A Letter from a Lawyer is No Substitute for Title Insurance

Have we learned nothing? 

The 2008-10 Great Recession and global financial crisis was caused, at core, by the failure to adhere to well-established lending standards and proper due diligence. Federal policy for the previous dozen years had been focused on making it easier to “get people into homes.” Permissive policies, over time, created incentives for both sub-optimal lending decisions and outright fraud. When this house of cards collapsed, the U.S. economy went with it. 

It was therefore unsettling to see Fannie Mae, in its selling guide announcement, released on April 6, announce that it would be accepting written opinion letters from attorneys in lieu of a title insurance policy “in limited circumstances.” 

Yes, one could reasonably argue that attorney opinion letters will not in and of themselves take down the U.S. housing market, or that the guidance only applies to lender title insurance for properties in “limited circumstances”

But that misses the point, as it was just this kind of weakening of standards that put the U.S. on a path to a housing crisis which then metastasized into a global financial crisis. Strong underwriting protects consumers, and title insurance provides a key part of this due diligence. After having now (hopefully) put the COVID economic crisis behind us, we have little to gain and everything to lose by weakening strong and well-tested mechanisms in the housing finance sector.

So, what is title insurance and why does it matter?

Quite simply, title insurance protects lenders and property buyers from financial losses stemming from defects in the title. A typical policy protects against a variety of problems, including if the property is owned by another party, if there are unrecorded encumbrances on the property, or if there are liens or judgements against it.

Title searches are a standard part of any property acquisition or refinancing process, but they are hardly infallible. This is why the system has evolved to backstop these transactions with title insurance, which is only drawn upon in the event of real-world problems.

An attorney opinion letter is simply that – an opinion based on a search of the public record, and not coverage for unknown risks, like title insurance. In the absence of title insurance, lenders and property buyers will be left to fight over the consequences if the attorney’s opinion turns out to be incorrect. 

Even Fannie Mae, which is supporting opinion letters in lieu of title insurance, is indicating through its actions that there may be additional risks in the system. It is requiring lenders to flag loans that use attorney opinion letters rather than standard title insurance.

So, the question is: why do this? It is hard to see a compelling answer. 

The title insurance system hardly looks like a drag on the dynamism of the U.S. housing market. Over the years, the title insurance industry has developed products that expedite the closing process while mitigating risks to the homeowner and lender’s investment. They do this by providing insurance tailored to the risks experienced by both parties.  

Because the system works so well, next to nobody thinks about title insurance until they need it. The myriad of issues that title insurance currently covers are often not apparent through a simple title examination and can frequently arise well after closing. Persons engaging in fraud, for example, do not make it easy to uncover their nefarious practices, and only title insurance provides protection in cases of fraud or forgery.

We have a very sound, dependable, trustworthy real estate system in the United States. During the financial crisis, we witnessed several systemic financial problems caused by shortcuts to well-established processes. Title insurance provides the most complete protection for the most important of purchases – one’s home.

Disruption has become a favorite concept in the innovation economy in recent years. Yet, disruption in the financial system, especially without any obvious purpose behind it, can lead to another financial crisis. 

Eric Miller is a Global Fellow at the Wilson Institute Canada and President of Rideau Potomac Strategy Group.