Cheaper – but scary – title options
As part of Uncle Sam’s efforts to make housing more affordable, some lenders are beginning to accept alternatives to expensive title insurance. But at what cost ?
The newer products — which include Lawyer Opinion Letters, or AOL — are certainly cheaper. But they may not offer the same protections as more expensive title insurance. Among many other things, AOLs do not cover undisclosed tax liens, homeowners association appraisals, or unpaid child or spousal support liens.
No one disputes the need to make homeownership more affordable. But Steve Gottheim, general counsel for the American Land Title Association, said alternatives to title insurance “could save [borrowers] a few dollars up front, but costing them a lot more money in the back.
Why title insurance, at all?
First, a quick introduction. Prior to closing, all lenders order a search of the property records to determine if there is anything to impair the buyer’s property. And they need title insurance to protect against the possibility that the search hasn’t uncovered something that would put a cloud over the title: maybe an unregistered easement allows your neighbor to gain access to property, for example, or that the previous owner’s long-lost heir shows up with a claim to property. Or maybe a previous record was forged.
Title insurance protects the lender, not you, in such cases. But you pay it at closing as part of your settlement fee. At that time, you will also be asked if you would like to purchase an additional policy that protects your rights, including legal assistance, if applicable. Together, the two policies can cost $1,000 or more, depending on many variables.
About 80% of all borrowers opt for a homeowners policy, according to ALTA, the trade group for securities. That’s why Fannie Mae recently joined Freddie Mac in accepting AOL instead of title insurance “in limited circumstances.”
Fannie and Freddie are government-sponsored companies that buy loans from lenders and combine them into securities that are sold to investors. Together they affect at least half of all mortgages.
Substantial discounts from alternatives
It is difficult to get an idea of the cost of AOL. United Wholesale Mortgage recently announced its new Title Review and Closing System, or TRAC, which completely removes the need for a lender’s policy. UWM will review the title and closing documents, ensure the title is clear and facilitate the closing process. The cost: a $350 apartment.
Meanwhile, provider SingleSource offers a standardized AOL that it says is scalable and affordable. It charges flat fees for refinances and a fraction of the cost of title insurance on purchase loans.
A closing rig offered by iTitleTransfer costs about $1,500 for a $411,000 loan, eliminating the need for $3,085 in title coverage and related costs, said chief executive Theodore Sprink. This platform also extends law firm protections to buyers, sellers and lenders for defaults and related issues affecting clear title, he said.
To make comparisons even more difficult, it is impossible to name an average cost for title insurance as rates depend on national regulations and local jurisdiction rules, not to mention the amount of the mortgage and the value of the property. underlying.
In Massachusetts, a lender’s policy on a $250,000 mortgage would cost $625, according to Boston National Title’s Nathan Bossers. But if the borrower also purchased their own policy, the total cost would be $1,088. On a $250,000 home with a $200,000 mortgage, the approximate combined cost of lender and homeowner policies is $1,700 in Texas, $1,350 in Florida and $1,440 in New York, according to the ALTA.
The cost difference can be striking. But in some states, the seller pays the owner’s policy; in other places, the cost of hedging is built into the cost of the loan. In these cases, there is no difference except that you end up paying interest as long as the mortgage is in effect.
“We support the idea of making homes more affordable,” ALTA spokesman Jeremy Yohe said, “but you have to be able to make the payments every month.”
AOL does not offer any protection
Beyond that, however, is the lack of protection offered by an AOL.
“If a title issue were to arise on a property covered by an attorney’s opinion,” Yohe told me, “the owner would have to prove negligence on the part of the attorney to pursue the claim. If he doesn’t is not proven, a plaintiff will likely have to pay the legal fees involved in litigating the case.
On the other hand, owner’s title insurance includes legal representation. And it covers many things not disclosed by AOL: undisclosed liens and charges, fraud, forgery, faulty legal proceedings, boundary disputes and many more, according to a list compiled by law firm Greenberg Traurig.
But here’s the catch: Only 2.4% of title policyholders filed a claim in 2020 (the latest year for which claims data is available), according to the Insurance Information Institute. Most claims involve fraud, forgery, errors in public records, and liens overlooked by the examiner.
Additionally, 3 out of 4 title searches and reviews find no issues — a fact that “renders coverage useless,” Sprink claims. He has spent 25 years in the title insurance business and said he thinks the business is “a dinosaur ready to be disrupted.”
The bottom line: If you want to save money, roll the dice with an AOL. But if you want extra protection, opt for traditional title insurance.
And remember, it’s the buyer’s choice, not the lender’s. If you don’t have an option, ask for one.
Lew Sichelman has been covering real estate for over 50 years. He is a regular contributor to numerous shelter magazines and housing and housing finance industry publications. Readers can contact him at [email protected]