Title insurance is a popular form of protection for residential and commercial real estate buyers and their lenders against title-related issues that may arise after closing. It provides peace of mind for all parties involved, as it insures against a range of potential problems such as liens, easements, unrecorded deeds and other title defects. However, title insurance can be expensive, and some people may prefer alternative methods of ensuring that a title is clear and transferable.
One alternative to title insurance that is getting more attention of late is an attorney opinion letter (“AOL”). An AOL is a written statement from a qualified real estate attorney that provides an opinion on the status of a property’s title. It includes a detailed analysis of the title records and any potential issues or defects, and a conclusion as to whether the title is clear and marketable. As of April 6, 2022, Fannie Mae has joined its competitor Freddie Mac in accepting AOLs as an alternative to title insurance. [1]
Advantages of Attorney Opinion Letters
One advantage of AOLs is that they can be a cost-effective alternative to title insurance. Since they only involve the services of an attorney, they tend to be less expensive than the cost of title insurance premiums. They also offer more specificity and a more in-depth analysis of a property’s title status, as the attorney is able to thoroughly review the title records and provide a written opinion on any potential issues or defects. Another reason why going “the cheaper route” is a better option is that the title insurance loss ratio for the month of September 2022 in the U.S. was reported at 2.8%. [2] Loss ratio is used in the insurance industry to represent the ratio of losses to premiums earned by insurance companies. This low percentage loss ratio may be enough for some buyers to roll the dice on forgoing a title insurance policy. In addition, if the title search comes back with no issues, then paying a premium for a title policy often appears to feel useless and a waste of money to the proposed insured.
Ironically, title insurance evolved from attorney opinion letters. Until the late 19th century, titles were examined and transfers occurred based on reviews of titles by attorneys. Title insurance and title insurance companies came into existence after a Philadelphia Supreme Court decision found that an attorney who opined that title was clear did so erroneously but held that the conveyancer attorney was not liable for the mistake based on his opinion. [3] Almost 150 years later, AOLs are again getting attention as an alternative to title insurance policies.
Risks With Attorney Opinion Letters
It is important to note that Attorney Opinion Letters carry some significant risks. First, unlike national title insurance companies, attorney opinion letters rely on the individual attorney or firm who issues the opinion. Further, as noted, some courts have held that attorneys are not necessarily liable when they make a mistake in an attorney opinion letter. Finally, and most significantly, in situations where a lender is involved, the lender may not accept an AOL as an alternative to the standard title policy. Diane Tomb, Chief Executive Officer of The American Land Title Association (“ALTA”) reminds us, “historically, lenders have preferred the protection of a title insurance policy, and Fannie Mae itself has acknowledged that there may be additional risk in accepting attorney opinions.” [4] AOLs are simply an opinion and do not provide the same level of protection as title insurance. Additionally, in some instances, there is little to no recourse for a buyer or lender if a problem arises after closing that was not detected by the attorney. As further explained by Jeremy Yohe, ALTA spokesperson, “should a title issue arise on a property covered by an attorney opinion, the homeowner would need to prove negligence on the part of the attorney to pursue the claim.” [5]
It is also critical to recognize that even Fannie Mae and Freddie Mac will not allow AOLs in certain situations. For example, certain transactions are ineligible for an AOL, including the following [6]:
- 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; and
- loans executed using a power of attorney.
Conclusion
Attorney opinion letters may appear to be a cost-effective alternative to title insurance for those who are looking for a more personalized analysis of a property’s title status. However, they should not be relied upon as a guarantee of a clear title and do not provide the same level of protection as title insurance. In addition, they are not available in many types of transactions. Prospective buyers and lenders should carefully consider their options and discuss these alternatives with a qualified real estate attorney to determine which route will best suit their needs.
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[1] https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B7-Insurance/Chapter-B7-2-Title-Insurance/2522435591/B7-2-06-Attorney-Title-Opinion-Letter-Requirements-04-06-2022.htm
[2] https://www.ceicdata.com/en/united-states/title-insurance-industry-financial-snapshots/title-insurance-loss-ratio#:~:text=United%20States%20Title%20Insurance%3A%20Loss%20Ratio%20data%20was%20reported%20at,of%202.600%20%25%20for%20Jun%202022.
[3] Watson v. Muirhead, 57 Pa. 161 (1868)
[4] https://www.alta.org/news/news.cfm?20220412-Fannie-Mae-Follows-Freddie-Mac-Guidance-to-Allow-Limited-Use-of-Title-Insurance-Alternative
[5] https://www.miamiherald.com/news/business/real-estate-news/article268210017.html
[6] https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B7-Insurance/Chapter-B7-2-Title-Insurance/2522435591/B7-2-06-Attorney-Title-Opinion-Letter-Requirements-04-06-2022.htm