Earlier this month, during his State of the Union, President Biden announced several initiatives to address housing affordability in our country. We have long supported thoughtful efforts to provide greater housing options and affordability.
Unfortunately, one of the proposals the president mentioned in the SOTU was to revive a previously discredited and delayed pilot program that would waive the lender’s title insurance requirement on certain refinances from Fannie Mae. Home ownership is out of reach for many Americans because of the lack of affordable housing, regulatory burdens on development and high interest rates – not the cost of title insurance.
By removing the title insurance requirement on these transactions, this program will introduce significant risk to the market and transform 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 the lender’s investment is protected. Title insurance protects against many risks that may have occurred between the old and new loan, such as fraud or foreclosure on a debt that has not been paid.
The Biden administration compared title insurance to other lines of insurance that pay 70 percent of claims premiums. This is a mischaracterization of the way our industry works that is either deliberately misleading or simply misinformed. The title insurance industry prides itself on its low claim rate due to the upfront costs and work of title professionals to ensure homeowners are protected. A lower claim rate means that title professionals have done a good job of resolving title issues uncovered during the title search process. However, in this case there is a claim, title insurance insures homeowners and lenders against threats to property rights.
In 2022, the industry paid out over $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 have been found in a public records search — indicating that title insurance can’t be effectively replaced from automated public records searches or alternative products that do not go beyond public records searches.
Title professionals also play a key role in fraud prevention. Impersonation fraud, real estate fraud and financial exploitation of the elderly, and attempts to defraud spouses, partners or other heirs of property are common schemes that property insurance professionals prevent by stopping fraudulent transactions with Real Estate. Under Biden’s plan, title professionals would be removed from providing this key level of fraud protection for consumers and lenders.
Under the proposal, lenders would pay Fannie Mae a risk coverage fee if there is an unexpected defect in the property. Fannie Mae is a government-sponsored entity created to provide liquidity to the secondary market focused on first-time home 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 that role is clearly outside of its core mission.
The last time Fannie Mae took significant risks, it helped wreck the housing finance system and cost taxpayers over $200-plus billion in 2008.
We cannot allow this pattern to repeat itself. Fannie Mae remains in conservatorship because of behavior like this. During the financial crisis, unfortunately, we witnessed several systemic financial problems caused by shortcuts to well-established processes. During all that time, the title insurance industry has unquestionably proven its ability to reliably pay out claims, many of which are fraudulent, even in a severe recession.
If this crisis has 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 has targeted an industry that protects property rights, but there is no talk of further reducing the fees charged by Fannie Mae — fees that are nearly six times the cost of title insurance over the life of the loan . And under this pilot, Fannie Mae will collect another fee while harming a proven industry that is 90% small businesses and has a workforce that is 70% women.
New research conducted by Ernst and YoungThe Quantitative Economics and Statistics (QUEST) team found that in 2022, the title insurance and settlement services industry directly contributed $30 billion to 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 industry suppliers and consumer spending that results from its important work. This report, published earlier this month by American Land Ownership Association (ALTA), specifically measures the US and local economic impact of the title insurance industry.
Importantly, the report found that the title industry collected $3 billion in federal income taxes, property taxes and unpaid child support benefits for communities across the county. These recovered funds provide critical support for local community programs and services — including education, infrastructure and economic development.
These data highlight the important role the property insurance industry plays in fueling local economies across the country as an employer and source of consumer protection. A title insurance professional’s job doesn’t stop at protecting title—the industry has also taken significant steps to make homeownership more affordable. 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 property 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 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 the CEO of American Land Ownership Association.
This column does not necessarily reflect the views of HousingWire’s editorial department and its owners.
