Alternative title products, including Attorney Opinion Letters, are currently being marketed as a cost cutting path to home ownership.
Melissa Jay Murphy 00:08
Welcome to The Fund's pop up webinar. I'm Melissa Murphy and I have the pleasure to host these pop up webinars every month or so. We focus on current topics of interest to the title and closing industry and I hope you find these conversations valuable. We also push the audio out to our podcast which is conveniently also called Title Now. We try to make it as easy as possible for you to listen to the content again, or maybe share it with friends and colleagues. So you can subscribe to our podcast at any of the channels that you subscribe to the other podcasts. So please join those people that are members of our podcast. We're going to invite you to post questions today on the chat function, and we will try to get back to you after the webinar with responses, but we're just not going to have time today to go through your questions but please, please feel free to post them and we'll get back to you later. So what are we talking about today? Traditionally, for many decades, title insurance has been the way buyers and lenders have been assured of good title to the property they're buying or lending against. And recently in the last 18 months or so, both Freddie Mac and Fannie Mae have approved the use an alternative title product or loans in limited circumstances, and specifically the alternative title product that has been approved are attorney opinion letters. There are six types of transactions that are not eligible for the use of attorney opinion letter. They are loans against condos, loans against co ops, loans on dwellings on leasehold estates, loans on manufactured homes, loans on property subject to restrictive covenants, which is an interesting carve out to me because most residential properties most I think, are encumbered by restrictive covenants of some sort. And then the last category are loans that are executed utilizing a power of attorney, but that still leaves thousands and thousands of transactions that are able to be or where an attorney opinion letter is able to be utilized. So it's an important topic for us to understand. And this move by the GSEs sent ripples if not waves through the title insurance industry. Concerns about whether the attorney opinion letters really effectively address the risks of real estate transactions that we see every day in our business. Those concerns are real. And lots of Fund Members emailed me with questions and shared articles that they might have read. And they were questioning this new product. So I quickly realized that I needed to get more information. So I reached out to our national industry advocacy group, the American Land Title Association, and I of course was not the only person doing that. Lots of people have looked at ALTA to give us some guidance here so it makes sense for me to have invited Chris Morton from ALTA as my guest today to talk with us about AOL's and what's been going on in this arena. Chris is the Chief Advocacy Officer for ALTA so he is perfectly positioned to talk about this subject. Welcome, Chris. Thanks so much for being here.
Chris Morton 04:14
Well, thanks, Melissa. Appreciate the opportunity to be with you on what is a really important topic and obviously been a huge focus for us and also in the broader industry. So, looking forward to hopefully shedding some light on some of the important questions around this.
Melissa Jay Murphy 04:32
Well, Chris, I would love to start with the why. What was the reasoning behind the GSEs move to approve attorney opinion letters, even if for now in limited circumstances
04:48
Yeah, it's a great place to start. And you know, I think in looking at this, we all understand and recognize the challenges that have been, you know, apparent when it comes to affordability. Affordability of housing, and homeownership affordability in particular from a public policy perspective. I think something, a goal that we all, you know, work towards helping to address and tackle in a meaningful way, particularly for certain underserved borrowers and communities. And so that's really what's driven a lot of the work that the GSEs have done, as well as the oversight that comes from the Federal Housing Finance Agency, just to give a little level set on sort of what happened historically. So in April of last year was when Fannie Mae made it selling guide change. And it really what it did was follow similar guidance that Freddie Mac had had going back all the way to 2008. And so really, it was, at least initially described as a conforming change to provide some standardization across the two GSEs. We did learn though from there that in June of last year, the two GSEs under the guidance of FHFA released what are called equitable housing finance plans and these are really broad scale efforts to look at that question of affordability across particularly low and moderate income borrowers and minority borrowers as well. And it's not just in one particular area. It's really the entirety of homeownership journey, so to speak, as well as on the rental side. So as it relates to our industry, what the focus was was really on, how can there be a reduction, a meaningful reduction in closing costs and, you know, downpayment requirements as it relates to this particular class of borrowers. You know, again, I think, from a public policy perspective, laudable goals that we all share. I think the big question's how do you get there in a way that is safe and sound, and that doesn't compromise a class of borrowers in a way that makes them more [unintelligible 7:16].
