fair pricing and non-discrimination.
In Conclusion
When you’re ready to close on your new home, turn to Lilly Title & Settlement. We’re obsessed with legal details and fabulous customer service for on-time closings.