Inside a Plan to Save Homeowners Hundreds of Dollars Closing Their Mortgages

Fannie Mae last month said it would expand the types of mortgages it will purchase that rely on a cheaper alternative to title insurance, which is one of the biggest fixed costs tied to closing a mortgage.

The alternative, called an attorney-opinion letter, allows a real-estate attorney to essentially attest that there are no problems with a property’s title. The average borrower relying on such a letter has saved more than $1,000 compared with more traditional title insurance, Fannie said.

Attorney-opinion letters aren’t widely used outside of some Midwestern states such as Ohio and Indiana. Until late last year, Fannie only accepted the opinion letters with certain mortgages, and it said fewer than 10 lenders have sold it loans with an opinion letter since 2022. In mid-December, the mortgage-finance giant said it would accept the opinion letters on the majority of the single-family loans it buys from lenders.

The Biden administration has directed Fannie and its smaller counterpart Freddie Mac to find ways to make housing more affordable, with particular attention to closing costs such as title insurance, which can run into the thousands of dollars on a property. Added competition in the title insurance space could over time bring down such costs, proponents say.

The administration has also faced limitations in how it can tackle housing costs, with elevated mortgage rates and high home prices.

Policy changes by Fannie and Freddie are important because they backstop roughly half of the roughly $14 trillion mortgage market. That means their standards play a big role in determining who gets access to mortgage credit and on what terms.

But housing experts said Fannie’s effort to promote alternatives to title insurance wouldn’t be an easy fix to the cost issues that can discourage potential home buyers.

“Any injection of competition in this space is a great step forward, but it doesn’t necessarily mean that every home buyer or refinancer is going to understand their options or shop around to get the best deal,” said Benjamin Keys, a professor at the University of Pennsylvania who has studied the title-insurance industry.

A title declares who has legal ownership of a property. Title insurance offers protection in case someone later says they had a claim against it. Attorney-opinion letters are an alternative to title insurance but aren’t insurance products. Freddie also accepts attorney-opinion letters, but on a more limited basis than Fannie.

The title-insurance industry has objected to Fannie’s moves, characterizing opinion letters as unregulated products that expose consumers and lenders to unneeded risk.

“Title insurance provides more comprehensive coverage, particularly related to risks not easily discoverable by a simple public records search,” Diane Tomb, chief executive officer of the American Land Title Association, a trade group for title insurers, said in a statement.

Attorney-opinion letters were once widely used, but title insurance grew in popularity because there were limited options for recovering losses from the attorneys issuing opinion letters, according to a recent paper on title insurance commissioned by the Mortgage Bankers Association. The industry group doesn’t have a position on title insurance alternatives.

Now, critics say that title insurance is overpriced, claims are rare and that digital access to public records makes it easier to confirm that a title is “clean.”

Backers say attorney-opinion letters provide a similar amount of protection to title insurance at lower cost to the borrower because the letters aren’t subject to state-level title regulations that set the cost of insurance policies in some jurisdictions.

One lender that has embraced attorney-opinion letters said they typically come with an insurance policy that protects against errors or omissions in an attorney’s title examination.

Since 2009, Fannie has purchased more than 10,000 mortgages with attorney-opinion letters and hasn’t experienced losses from title claims on these loans, according to the mortgage company.

Fannie said in December that it would expand the types of loans for which it accepts opinion letters to include condos and properties that may face restrictions because of a homeowners association. An internal review of Fannie’s distressed loans showed condos were less likely than other mortgages to have title issues, the company said. It also said low-income and first-time home buyers pay disproportionally more in closing costs, and condos can be an affordable option for those buyers.

“What Fannie did was monumental in terms of opening it up for consumers,” said Jim Albertelli, chief executive of the law firm ALAW. He helped design attorney-opinion letters that are offered through a startup platform called Alita.

Fannie was preparing last summer to test a program that would have eliminated the need for title insurance on certain mortgages. It abandoned that project following opposition from the title insurance industry and some lawmakers.