Opinion: Fannie Mae’s title insurance pilot program overachieves

Earlier this month, President Biden during his State of the Union announced several initiatives to address housing affordability in our country. We have long supported thoughtful efforts to ensure greater housing options and affordability.

Unfortunately, one of the proposals the President mentioned at SOTU was the revival of a previously discredited and expired pilot program that would waive the lender’s title insurance requirement for certain refinances. Fannie Mae. Home ownership is out of reach for many Americans due to a lack of affordable homes, regulatory burdens on development and high interest rates – not the cost of title insurance.

By removing the requirement for title insurance in these transactions, this program would introduce significant risk into the market and turn Fannie Mae into a primary market insurer, expanding authority beyond its mission and charter.

During a refinance, homeowners take out a new loan and title insurance provides assurance that a lender’s investment is protected. Title insurance protects against many risks that may have occurred between an old and new loan, such as fraud or encumbrance from a debt that has not been repaid.

The Biden administration compared title insurance to other lines of insurance that pay 70% of premiums in claims. This is a mischaracterization of how our industry works that is either deliberately misleading or simply misinformed. The title insurance industry prides itself on its low claims rate due to the upfront costs and work done by title professionals to ensure homeowners are protected. A lower claims rate means that title professionals have done a good job of resolving title issues discovered during the title search process. However, in the event that there is a claim, title insurance insures homeowners and lenders against threats to property rights.

In 2022, the industry paid out more than $596.1 million in claims. That’s up from $474.4 million in claims paid in 2021. Roughly one-third of all claims are for issues that wouldn’t be found in a public records search—demonstrating that title insurance could not be effectively replaced. from an automated search of public records or alternative products that do not go beyond public records search.

Title professionals also play a key role in fraud prevention. Impersonation scams, elder real estate fraud and financial exploitation, and attempts to defraud spouses, partners or other heirs to property are common schemes that title insurance professionals prevent by stopping fraudulent real estate transactions. . Under Biden’s plan, title professionals would be removed from providing this key layer of fraud protection for consumers and lenders.

Under the proposal, lenders would pay Fannie Mae a fee to cover the risk if there is an unexpected title defect. Fannie Mae is a government-sponsored entity created to provide liquidity in the secondary market focused on first-time buyers. By law it is not an insurer, nor is it capitalized or regulated to do so. Title insurance is comprehensively regulated at the state level, and for Fannie Mae to act in this role is clearly outside of its core mission.

The last time Fannie Mae engaged in significant risk-taking, it helped dismantle the housing finance system and cost taxpayers over $200-plus billion in taxpayer dollars in 2008.

We cannot allow this pattern to repeat itself. Fannie Mae remains in custody because of such conduct. During the financial crisis, we unfortunately witnessed several systemic financial problems caused by shortcuts to well-defined processes. Throughout that time, the title insurance industry has unequivocally proven its ability to reliably pay claims, many related to fraud, even in a severe recession.

If that crisis taught us anything, it’s that underwriting standards and risk protection must be strong and well-tested. Strong insurance protects both lenders and consumers – and title insurance provides a key part of that due diligence.

The administration is targeting an industry that protects property rights, but there is no talk of further lowering the fees charged by Fannie Mae — fees that are nearly six times the cost of title insurance over the life of a loan. And under this pilot, Fannie Mae will collect another fee while undermining an industry with proven expertise that is made up of 90% small businesses and has a workforce that is 70% women.

New research conducted by Ernst & YoungThe Quantitative Economics and Statistics Team (QUEST) found that in 2022, the title insurance and settlement services industry directly generated $30 billion for US GDP and employed 155,000 workers – and that’s just the direct benefits. Hundreds of thousands of additional jobs and billions more in GDP are generated by the industry’s suppliers and consumer spending that is a result of its important work. This report, published earlier this month by American Land Title Association (ALTA), specifically measured the US and domestic economic impact of the title insurance industry.

Most importantly, the report found that the title industry collected $3 billion in federal income taxes, property taxes and unpaid child support, benefiting communities across the county. These recovered funds provide critical support for local public programs and services — including education, infrastructure and economic development.

These data highlight the important role of the title insurance industry in boosting local economies across the country as an employer and as a source of consumer protection. The job of a title insurance professional doesn’t stop at protecting property rights – the industry has also taken important steps to make home ownership more accessible. Preserving affordable housing is also important because it improves access to health care, transportation, jobs, and vibrant communities.

Like any industry with a strong national and local footprint—the title insurance industry has operations that serve every county in the country—we believe it is our responsibility to play an active role and invest in the communities we serve. Whether it’s through job creation or providing local grants to community nonprofits through our ALTA Good Deeds Foundation, the title industry is committed to strengthening communities across the country. We’ve seen this play out before with Fannie Mae expanding beyond its charter. We didn’t like the ending. Let’s make sure it doesn’t happen again.

Diane Tomb is the CEO of American Land Title Association.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

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