FHFA’s pilot to waive lender title insurance on refis faces opposition

President Joe Biden’s new plan to lower housing costs includes a pilot program that waives the requirement for lender’s title insurance on certain refinance transactions, according to the White House. The plan will be announced during his 2024 State of the Union address on Thursday night.

However, that’s a controversial topic for the mortgage industry and it’s already facing resistance from trade groups. Regulators believe reducing title requirements would cut closing costs, but title and mortgage companies challenge the argument and point to elevated risks.

On Thursday afternoon, the White House announced that the Federal Housing Finance Agency (FHFA) has approved policies and pilots to reduce closing costs, including the pilot to waive lender title requirements.

The program “would save thousands of homeowners up to $1500, and an average of $750,” unlocking “substantial savings for homeowners as mortgage rates continue to fall and more homeowners are able to refinance,” the White House estimates.

Regarding the risks of waiving title requirements, it also mentioned an independent analysis showing that title insurance typically pays out only 3% to 5% of premiums in claims to consumers, compared to more than 70% in other types of insurance.

Following the announcement, FHFA director Sandra Thompson clarified that the pilot only impacts lender’s title policy or legal opinions, focuses on low-risk refinance transactions and will be subject to “robust oversight.”

Government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac’s attempts to launch title waiver programs, which aim to improve affordability by reducing closing costs, have faced resistance from trade groups since 2023 due to allegedly increased risks.

However, according to Thompson, the pilot “does not impact a borrower’s title risk since it only applies to certain refinance loans where the borrower has title to the property already.” The FHFA director added that these are “low-risk refinance transactions where there is confidence that the property is free and clear of any prior lien or encumbrance.” 

In addition, Thompson said that lenders will “retain the option to provide evidence of clear title through other options, such as title insurance or an attorney opinion letter (AOL). Meanwhile, homeowners can always purchase their title insurance policy or AOL if they choose.

In March 2023, a report from PoliticoPro showed that Fannie Mae was considering piloting a program to bypass traditional title insurance and AOLs, which drew resistance from trade groups. The introduction of AOLs had already frustrated groups representing the title industry the previous year. In August 2023, Fannie Mae said it was no longer considering the pilot program. 

Following the White House announcement, Mortgage Bankers Association (MBA) President and CEO Bob Broeksmit said the trade group has “significant concerns that some of the proposals on closing costs and title insurance could undermine consumer protections, increase risk, and reduce competition.”

In an emailed statement, the American Land Title Association (ALTA) called the program a “purely political gesture offering a false promise of savings for homeowners while exposing consumers, lenders, and taxpayers to greater financial risk.” 

“The approval of this waiver is a hollow attempt by the White House to placate Americans’ current economic frustrations,” the statement continued. “By announcing this only hours before the State of The Union address, without outreach to, or engagement with, the title insurance industry, the Administration has reduced the crucial role of the industry to nothing more than a politicized talking point.”

The trade group also noted that federal lawmakers introduced a bill in October 2023 that would require title insurance on all mortgages purchased by the GSEs.

“Since the waiver program was first reported, the FHFA has faced strong bipartisan opposition,” the statement read. “The Administration should not be playing politics with the American Dream.”

In her statement, Thompson said, “As with any pilot undertaken by an Enterprise, this effort will be subject to robust oversight by FHFA to monitor the effectiveness of the pilot in meeting its desired outcomes.”