Real World Stories of Title Insurance Protection

From HousingWire

https://www.housingwire.com/articles/opinion-title-insurance-matters-heres-why/

Last month, the Biden Administration announced the revival of a previously abandoned pilot program that would waive the requirement for lender’s title insurance on certain home refinances – part of a misdirected effort to address housing affordability. Additionally, the CFPB has shortsightedly questioned the benefits and cost of title insurance.

It’s uncertain whether federal regulators are purposefully misleading Americans about the potential savings or just don’t understand how title insurance works. The truth is the cost of title insurance coverage has decreased nearly 8% over the last two decades due to innovation in the industry.

Critics of title insurance highlight a limited understanding of the vital nature of title insurance protection by mistakenly and repeatedly referring to the industry’s lower claims rate relative to other lines of insurance. A 70% claims rate — standard for other insurance lines — on property rights would be catastrophic to our economy. Success in the title insurance industry is measured by preventing claims in the first place. A lower claims rate means that title agents are succeeding in their job by resolving any title issues and reducing risk upfront – protecting the largest asset most households will ever own and source of their greatest wealth over time.

Title insurance is significantly different from other lines of insurance. For a one-time fee paid at closing, title insurance provides homeowners protection for as they or their heirs own the property. Other types of insurance charge monthly or yearly premiums. The facts are clear: title insurance is essential to protecting homeowners and their most important investment both during the initial purchase of a home and refinancing – and it exists for a reason.

Without a title insurance policy, homeowners can find themselves fighting for their property over issues they never knew existed.

Here are some real-world examples of how title insurance protects consumers:

Surviving Spouse Left Without Deed

Under the new pilot program, the requirement for a lender’s title insurance policy on certain refinances would be waived – but this can leave homeowners vulnerable. For example, a property owner passes away and leaves behind his surviving wife. If the widow isn’t listed on the deed, issues regarding ownership could arise when the wife goes to refinance. During the refinance process, title insurance professionals would do their due diligence to disqualify any potential heirs who may attempt to claim the property down the road. This would allow the surviving wife to officially claim ownership of the property. The proposed pilot program would not identify this type of issue with a search engine.

IRS Tells Couple: “You Don’t Own Your Home”

After purchasing their home from an individual who had acquired it from an IRS auction, a couple found out the government agency had rescinded the original sale. The IRS refused to turn over the deed to the new homeowners because of unpaid tax bills by a previous owner. The couple contacted their title company and were told they had coverage for this dilemma. Thanks to their title insurance policy and the great work conducted by their title professionals, the couple was able to keep their home, and they didn’t have to pay a dime out of pocket. Fannie Mae is not capitalized to address these issues, nor is set up to be able to pay these types of claims.

Sold—But Not by Homeowners

After a California vacation home was left unused for several months, the county notified the homeowners that the property had sold – but the owners hadn’t put the house up for sale. This was a case of seller impersonation fraud, where an unsavory actor posed as a homeowner and fraudulently “sold” a property. Thankfully, due to their title insurance policy, the homeowners were protected against post-policy fraud; title professionals were able to expunge the fraudulent deed from the record. The “buyer” also had a title insurance policy for the transaction, and their title company paid them the purchase price of the home – money that they otherwise would have lost without their policy. Fraud and forgery claims account for more than 20% of claims expenses and dollars paid to insureds.
Approximately one-third of all claims are for issues that would not be found in a public records search – demonstrating that title insurance could not be effectively replaced by an automated search engine that will be used under the title waiver program.

Title Insurance Provides Essential Protection

The above examples barely scratch the surface when it comes to the protection provided by title insurance. Time and time again, seasoned title professionals have saved American homeowners from their homes being seized, stolen, or defrauded. The Biden Administration’s pilot program would put Fannie Mae and Freddie Mac in charge of resolving any title-related claims that arise for qualified borrowers refinancing – a seismic shift in the housing finance system.

Title insurance is equally important when homeowners refinance. When a homeowner refinances, they obtain a new loan. Lenders require a new title search for a title insurance policy on that loan to protect their investment in the property. If this is not done correctly, the homeowner could still face collection on a previous mortgage thought to have been paid off. Similarly, a lender could face the risk that they do not have the required lien priority.

Under the Administration’s title waiver plan, title insurance professionals will be eliminated from refinance transactions, removing a key layer of anti-fraud protections for consumers and lenders. Consumers and lenders who are victims of refinance fraud would have to investigate and negotiate a resolution with some unidentified department within the GSEs, and consumers could ultimately be forced into property sale or foreclosure.

By turning Fannie Mae and Freddie Mac into title insurers, the GSEs would also be moving beyond its charter into a primary market activity. The 2008 financial crisis happened the last time these entities took on significant risk for which they were ill-equipped to handle.

The title industry agrees that homeownership should be more attainable and affordable for more Americans. However, the notion that title insurance is in any way a principal driver of affordability challenges is misguided. Title insurance is crucial to protecting American homeowners, lenders, and their most important investments.

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Fannie Mae to Charge Fee to Cover Risk Under Title Waiver Pilot; Pushes GSEs into Insurance Business

March 14, 2024

Fannie Mae will charge lenders a fee to cover risk under a proposed title waiver pilot program announced by the Biden administration. The program essentially turns the government sponsored entities (GSEs) into primary market insurers and expands authority beyond their mission and charter.

Click HERE to learn more.

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.