Fannie Mae Was Going to Save Mortgage Borrowers Thousands by Dropping Its Title Insurance Requirement. Never Mind.

The Biden administration was working with loan backers to delete title insurance charges from closing costs. The move would have saved quite a few home buyers hundreds or even thousands of dollars.

Noting that the plan had been silently scuttled, the Wall Street Journal said pressure against it came from “an obscure industry.”

The obscure industry is the real estate title insurance sector. It’s hardly obscure in our book. But the Wall Street Journal pointed to the industry’s small population. Only some 155,000 people reportedly work in the title and settlement sector.

In 2023, Fannie Mae was getting ready to test its planned phase-out of the title insurance requirement for mortgage borrowers. Evidently, the aforementioned industry wanted to save itself from further obscurity!

The title insurers pushed back. And Fannie Mae abandoned its test run.

Title Insurance Is Overrated. Just Ask Iowa.

Your home title states that you do, in fact, own your home. Do you need a title insurance policy, just in case someone challenges your title? Isn’t there a better way to prevent this risk?   

The state of Iowa thinks there is. Its Iowa Title Guaranty is the only title insurer an Iowa home buyer needs. Iowa just doesn’t let private corporations sell title insurance. Instead, the state has its own employees running the title abstracts. So, an Iowa home buyer can rest assured with a protected title — without paying companies to provide that protection.

OK. If a state can offer a public title guarantee on any home, do we really need insurance companies taking people’s money? If lenders want home buyers to shell out .5% of the total loan for mandatory title insurance, these buyers will be paying an extra $1K on the typical $200,000 mortgage. So, it’s a bit more than just being nickled and dimed.

And our famous government-sponsored backers of conventional home loans, Fannie and Freddie, do require the loans they back to have title insurance. They want to make sure there are no undiscovered tax liens. No other claims on a title. They don’t want to leave potential snags, should a lender ever need to foreclose on the borrower.

Just to be clear, we are talking about an insurance product designed to protect the lender — not the home buyer. (The government plan to delete title insurance only involved that lenders’ title insurance — not the additional product known as owners’ title insurance.)

A Reckoning Over Fees and Commissions, Continued

When buyers fork over cash to cover the costs of title insurance for lenders, the funds mostly become title insurance agents’ commissions. A fellow at the Urban Institute, talking to the Wall Street Journal, says the data show that up to 80% of a title insurance premium goes into title agent commissions.

If this all sounds vaguely familiar, it should. The title insurance premium debate parallels the real estate commissions debate.

Real estate agents’ commissions are under scrutiny — so much so, that a jury recently found the National Association of REALTORS® conspired to keep agent commissions artificially inflated. NAR is appealing the jury’s verdict.

There has to be a reckoning over the large fees and premiums that home buyers pay at closing. Fees for the “middlemen” are under intense scrutiny in our current affordability crisis.

In the case of title insurance, the matter shouldn’t be hard to resolve. To cut the costs of title insurance and help hopeful home buyers, the federal government could do essentially the same thing Iowa has long been doing. Fannie Mae employees could use software to search title records with a high degree of accuracy in this digital era. Fannie Mae should have been able to succeed in their test run, hands down. Even simpler? Refinancing. A government title check for mortgage refinancing could easily become a thing.

So, What Just Happened? How the Pilot Plan Was Scuttled

Regular readers (and most everyone else) are well aware of the housing affordability problem. Home prices and high loan interest have sidelined many hopeful home buyers.

So, the insurance deletion plan was part of a federal directive for Fannie Mae and Freddie Mac to create a more “equitable” mortgage environment and making home financing easier on the buyer. Title insurance costs are just one more straw on the camel’s back for minority loan applicants and people making modest earnings.

The pilot actually got under way. Fannie Mae partnered with Doma, a fintech company, to create the test. The head of Doma was keen to save U.S. borrowers “hundreds or even thousands of dollars on every home purchase or refinancing,” reported the Wall Street Journal.  

The demand for real estate fintech (financial technology) is growing at a rapid pace. Read more in our article Fintech and Proptech and Deeds – Oh My! Trends Shaping the Future of Real Estate.

Under the pilot program, Fannie would have covered title insurance costs in a test pool of mortgage refinances. The pilot, once proven helpful, could have then expanded to bigger pools of borrowers, and to help people who are just starting off with their mortgages.

The title insurance industry didn’t want it. It carried out a writing and meeting blitz. Too risky! Fannie Mae isn’t a title insurance expert!

Some legislators got into the fray. At a May 2023 hearing, the Wall Street Journal article said, Rep. Andrew Garbarino of New York said deleting lender’s title insurance would by bad for home buyers. (Really? Rarely does a title insurance policy save anyone’s day, in these times of tech-powered title searches.)

Garbarino also suggested that the federal government was straying out of its lane by trying to protect titles.

Christopher Morton, chief advocacy officer and senior VP of public affairs for the American Land Title Association, put forth similar objections. Morton defended the price of lender’s insurance, saying it matches the costs of identifying and searching through county deeds and related records for title defects.

By August, Fannie Mae had quietly stopped working on its title insurance pilot plan.

Takeaway: A Quiet But Serious Blow to the Goal of U.S. Housing Affordability

Using executive orders and leveraging public pressure, the Biden White House has been pushing Fannie Mae and Freddie Mac to find pathways to more affordable homes and home financing.

Alas! Affordability projects from these government-sponsored entities look like threats to some.

Fannie could have carried this pilot to fruition. It shouldn’t have been hard, in our age of programmable software, to give buyers a fair break and allow the government to safely back their home titles. It shouldn’t be hard, in short, to make progress in the direction of housing fairness and affordability. But the blowback to Fannie’s title insurance pilot from the industry with a vested interest, as the Wall Street Journal itself said, “shows how difficult that could be.”

Supporting References

Andrew Ackerman for the Wall Street Journal (Dow Jones & Company, Inc.) via Washington Quietly Scrapped a Plan to Save Home Buyers Thousands of Dollars (22 Nov. 2023).

More on topics: Standard versus extended title insurance, White House encourages home buying

And as linked. Photo credits (both): Karolina Grabowska, via Pexels.