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Approving Attorney Opinion Letters In Lieu of Title Insurance Is Trending, But Use With Caution
In the context of a real estate finance transaction, an attorney opinion letter (an AOL) is typically a legal opinion prepared by a licensed attorney that opines as to the authority of the borrower and the enforceability of the security instrument and the other loan documents. Customarily, an AOL does not opine as to the status of title, and the parties will rely on title insurance to confirm the priority of the lien of the mortgage. Unlike an AOL, title insurance is obtained to protect the owner and lender, as applicable, against any loss or damage resulting from defects in title. Nevertheless, some cities and counties require an AOL for matters that pertain to unity of title, permitting and zoning.
In 2022, Equitable Housing Finance Plans were approved by the Federal Housing Finance Agency (FHFA) which allowed for government-backed entities like Freddie Mac and Fannie Mae to accept, in limited circumstances, AOLs as an alternative to title insurance for a mortgage transaction. Discussion of AOLs for the purpose of this article will solely be focused on their use in lieu of title insurance; the proposed objective of approving the use of AOLs in lieu of title insurance; the risks associated with this practice; and the stance taken by reputable title underwriters with regard to real estate transactions that accept this practice.
The Proposed Objective of Approving the Use of AOLs In Lieu of Title Insurance
Freddie Mac and Fannie Mae were created by Congress to provide more liquidity, stability and affordability in the mortgage market. The seeming objective of the FHFA endorsing plans for entities like Freddie Mac and Fannie Mae to accept AOLs (in limited circumstances) in lieu of title insurance was to provide a reduction of closing costs and more opportunities to obtain loans for low-income and first-time homebuyers. In a 2024 publication released by Fannie Mae, it claimed that borrowers in refinancing transactions saved on average over $1,000 when utilizing an AOL instead of title insurance. Additionally, Fannie Mae claimed to have purchased over 10,000 loans with AOLs since 2009 and stated that no losses from title claims on such loans were sustained. However, despite these positive figures, critics have suggested that the costs associated with this practice outweigh the intended benefits.
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