Fannie Mae to Issue Request for Proposal to Identify Potential Suppliers for Participation in the Title Acceptance Pilot

On March 7, 2024, FHFA announced the intention to explore a pilot that would allow lenders to forgo a lender’s title insurance policy or attorney opinion letter (AOL) on a small population of refinance loans sold to Fannie Mae in an effort to reduce closing costs for borrowers.  Since that announcement, Fannie Mae has been working with FHFA to develop a Title Acceptance pilot framework and has received increased interest from title and settlement service and technology providers seeking to participate in the pilot. 

In response to that interest, Fannie Mae announced today that it will issue a Request for Proposal to identify potential suppliers to participate in the Title Acceptance pilot.  The Request for Proposal, which will be issued by the end of the second quarter, will provide Fannie Mae the opportunity to evaluate interested industry participants for potential inclusion in the pilot that have viable technology solutions for managing title-related risk and reducing closing costs for borrowers.

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.

This morning, I received the following memo from our media communications consultants.

Bob

We wanted to make you aware of a recent story (3/1/23) from “Politico” on Fannie May’s leaked plan to change title insurance. It’s behind a pay wall but the following is a rundown.

“Fannie moves to revamp title insurance despite GOP warnings of risk” was written by Katy O’Donnell and includes references to Congressional GOP warnings to the Administration.

The article states according to sources, “Fannie Mae is developing a pilot program to bypass traditional title insurance, and planning to expand its role in homeowners' insurance despite warnings from Republican lawmakers to stay away from the industry.”

According to the sources, Fannie is developing a pilot program to bypass traditional title insurance.

The program is part of a strategy to reduce closing costs for minority borrowers. Critics say it “could increase risk for taxpayers and have major consequences for the title insurance industry.

The plan could be rolled out this spring, according to industry sources who requested anonymity to discuss conversations with Fannie's regulator. Certain mortgage lenders would be granted a waiver on title insurance requirements for loans sold to Fannie.

A spokeswoman for Fannie declined to comment, but pointed out the company is “continuing to research options to help borrowers save money on closing costs and protect borrowers... and Fannie Mae from property and title defect risks.”

O’Donnell wrote, “Critics of Fannie and Freddie Mac see the latest proposal as part of the ‘mission creep’ that they say the companies have engaged in for years. Fannie and Freddie, which together guarantee about half of the residential mortgage market, were created by Congress to help stabilize the market and increase the availability of money for residential mortgages. The companies have been in the government's hands since 2008, when Treasury took control of them to stave off their collapse in the financial crisis. The $190 billion bailout sparked more protests against the companies.”

The article states, “Republican lawmakers have already taken issue with Fannie’s foray into tinkering with title insurance requirements.” It points out Senate Banking Committee Republicans warned Freddie’s regulator in July against “repeating the mistakes of the recent past” by allowing the government-sponsored enterprises to overextend themselves as they did in the run-up to the 2008 crisis.

“The plans are a return to GSE mission creep,” the 12 Republicans, including Sens. Mike Crapo of Idaho, Thom Tillis of North Carolina and Tim Scott of South Carolina, wrote in a letter to Thompson July 19.

“The GSEs’ charters limit them to supporting the secondary market. These plans, however, contemplate that the GSEs would push into the title insurance market,” they added. “Primary market participants should be concerned about the GSEs seeking to return to their pre-crisis endeavors at evolving into full-service mortgage companies.”

Fannie identified “reduc[ing] closing costs for Black consumers” as a goal in its Equitable Housing Finance Plan, the plan to advance racial equity in the market. The company said it would consider “pilot options to reduce title insurance costs to borrowers" as part of that effort.

Industry insiders stressed “the new pilot is being developed in secret and goes beyond reducing the cost of insurance by effectively making Fannie itself a title insurer.”

“As the industry continues to work collaboratively with the FHFA and the GSEs to strengthen its Equitable Housing Finance Plans, it was shocking to see this unprecedented step by Fannie Mae to move well beyond its statutory authority under its charter and mission,” said an industry participant.

“Fannie Mae is now essentially entering the title business, and as a result, low- and moderate-income homeowners may unknowingly become exposed to greater risks and unforeseen financial costs,” the industry participant added.

Lawmakers also objected to Fannie’s announcement in April 2022 that it would accept attorney opinion letters in lieu of traditional title insurance as a way to lower closing costs. Attorney opinion letters are based on searches of public records about a property and do not cover issues that may not be discoverable in the public record.

Our Annual Meetings are renown for the good fellowship and social amity that pervades the event.  We also provide valuable professional information, which justifies the time away from the office.

I have been asked to provide two of the presentations for download and you will find them on this Members Web site.

Doug Duncan, Fannie Mae economist presented a dazzling array of data about the economy in general and the factors driving the housing market. Go to GOVERNMENT>FEDERAL using the top navigation or click this link: http://nyslta.site-ym.com/?page=GoveFederal and scroll down .

Bill Burding of Orange Coast Title and a Member of the ALTA Board of Governors gave us the latest on how ALTA is viewing and addressing the challenges of CFPB and TRID.  Go to RESOURCES>COMPLIANCE SUPPORT or click this link: https://nyslta.site-ym.com/?page=Compliance

Both of these presentations have timely information, which means as the weeks and months roll on the accuracy will diminish. We intend to remove these links in a few months so if you need the slides and cannot download them, call the NYSLTAStaff at 212-964-3701.