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 opportunity and affordability.
Unfortunately, one of the proposals the President mentioned in the SOTU was to revive a previously discredited and shelved pilot program that would waive the requirement for lender’s title insurance on certain refinances by Fannie Mae. Homeownership is out of reach for many Americans because of the lack of affordable homes, regulatory burdens to development, and high interest rates – not the cost of title insurance.
By removing the requirement for title insurance on 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 receive 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 a lien from a debt that was not paid off.
The Biden administration compared title insurance to other lines of insurance that pay out 70% of premiums in claims. This is a mischaracterization of how our industry works that is either intentionally misleading or simply misinformed. The title insurance industry is proud of its low claims rate because of the upfront expenses and work 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 uncovered during the title search process. In the case there is a claim, however, title insurance insures homeowners and lenders against threats to property rights.
In 2022, the industry paid more than $596.1 million in claims. This is up from $474.4 million in claims paid in 2021. Approximately one-third of all claims are for issues that would not be found in a public records search – demonstrating that title insurance could not be effectively replaced by an automated search of public records or alternative products that don’t go beyond a public records search.
Title professionals also play a key role in helping prevent fraud. Impersonation scams, elder real estate fraud and financial exploitation, and attempts to defraud spouses, partners or other property heirs are common schemes title insurance professionals prevent by halting 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.
According to the proposal, lenders will 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 homebuyers. By law it is not an insurer nor is it capitalized or regulated to do this. Title insurance is comprehensively regulated at the state level and having Fannie Mae act in this role is clearly outside of its core mission.
The last time Fannie Mae engaged in significant risk taking, it helped implode the housing finance system and cost taxpayers over $200 plus billion in taxpayer dollars in the 2008.
We can’t allow this pattern to repeat itself. Fannie Mae remains in conservatorship because of behavior like this. During the financial crisis, we unfortunately witnessed several systemic financial problems caused by shortcuts to well-established processes. Throughout that time, the title insurance industry indisputably proved its ability to reliably pay claims, many fraud-related, even in a severe recession.
If that crisis taught us anything, it is that underwriting standards and risk-protection should be strong and well-tested. Strong underwriting protects lenders and consumers alike — and title insurance provides a key part of this due diligence.
The administration is targeting an industry that protects property rights but there’s no conversation about further reducing fees charged by Fannie Mae — fees that are nearly six times more than the cost of title insurance over the life of a loan. And under this pilot, Fannie Mae will collect another fee, while hurting an industry with proven expertise that’s comprised of 90% small businesses and has a workforce that’s 70% women.
New research conducted by Ernst & Young’s Quantitative Economics and Statistics (QUEST) team found that in 2022, the title insurance and settlement services industry directly generated $30 billion to the U.S. GDP and employed 155,000 workers — and those are just the direct benefits. Hundreds of thousands of additional jobs and billions more in GDP are generated by suppliers to the industry and consumer spending that is an outgrowth of its important work. This report, released earlier this month by the American Land Title Association (ALTA), specifically measured the U.S. and local economic impact of the title insurance industry.
Importantly, the report found that the title industry collected $3 billion in back federal income taxes, property taxes, and unpaid child support, to the benefit of the communities across the county. These recovered funds provide critical support for local public programs and services — including education, infrastructure, and economic development.
This data highlights the title insurance industry’s important role in fueling local economies across the country as both an employer and source of consumer protection. The job of a title insurance professional does not stop at protecting property rights – the industry has also taken significant steps to make homeownership more accessible. Preserving affordable housing is also important because it improves access to healthcare, 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 be through creating jobs or offering 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 movie 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 CEO of the American Land Title Association.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