Melissa Jay Murphy 07:18
Well, that's what concerns me because I can't argue with the goal of reducing closing costs. That certainly is an appropriate topic for discussion. But I'm also confident that the GSEs while being supportive of reducing costs, surely they are not supportive of reducing costs but increasing risks to a consumer. Particularly perhaps, consumers in the targeted group. So do they have guidelines that have been established for what these attorney opinion letters say and do?
Chris Morton 08:01
Yeah, so let me speak to some of the requirements as the guidance laid out. This relates to the attorney opinion letter. So you know, first it needs to be addressed, the letters addressed to the lender and successors in interest. The other piece of this is it needs to be commonly accepted in an area where the property is located. Gap coverage needs to be provided. All other liens need to be listed and affirmatively stated that they're subordinate to the mortgage. The condition of the title needs to be acceptable. The mortgage needs to have the appropriate lien priority of a [unintelligible 8:48] estate, and the attorney involved needs to have malpractice insurance. So there are some stipulations here. We can get into this a little bit more but in terms of this, we've talked more about the particular products that we're aware of in the marketplace, but you know, it's important to recognize how this may really be in many respects as we get into it, the business of title insurance and its definition so I'll talk a little bit more about that, but those are some of the major requirements.
Melissa Jay Murphy 09:25
And those all sound fine. I mean, those all sound like reasonable requirements of the attorney opinion letter, but I suspect that there's more to this behind the curtain, if I could use that expression. So what are the main areas that ALTA has focused on in their efforts to understand more about this product?
Chris Morton 09:50
Yeah, and again, I come at it from you know, we start as an advocacy organization with a proposition of understanding the policy objectives and, you know, and working to analyze what we know about what is out there in the market in terms of attempting to meet some of those objectives. The reality here you know, unfortunately has been, there has been a real lack of transparency as it relates to some of these products. We have been able to find some information and have been able to do an analysis of what we've been able to see in the market, at least on one of the products, and I can talk a little bit more about that. As we've dug in on this, we've worked with a major law firm, Greenberg Traurig to produce a coverage comparison between the standard ALTA policy and what we have seen at least or been able to have access to, in terms of one AOL that it does have an insurance component associated with it. And when we did that analysis, what we found was real concern from our perspective, because there are some things within that coverage analysis that we've done, which is available on ALTA's website, for those of you interested, but things like, you know, undisclosed matters beyond what's found in the public records would not be covered. Issues of fraud and forgery which we know are a significant area of claims for our industry, certainly would not be covered in this particular analysis that we did. Things like the duty to defend, also not, you know, covered necessarily. So, as we've dug in, we've tried to first understand and get some information. And then second, it raises a bunch of questions about what it is the objectives are with the GSEs and FHFA. And so we've tried to bring these questions and concerns to them, to really have a conversation and get a better sense of where their head is on this. I think there's a shared, at least from our conversations, belief that there shouldn't be increased risk associated with alternative products. However, we've not been able to understand or see that what's in the market, in fact, doesn't increase those risks. So we're continuing to talk with the GSEs in the FHFA. We're also engaged with policymakers both on the federal and state level and particularly state insurance regulators, who we think should be asking these similar questions, given the nature of title insurance regulation, and if there is, you know, product or products in the marketplace that you know, to use a phrase quack like a duck and walk like a duck, they should be regulated in a similar way. So that's been, you know, the series of activities and conversations that we've been engaged in. And you know, principally we're really driving to that transparency argument and point, which is the need for regulators, particularly at the state level to better understand these products.
Melissa Jay Murphy 13:19
Well, that's an interesting point that you've raised because this lack of transparency by the people that are offering this product in the market is so curious to me. Because if it's so great, why aren't they willing to be totally transparent about what it does and how it covers risks and how it's a safe product for a lender to rely on and certainly, that's a key element of concern that I have, is that this appears to only benefit the lender. And it also sounds like the there's only one product that ALTA has been able to do this deep dive comparison. And so are there other products out in the market that are maybe slightly different, but you don't really know because they're not sharing?
