For many aspiring and current homeowners, closing costs represent a substantial affordability barrier to purchasing or refinancing a home. The Federal Housing Finance Agency (FHFA) continues to focus on ways Fannie Mae and Freddie Mac (the Enterprises) can responsibly reduce closing costs for homeowners in a safe and sound manner. Homeowners who want to refinance their mortgages are often surprised to learn that the out-of-pocket costs can make that difficult. One of those costs is a new lender’s title insurance policy that covers the lender, but not the homeowner.
Lenders are permitted to sell mortgage loans to the Enterprises only if the lender warrants that the mortgage is a valid first lien that is free of any prior lien or encumbrance. While lenders are responsible for making sure title meets these requirements, lenders also are required to provide independent verification through either a legal opinion or a lender’s title insurance policy. Lenders purchase title insurance to protect the mortgage, but the costs are borne by the homeowner. Homeowners are not covered under lender’s title insurance. Instead, homeowners may choose to purchase their own, separate title insurance policy if they want title protection, also at their own cost.
The recently approved title acceptance pilot will waive the requirement for lender’s title insurance or a legal opinion on certain low-risk refinance transactions where there is confidence that the property is free and clear of any prior lien or encumbrance. The title acceptance pilot will make it possible to test whether allowing lenders to sell these refinance loans is a responsible approach to reducing the closing costs incurred by existing homeowners. Lenders will also retain the option to provide evidence of clear title through other options, such as title insurance or an attorney opinion letter (AOL). And homeowners are always able to purchase their own title insurance policy or AOL, if they so choose.
The pilot only impacts the requirement for a lender’s title policy or AOL and 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. 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.
Title Acceptance Pilot FAQs
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The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac, and the 11 Federal Home Loan Banks. These government-sponsored enterprises provide more than $8.4 trillion in funding for the U.S. mortgage markets and financial institutions. Additional information is available at www.FHFA.gov, on Twitter @FHFA, YouTube, Facebook, and LinkedIn.
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