Misguided Attacks On Title Insurance Could Have Grave Consequences

In the last couple of years Fannie Mae
FNMA
and its government overseer, the Federal Housing Finance Agency have taken aim at the title insurance industry – an often overlooked but important part of the housing finance infrastructure that protects homeowners from possible issues regarding the provenance of the title of any home they are attempting to purchase.

For instance, Fannie Mae’s recently-scrapped title waiver pilot program – which would have resulted in the GSE taking on an altogether new role in the primary market with which it has no experience nor authority – and recent expanded acceptance of unregulated attorney opinion letters in lieu of title insurance on certain loans are evidence of the reality that government regulators have gaping misconceptions about what title insurance entails and the risks involved with alternatives.

These attempts to sidestep title insurance is a mistake, and any ostensible cost savings would likely be outweighed by the lack of coverage and uncertainty these efforts would create in the real estate market.

Title insurance is fundamentally different from property and casualty insurance or other insurance products, where most of the upfront cost is marketing. Title companies incur significant upfront expenses related to conducting public records searches and rectifying any problems found before the buyer closes on the home. For a one-time fee that typically costs the borrower approximately 0.5% of the home’s purchase price, less than most all other fees involved in the mortgage process over the life of a loan, title insurance companies ensure clear property ownership rights for home buyers and provide comprehensive coverage if a problem arises.

Title insurance rates are regulated at the state level, and due to significant fixed costs to produce a title policy, the industry’s profit margins are much lower than other lines of insurance. The National

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