Chris Morton 14:22
Yeah, so there's as we know it right now, there's sort of two flavors that I would say, you know, in terms of what's out there, one is this product that it's an attorney opinion letter combined with a service agreement and a specialty errors and omissions insurance policy wrapper. There are varying evolutions of this in terms of what's being claimed again, however, what we've seen and what we used to produce the analysis I described, you know, shows real gaps. So that's one product out in the market, the other being offered and that is purporting now, and this has evolved, that is purporting to cover the lender, the consumer, and sort of all parties of the transaction. It's being offered in all 50 states, apparently, up to a million dollars in loan amount. You know, so there's a number of assertions, you know, here, but again, we're trying to understand the facts and the specifics. I think the other thing I would say is on the non insured side, there is a lender, only non insured, or, a mortgage lender that is self insuring, essentially, out there that is not covering the owner side of the transaction. One of the things that we've raised in conversations with various parties that I described is, you know, what does this do from a consumer perspective, as well as a lender perspective? There's a lot of confusion about you know, what exactly is covered? What are the risks, what are the you know, one of the gaps? And it's not providing for sort of a healthy you know, open dialogue so that people can make informed choices from a consumer perspective in particular, as they're going into these actions. And so, we would hope that we can get to a place where those questions are adequately answered. There's appropriate transparency, and most importantly, appropriate regulation. If this is a product that is essentially title insurance, under a different name, that is regulated as such.
Melissa Jay Murphy 16:48
Well, let me ask you a question about this self insuring situation because that seems very curious to me also. Because if the if the lender is self insuring, are they doing that by having employees, attorneys that are employees that are issuing the attorney opinion letter? Is that why it's self insuring because their employees are issuing the letter?
Chris Morton 17:22
Yeah, again, it may be but, you know, the lack of detail around some of this still remains. And so, but these are the kinds of questions. I think there's some other questions, you know, you look like from a state law perspective, that it's important to really, for regulators in particular to ask you know, in terms of the insured product, and the underlying insurance, what type of license is being required to be had there? You know, are the state regulators looking at and reviewing the coverage in the same way that they do with title insurance? What level for instance of reserves for future losses does the particular insurance provider hold or is holding, how are reserves being calculated, if any are are available? Quite honestly. And so, you know, and again, I think, in terms of charges for these attorney opinion letters, you know, are they regulated and how so, you know, again, all open important open questions, but ones that need to be resolved. If you know if both lenders and consumers are to be comfortable with the choices they are making and the risks they're taking in various iterations of product.
Melissa Jay Murphy 18:46
And if those are questions that need to be answered, based on state law, because title insurance is something that is regulated by and large by state law, so you've got 50 different sets of state laws, and they do vary from state to state. There are similarities for sure. But in Florida, title insurance is a highly regulated industry. And those questions that you just listed out are extremely relevant, because our industry pays very close attention to those things. And they are held accountable by our insurance commissioner, our regulator to comply with the law that requires those things from them. So do you have a sense of how the various state insurance commissioners and or regulators in each state are reacting to this? Is there any sense of whether or not they're paying attention?
Chris Morton 19:56
Yes, I believe. I mean, the answer is yes they're paying attention. There's actually been a couple of sessions with the NAICs title task force on this topic. One of which I participated in back in August of last year and then, more recently, in December of last year, there was another presentation at which I know one of the providers was able to now have a conversation with some of the members of the task force. I think a lot of the questions even more specific than the ones I raised were asked, and I'm not sure that they were satisfactorily answered in a way that was providing the answers that were sought. And so, you know, I think there's additional work that I'm sure the state regulators are doing to better get those answers and understand, you know, just exactly how these various iterations of product are being structured and appropriately, you know, managing risk and particularly, dealing with the needs of consumers, who are, you know, obviously under the appropriate title insurance regime in a normal circumstance in all 50 states.
