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Attorney Opinion Letters vs. Title Insurance

• by David Sober
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A Not-So-Tough Choice By David Sober Much of the industry is taking sides in the great debate of attorney opinion letters versus title insurance. Both sides seem to have strong feelings about why one is better or worse than the other, and there has been no shortage of commentary from both parties battling this out in the press. As head of business development at the only national firm that offers both, I have excellent news: You do not have to choose sides. Ceasefire, everyone. There is no need to be all-in as a rule on one option or the other. Instead, you can choose which best suits the homebuyer you are helping, based on their situation. And isn’t that what it’s all about? We can all agree that homeownership is the surest path to building savings and net worth for most people and that breaking down financial barriers to homeownership is a major priority for those working in the housing space. In that spirit, let’s explore this great debate and the path forward that has emerged so that we can focus our efforts squarely on helping the homeowners we work to serve. FHFA Introduces a Paradigm Shift Over the last six months, there was news that Fannie Mae and Freddie Mac would not only continue accepting written attorney opinion letters (AOLs) as an alternative to a title insurance but also would expand their use. This new approach generated mixed reactions. The announcements are part of a larger program exploring waiving certain title requirements in specific transactions. As the FHFA notes, in some cases, AOLs are less expensive for homeowners. But many wonder if they are indeed better. Various questions were asked: Is this move too risky? Will lenders be comfortable? Is the homeowner still protected? And of course, there is an entire title insurance industry to consider, and they were none too happy to hear of this news, pushing back furiously in statements, interviews, and op-eds all over the trade press. But curiosity reigned for those who do not make money off the issuance of a title insurance policy. After all, if the GSEs are willing to allow it, then it is considered a legitimate alternative. Does this new guideline represent a notable paradigm shift, and if so, is there still room for traditional title insurance? The fact is, with an AOL, some homebuyers can shave hundreds or thousands of dollars off of their closing costs. Many industry players pointed out that by accepting AOLs, Fannie and Freddie are helping to make the housing transaction more affordable for homebuyers, which is critical now more than ever in this challenging market environment. And with rates so high, maybe now is the time for lenders to consider alternatives that will reduce business and consumer costs. As long as it is safe, with minimal risks to the homebuyer or downside for the lender. And it is safe. AOLs: A Viable and Effective Alternative to Title Guess what? AOLs are not new. In fact, using legal opinions to confirm the marketability of a title is a practice that existed long before title insurance. But with the growth of large title insurers with the capacity to process high volumes of originations and take on the accompanying risk, attorneys issuing title opinions were priced out of the market. The advent of recent innovations, however, has brought the AOL back into play. The recent introduction of AOL products like the Voxtur AOL, marks the first time that attorney opinion letters have been produced in a way and carry an insurance policy that makes them a genuinely viable alternative to title insurance. This product covers all the bases. It is available nationwide, has purchase and refinance options, and offers comprehensive owner’s and lender’s coverage.  Despite the clear advantages of using an AOL, given the substantial cost savings, there are some misgivings about the “risks” involved in using an AOL instead of a title insurance policy. The problem is that these “risks” are based on assumptions about attorney opinion letters as they once were, not as they are now. One misconception is that title insurance focuses on risk prevention rather than risk assumption, while an AOL only protects on a go-forward basis. To understand why this is misguided, it helps to know why title insurance started. Before title insurance and AOLs existed, owners and lenders were often left without protection because they needed the privity of a contract with the attorney performing the review and issuing the opinion.  Today’s AOLs have addressed the problem of the lack of privity. They do not rely on traditional liability, errors, omissions, or insurance. And with a Voxtur AOL, every issuance is backed by a transactional liability policy that covers the lender, the owner, the attorney, and the title service provider. Each stakeholder in the loan origination process, and each successor in interest to those stakeholders, has the legal right to file a claim. In other words, the coverage is fully transferable in the secondary market. Another common misconception is that an AOL does not cover title curative work, which may become necessary. The assumption is that title insurance provides this coverage. But “enhanced” AOLs like the Voxtur product follow the same curative process that exists for traditional title insurance. Similarly, Voxtur AOL provides coverage for both curative work and payment of the diminution in value claim if the issue cannot be cured. The difference is that the A.M. Best-backed A-rated carriers behind Voxtur AOL provide a faster and more effective claims process. Finally, some critics assert that title processors are the only professionals focused solely on the title and, therefore, the only experts qualified to opine on it. This argument is easily debunked. In reality, attorneys are held to higher professional standards than those applied to title processors. An attorney’s work in the title review process and the issuance of AOLs is no exception. Aside from honing a highly specialized skill set, attorneys must also approach this work practically, responsibly, and