Author: David Jennings

Announcements by Fannie Mae, Freddie Mac, and the Veterans Administration over the past several months allowing for the use of an attorney opinion letter (AOL) as an alternative to traditional title insurance has led to the emergence of both instigators and imitators. Both of these signal one thing to the market: the AOL works.  

The title insurance industry has been extremely vocal in its opposition to the introduction of an alternative title product. The American Land Title Association, the national trade association for the title insurance industry, has actively lobbied against the use of AOLs for months. ALTA CEO Diane Tomb has indicated that advocating against the use of AOLs is a top priority for the trade group. 

Without a full understanding of the AOL product in all of its variations, this prioritization is misguided and shortsighted for several reasons.    

Reason one: Cost
ALTA has been quick to speculate about the potential long-term costs of using an AOL in lieu of title insurance, pointing to the perceived lack of coverage and detriment to the homeowner, including the potential loss of their home. Without having reviewed the leading AOL product in the market and the coverage behind it, ALTA’s risk assessment is uninformed and inaccurate. If appropriately insured, as the Voxtur AOL is, there is no more risk with an AOL than there is with a title insurance policy.

The primary difference between the two is not in the risk profile, but in the cost structure. An AOL can save a homeowner hundreds or thousands of dollars at the closing table, whereas title insurance remains a burdensome cost that appears consistently from one transaction to the next, regardless of the risk being underwritten. 

Title issues have been substantially reduced over the past two decades, with approximately 75% of title searches revealing clean title. However, the cost of title insurance has remained steady and, in many jurisdictions, is no longer commensurate with the risk. Similarly, with access to better data and more robust technology products, the savings being realized by title agents should be passed on to the consumer. AOL is intended to do just that.  

Reason two: Coverage and Transferability
Traditionally, attorney opinion letters were not a viable alternative to title insurance because they were not scalable and didn’t offer sufficient coverage to all parties in the transaction. With the data and technology to create consistency and scalability, an AOL can now be insured to provide protection comparable to title insurance. 

For example, the Voxtur AOL is backed by transactional liability insurance that protects the owner and lender, covers the full amount of the loan or purchase price, and follows the loan into the secondary market. 

Reason Three: Not all AOLs are created equal.
As the use of the AOL has gained traction, several versions of the alternative title product have emerged, both from service providers and lenders. A review of these products in any detail makes it clear that not all AOLs are created equal. For example, one of the more prominent versions on the market is sold in purchase transactions, but does not offer any protection to the homeowner, who is advised to obtain their own separate policy of title insurance. This provides great value to the lender, while leaving borrowers to fend for themselves. This is contrary to the spirit of responsibly reducing the cost of homeownership.  

The adversarial approach of the title insurance industry to the introduction of an alternative product makes it clear that accessibility and affordability of homeownership for consumers is not the driving force behind the messaging. As industry leaders with access to data and resources, we have a duty to support the homeowners that support us. That means providing alternatives to costly products when and where it is reasonable. It won’t always be the case that an AOL is a suitable alternative for title insurance, but it will sometimes (maybe even often) be the case. When it is, we should err on the side of the consumer, not the ‘Big Five’ multi-billion dollar title insurer collective.  

Fannie Mae has identified closing costs as a barrier to homeownership, with a reduction as little as $150 being identified as meaningful enough to move the needle. Similarly, the current administration has identified affordability of homeownership as a priority. We have the resources to accomplish these goals. We just have to direct them appropriately. 

The title insurance industry has historically been controlled by a handful of title underwriters. According to ALTA, five title insurers control nearly 80% of the more than $20 billion industry. Admittedly, providing access to an alternative product that is available in certain transactions may ultimately have a nominal impact on these insurers. The impact to consumers, however, will not be nominal and it is that meaningful impact that we, as an industry, should be focused on.

This article was written by Jim Albertelli and originally appeared in National Mortgage News.

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.