Melissa Jay Murphy 21:21
Well, let's make sure our audience knows who that NAIC is. That's the National Association of Insurance Commissioners and every state has a representative that attends those meetings, and participates in those discussions. And it's a great forum for the various insurance commissioners to share discussions and brainstorm about issues just like this. Now they deal with all kinds of insurance, not just title insurance. But it does sound like this has drawn a lot of attention to the title insurance aspect of their jobs. And I'm really thrilled to hear that NAIC is paying attention to this. Because understanding it is so important and each state insurance commissioner needs to spend some time looking at their own laws that regulate title insurance and how this product fits or doesn't fit in there. And I do want to spend a few minutes talking about what we are doing here in Florida, because Florida has certainly been identified as one of the states where attorney opinion letters are commonly acceptable. That could be a debatable question, but let's give them that for the moment. And here in Florida, I know that individual underwriters are having conversations with our office of insurance regulation. And they did attend that NAIC meeting that was in Tampa in December. Old Republic had people there, Florida's Office of Insurance Regulation had people there. We do have a challenge here in Florida because we do not currently have an insurance commissioner, our insurance commissioner resigned effective at the end of December and his replacement has not yet been appointed by the cabinet. So that is hampering. I think whether our office is going to take any action and what that action will be. I think they're waiting for their boss to be appointed. So we're all hoping that that gets filled quickly by our cabinet but that is a challenge that we're having here in Florida, but I do think that here in Florida, we have gone a long way to make sure that our office of insurance regulation is very aware of this and they are starting to collect information also. So I hope the other states are equally engaged and doing the same thing. So my next question for you, Chris, is do we have any data on how pervasive this is in the market is this alternative vital product being used at all and to what degree do you think we have any data on that?
Chris Morton 24:27
So, as I said, there are claims that this is being offered in various iterations in states all across the country. However, the actual number of transactions that have been seen, I think is very minimal, if any, and so one of the things I would say to folks who are listening is, you know, if, if you're learning about this, I think it's important to better understand it and communicate it about what exactly you're seeing in the market again, from a public policy perspective, we want to be able analyze that so that, again we are recognizing and understandnig what is being offered, we're able to assess the true nature of the risk associated with those offerings and make appropriate analysis to the types of risk that the title insurance industry takes in the way in which we are structured and regulated and I think that's an appropriate comparison that all regulators and policymakers need to better understand. So we're gonna continue to work to gather information as it relates to that, and have the conversations both at the federal and state levels that we've been conducting, again, and I would encourage people listening to this to share what they're learning. I think that makes us all more informed and helps us better make decisions. And then you know, I think your point about talking particularly to your regulators about what you're seeing in the market is important and we can certainly help in collaboration with that we've worked with alot of state land title associations and members here at ALTA to appropriately prepare them for those conversations, and so we offer that as a service as well.
Melissa Jay Murphy 25:42
That's a great resource I would definitely call upon ALTA if I learned about specific things in the Florida market and share that information with you. Do you think that there's going to be any significant change in the near future in this arena? Or do you think that FHFA in particular, is just waiting to see how this evolves, whether or not it does help them achieve their goals to reduce closing costs? Or do you think that something significant is going to happen anytime soon?
Chris Morton 26:21
You know, I think this is a process and an ongoing set of conversations, as I said we're talking with them and others to better understand, you know, how they're viewing these things. I think, you know, the goal is one again, we all share it's the how you reach that goal that's really important. And so, you know, I think the more the more data and information we can get to even better assess, you know, these offerings, then we're going to be in a better position to make judgments about you know, where we can continue to contribute as an industry to an important discussion. And so, that's our goal as we move through this.
Melissa Jay Murphy 27:07
Well, thank you, Chris. We are just about out of time. I do want to emphasize one one of your messages today, which was for our listeners to share any information that they observe out in the Florida market. For examples where these attorney opinion letters are being used, and specifically I'm talking here to the attorneys in the audience that might represent a buyer or seller in a transaction where you discover that title insurance is not the title assurance product that is being used, but this attorney opinion letter is. We would be very interested in knowing whatever you can share about that transaction. And in Chris's perfect world you would get a copy of the closing statement and you would get a copy of the attorney opinion letter itself to see exactly what it provided and any underlying type of insurance that the lender can rely on in accepting that attorney opinion letter, so please share whatever information you get out there. So thanks to everybody that was listening today. Don't forget we push the audio out to our podcast, Title Now. You can get there anywhere you get your podcast channels. And please share information that you might glean about the use of AOL's in your area. We would really appreciate that. And as always, thank you for your support of The Fund.