ALTA's Diane Tomb on why title insurance is essential
It is no secret that there is a housing affordability challenge in the U.S. According to the National Association of Realtors’ (NAR) Housing Affordability Index, since spring of last year, a typical family with a median income have not been able to afford a median-priced home.
While mortgage rates
will likely fall this year, conversations about how to increase
accessibility to homeownership are still top of mind — and should be top
of mind — across the real estate industry. However, there is no
one-size-fits-all approach to homeownership affordability. Any proposal
to increase access to homeownership and improve affordability should be
evidence-based, sustainable (avoiding quick fixes) and not come at the
cost of consumer protection.
For example, recently, Fannie Mae has focused on expanding alternatives to title insurance
as a way to supposedly increase homeownership affordability. However,
Fannie Mae’s own research from 2022 found that title insurance is not a significant component of the overall closing costs
when buying a home. Accounting for geography, differences in title and
settlement costs across groups of borrowers were not “economically
meaningful.”
Additionally, recent research by First American found that title and settlement fees account for less than 1% of a borrower’s total life-of-loan costs,
indicating that title insurance fees are one of the smallest portions
of the equation. A homeowner’s largest life-of-loan costs are property
taxes and recording fees ($29,675), fees paid to the mortgage-backed
security (MBS) investor ($28,779), fees paid to the lender ($14,026),
homeowner’s insurance ($9,279) and GSE fees (7,705).
Targeting title insurance as a way to cut costs not only fails to
address real affordability problems, but it can actually leave consumers
open to future title risks that can come with large price tags. As an
example, attorney opinion letters (AOLs) are being touted as a substitute to title insurance, but they do not offer the same level of protection.
According to industry data, a third of all claims paid by title
insurance companies are for issues that cannot be found in a search of
the public records and would not be covered by an AOL. An opinion from
an attorney based on a title search is not the same thing as insurance,
which has statutory reserving requirements to protect against losses.
Additionally, in the majority of states – so-called “seller pay”
states – AOLs can increase expenses for consumers beyond what they would
pay for title insurance. In these states, the seller pays for the
homebuyer’s title insurance policy, and therefore, homebuyers only pay
for a lender’s policy at a reduced cost at closing, oftentimes as little
as $150.
The title industry embraces efforts to help increase homeownership
accessibility. That’s why title companies are constantly innovating to
drive down the cost of our policies. While the cost of other forms of
insurance have steadily increased in recent years, thanks to industry
innovations, the cost title insurance has decreased by 7.8% nationally since 2004,
according to industry financial statements. Additionally, title
companies offer various discounts – such as a simultaneous issue rate
discount when owner’s and lender’s policies are purchased together – to
help lower the cost of coverage.
But while these improvements to reduce costs are important to
addressing housing affordability, there are much bigger barriers to
homeownership, especially for low- and moderate-income homebuyers.
Instead of replacing longstanding products that have protected consumers
for the last century and only cost homebuyers sometimes as little as a
couple hundred dollars, both the private and public sector should focus
on addressing the root causes of housing unaffordability.
As Fannie Mae’s Senior Vice President and Chief Economist Doug Duncan recently noted,
“Until we see a meaningful increase in housing supply, we expect
affordability will remain a significant barrier to homeownership for
many households.” Increasing the supply of affordable housing is
critical to bringing the American Dream of homeownership within reach
for more Americans. According to NAR, elevated home prices, mortgage rates and a limited supply of homes are the top barriers to homeownership.
In order to fix the housing affordability crisis, the real estate
industry and federal government must focus on the fundamental problems
that keep home prices high. Replacing consumer safeguards like title
insurance with unproven, unregulated alternatives will just expose
homebuyers—especially first-time homebuyers who need it the most—to
greater financial risk.
Diane Tomb is CEO of the American Land Title Association.
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