Risky Business

EARLIER THIS YEAR, Fannie Mae updated its Selling Guide to align its policy with Freddie Mac so both entities now accept written attorney opinion letters in lieu of a title insurance policy “in limited circumstances.”

Lenders “must ensure the loan is covered by either a title policy issued by an acceptable insurer (including any required endorsements) or a title opinion letter issued by an attorney; according to Fannie Mae. This brings Fannie Mae’s guidance in line with guidance Freddie Mac issued several years ago.

Fannie Mae requires lenders to use a special code to flag loans using an attorney title opinion letter. The attorney issuing the title opinion letter must be licensed to practice law in the jurisdiction where the subject property is located and must be insured against malpractice in rendering opinions of title in an amount commonly prevailing in the jurisdiction.

The attorney title opinion letter must:

• Be addressed to the lender and all successors in interest of the lender.
• Be commonly accepted in the area where the subject property is located.
• Provide gap coverage for the duration between the loan closing and recordation of the mortgage.
• List all other liens and state they are subordinate.
• State the title condition of the property is acceptable and the mortgage constitutes a lien of the required priority on a fee simple estate in the property.

The following transactions are not eligible for an attorney title opinion letter:

• loans secured by a unit in a condo project
• co-op share loans
• loans secured by a dwelling on a leasehold estate, including leasehold estates on property owned by a community land trust
• loans secured by a manufactured home
• HomeStyle Energy and HomeStyle Renovation loans
• Texas Section 50(a)(6) loans
• loans secured by property subject to restrictive agreements or restrictive covenants
• Loans executed using a power of attorney

Shifting of Risk

Attorney opinions, in providing more limited coverage of tide risks, represent a shifting of risk to the lender because they are responsible for representations and warranties for the life of the loan that pertain to clear tide and first-lien enforceability. Title insurance protects a lender’s security interest in a property by ensuring that its lien has priority over others and is enforceable. Tale insurance policies can insure against lien impairment caused by diversion of funds and similar risks while alternative products cannot.

Since the policy change, ALTA has engaged with the Federal Housing Financial Agency (FHFA), government sponsored entities (GSEs), lenders and state regulators to explain the risks alternative products including certain attorney opinion letters (AOLs) present to lenders and consumers.

“ALTA believes it is misguided for lenders to offer title insurance alternatives that provide less coverage but introduce more risk to lenders and consumers,” said Diane Tomb, ALTA’s chief executive officer. “We know that in some parts of the country and on limited types of transactions, other products such as attorney opinion letters have been used in limited situations. However, over the years, AOLs have been replaced by title insurance in most of the country because of the protections afforded by title insurance.