Should homebuyers consider an Attorney Opinion Letter to reduce closing costs?

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | January 22, 2024

Article originally posted in Orange County Register on January 19, 2024.

One of the perpetual questions in high-cost California is whether homeownership can be made more affordable and accessible.

Reducing settlement costs is one way. More lenders are accepting or at least contemplating Attorney Opinion Letters instead of title insurance.

The savings can be big.

Last month, I wrote about AOL savings of $2,891 on a $995,000 sales price ($780,000 loan amount) compared with a title insurance policy.

Mortgage giants Fannie Mae and Freddie Mac are looking at ways to lower closing costs and make homeownership more accessible for low- to moderate-income and minority homebuyers.

In mid-December, Fannie Mae expanded its AOL guidelines to include most HOA communities. Previously, AOLs were limited to single-family homes without an HOA. So far, Freddie Mac hasn’t said if it’s also going to expand its AOL guidelines to HOA properties.

AOLs are also allowed on FHA transactions.

The Department of Veterans Affairs does not require a lender making a VA loan or the Veteran-borrower to obtain title insurance or, an Attorney Opinion Letter. Its handbook requires only that a title to a property meets its standards. Neither title insurance nor AOLs are required.

And while they aren’t required by the VA, anyone buying or selling should get some type of title search done. In my experience, lenders always vet the title records. Ultimately, the lender, not VA, could end up having to deal with a title defect.

Others in the industry have not leaped into AOLs — yet.

I polled several of my wholesale mortgage lenders and found the only lender not accepting AOLs was Rocket Mortgage, which was the largest volume lender in the U.S. in 2022.

Two of our bigger banks also do not accept AOLs.

Bank of America told me it’s not accepting the letters. Wells Fargo said it was reviewing the option but has no plans to allow AOLs “in lieu of a lender title insurance policy at this time,” according to Tom Goyda at Wells Fargo Bank.

So, what is title insurance?

Title insurance protects you and your lender if someone challenges the title to your property. This often comes in the form of an alleged title defect, which was unknown at the time of sale, according to the California Department of Insurance website.

Title insurance provides comprehensive coverage for many issues that AOLs don’t, including fraud and forgery, according to the American Land Title Association.

And what is an Attorney Opinion Letter? And is it a safe option?

An AOL is a legal opinion prepared by an attorney that provides their professional determination of the status of title to a property, and when delivered to a lender, the priority of the mortgage lien.

Fannie Mae performed a rigorous analysis to evaluate the risk and protection offered by AOLs and concluded they provide a comparable level of risk protection when coupled with a lender’s representations and warranties, the mortgage giant found.

The Mortgage Bankers Association commissioned an AOL study by the law firm BlankRome, which concluded, in part, that there was room for both types of products to exist in today’s market.

For now, MBA is not taking a position on alternatives to traditional title insurance, according to Adam DeSanctis, vice president, communications, MBA.

Why not? My hunch says that MBA may be stuck in the diplomatic middle between lenders wanting to find cheaper settlement services (who don’t own title companies) and other lenders who own title companies that may be cash cows.

Others tell me that AOLs are not for complex transactions like probate. Ryan Marshall, a consultant to Voxtur Analytics, which sells AOLs and title insurance, says the letters don’t provide heir searches, for example.

But industry change is likely coming, mostly because title defects are not what they once were.

“The secondary mortgage replaced the 1980s savings and loans when title searches weren’t closely monitored,” said Ted Tozer, president of Ginnie Mae during the Obama presidency. “Since then, there have been minuscule problems. AOLs come with plenty of protection for the buyer to make the buyer whole. What does it really cost to do a title search?”

I’ve arranged thousands of mortgages in my 37 years. I’ve been involved in exactly two title insurance claims.

The first one was a builder who transposed unit #2 and unit #4 on a 4-unit San Pedro condo complex. It was an easy fix when the unit numbers were properly recorded.

The second was borrower fraud in early 2000. The borrower applied for a second mortgage with me at the same time he applied elsewhere. He coordinated the loans to fund at about the same time. The lenders didn’t know about each other. The borrower walked away with all the cash from both lenders and let the property go into foreclosure.

Title issues are rare to my knowledge. And yes, they do occur.

When asked, the American Land Title Association did not offer a single example in which a consumer bought an AOL, and it came back to bite them. (Specifically, where a title insurance policy would have been available to cover the claim had the consumer purchased title insurance instead.)

Freddie Mac rate news: The 30-year fixed rate averaged 6.6%, 6 basis points lower than last week. The 15-year fixed rate averaged 5.76%, 11 basis points lower than last week.

The Mortgage Bankers Association reported a 10.4% mortgage application increase compared with one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $226 less than this week’s payment of $4,896.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.5%, a 15-year conventional at 5.375%, a 30-year conventional at 5.99%, a 15-year conventional high balance at 6.5% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year-high balance conventional at 6.75% and a jumbo 30-year fixed at 6.625%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego, and Orange counties.

Eye-catcher loan program of the week: A 30-year adjustable with 30% down, fixed for the first five years at 5.625%, 1 point cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com. 

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.