Attorney Opinion Letters and Alternative Appraisal Products Provide Lower-Cost Options That Could Save Members Real Money
Credit unions are highly skilled at evaluating risk when making mortgage loans. They know exactly what factors to focus on when assessing a members’ ability to pay their mortgage, including their credit, their property risk, the amount available for a down payment, and the amount of funds left over post-closing.
It stands to reason that members who have more funds to put toward a down payment and larger reserves after closing will have a greater likelihood of successfully repaying their mortgage loan, meaning that they can enjoy homeownership, and your loans will stay out of delinquency.
For first-time homebuyers, cash reserves are especially critical, as unplanned expenses can quickly unravel even amid the soundest financial plan. But in today’s economic climate, it’s more difficult for younger generations to save while still managing the growing cost of everyday expenses. With inflation rising to a 40-year high, mortgage rates climbing to their highest level since the early 2000s, and recession possibilities looming large, first time homebuyers are having a tough time entering the market and building that generational wealth that is so crucial to their long-term financial security.
Since credit unions focus every day on providing exceptional member experiences, what can they do to help their members achieve homeownership? How can they protect themselves and help their members purchase a new home in a challenging market? I believe one of the answers lies in better analyzing closing costs.
CONTROLLING CLOSING COSTS
While mortgage rates and home prices are factors that fall outside of our control, member closing costs are part of the equation that credit unions can influence. If a credit union can help reduce a member’s closing costs, then it can help more members qualify for mortgages and better position them to succeed in managing the loan. Studies indicate that lender and loan origination fees plus title and settlement fees represent up to 75% of member closing costs, so let’s start there. On a purchase transaction, typically, a member would see a charge for Owner’s Title Insurance, Lender’s Title Insurance, and maybe even Endorsements. In totality, this is regularly hundreds or thousands of dollars — a large part of a member’s overall closing costs, and it could directly impact their ability to qualify for the loan, support a down payment, and maintain reserves.
For decades, alternatives to traditional title were not viable, but timing could not be better to provide your members with a more affordable option, without assuming additional risk. Even though they may be relatively new to mortgage lending, Attorney Opinion Letters have been around as far back as the quill pen and are still used regularly in several walks of life.
AN OLD PRACTICE BECOMES A NEW SOLUTION
As of April 2022, both Fannie Mae and Freddie Mac began allowing the use of Attorney Opinion Letters in lieu of traditional title insurance for many mortgage transactions in all 50 states. The Department of Veterans Affairs (VA) has also begun insuring loans that use an Attorney Opinion Letter instead of traditional title. Furthermore, correspondent loan purchasers, investors, and aggregators have embraced Attorney Opinion Letters and are now purchasing loans that contain this title alternative.
A big reason why credit unions will find Attorney Opinion Letters so attractive is that they are typically priced hundreds or even thousands of dollars less than traditional titles, saving members as much as a full mortgage payment at the closing table and directly impacting a members’ experiences. Lenders and Owner’s Coverage, plus each Endorsement, can be contained all within a single Attorney Opinion Letter.
But please pay attention when choosing a provider, as not all Attorney Opinion Letters are created equally. Credit unions must ensure that the letter comes with similar, equal, or even better insurance coverage than a traditional title to protect themselves and their field of membership. An Attorney Opinion Letter deemed acceptable by Fannie, Freddie and the VA will need to include full insurance coverage throughout the life of the loan with no coverage gaps, and it should be crafted in a way that makes it easy to produce with consistency and at scale.
TECHNOLOGY PAVES THE WAY FOR CHANGE
An appraisal fee is normally part of a member’s Lender or Origination Fee, as part of the total closing cost equation. A traditional or full appraisal typically includes a physical inspection of the interior and exterior of subject property by an appraiser, which costs members hundreds and, for some properties, thousands of dollars.
In 2022, Fannie Mae and Freddie Mac introduced ways to modernize how homes are appraised by leveraging technology to perform data analysis, quality control, and monitor trends. Technology can also help eliminate potential biases and better ensure fair lending practices, which are so important to credit unions and their members.
Additionally — and key to credit unions and their member experience — these GSE appraisal alternatives and other product options are typically less expensive and can be completed in a timelier manner. To obtain the ability to use these valuation products and still have a saleable loan, credit unions can receive offers for a Property Data Collection in Desktop Underwriter and a Property Data Report in Loan Product Advisor on eligible transactions in all 50 states. Additional alternative valuation options are available today, such as an Automated Valuation Model, Hybrid, and Desktop solutions that can be leveraged by credit unions to help their members access their home equity or remove Private Mortgage Insurance and monitor an existing loan portfolio.
Since credit unions often portfolio mortgage transactions, their risk appetite can help determine which product best suits their needs and how they want these alternative valuations performed, such as interior versus exterior, with or without a sketch, conducted by an appraiser or a third party. Each choice can impact cost and time. When selecting a valuation provider, it is important to insist upon a full product suite in order to meet your credit union’s and its members’ particular needs.
PROVIDING A FIRST-RATE MEMBER EXPERIENCE
Every credit union desires lifelong members. To accomplish this goal, it means constantly delivering a best-in-class member experience. This means leveraging all products at your disposal to ensure your credit union is offering high quality and low-cost financial solutions at the right price for your members, directly impacting their ability to achieve homeownership, save, and build generational wealth.
Think of the power and member satisfaction in being able to reliably market the fact that your credit union has the lowest possible closing costs. Builders, realtors, and other spheres of influence will pay attention. These types of savings provide tangible benefits to your members; it could amount to the ability to afford a new refrigerator, replace windows, or buy a new couch. By choosing the right solution provider, credit unions can maintain a minimal level of risk while winning more loans and creating added value for their members.
This article was written by Phil Reichers and originally appeared in the Winter 2023 edition of Acuma Pipeline Magazine.