Why is the President talking about title insurance?

What you’ll learn (TL;DR)

• Title insurance protects against defects in title, or the ownership of property. A loan policy of title insurance protects a lender’s interest in the property used as collateral for the loan it gives the homeowner.

• In the 2024 State of the Union, the President announced a pilot program that would waive title insurance requirements for loan policies on certain refinances.

• The pilot program will not improve housing affordability because it applies only to refinances and not loans needed to purchase property.

• Without title insurance, the government takes on the risk of a title insurer, and any losses and expenses from title claims must ultimately be paid by the taxpayers.

• While title insurance is an upfront cost, it is a very small percentage of a borrower’s total life-of-loan costs, and other expenses, like lender fees and mortgage interest, are much greater.

Title Insurance Waiver Program

In the 2024 State of the Union, the President announced a pilot program that would waive title insurance requirements for loan policies on certain refinances. A refinance is when a current debt is replaced by a new loan with different terms. Property owners often refinance their mortgage loan for a lower interest rate, which reduces their monthly payments. Government-sponsored enterprises like Fannie Mae and Freddie Mac buy mortgages from lenders so that lenders will have money available to make mortgages to other borrowers. This ensures that mortgage financing is available to those who need it. Historically, the government has always required title insurance on the loans that it purchases.

What is title insurance?

Title insurance protects against defects in title, or the ownership of property. For example, there may be a dispute over who owns the property, or a deed may be void because of fraud, or there may be document errors or liens A lien is an interest in property for a debt that is owed. If the debt is not repaid, the creditor can force the sale of the property and apply the money from the sale to the debt. Mortgages, unpaid real estate taxes, and court judgments are examples of liens. against the property. A loan policy of title insurance protects a lender’s interest in the property used as collateral for the loan it gives the homeowner. If the loan is not repaid, the lender can foreclose, which means it can sell the property and repay itself with the proceeds from the sale. This gives the lender confidence to make the loan.

A loan policy only protects the lender. A separate owner’s policy of title insurance protects the owner. If the owner refinances, their owner’s policy still covers them, but a new loan policy is needed because the title company must re-examine title for any new issues that may impact the lender’s ability to foreclose. The policy not only insures that the new mortgage lien is valid, it also covers title problems that may have occurred between the old mortgage and the refinance. For example, there may be new liens against the property, like unpaid taxes or a child support judgment against the borrower.

Eliminating Title Insurance Will Not Improve Affordability

As a misguided attempt to improve housing affordability, the pilot program would waive title insurance on certain refinance loans purchased by government-sponsored enterprises. As a result, borrowers would save money by not having to pay for a loan policy for the new mortgage lien, which may be less at risk for title problems than a mortgage given when property is first purchased. However, this plan will not improve housing affordability. This same proposal was considered and abandoned last year, and Fannie Mae decided not to proceed with the program. [1]

First, the pilot program applies only to refinances and not loans needed to purchase property. Borrowers who are refinancing are already homeowners so lowering their costs does not help those who want to buy a home. Second, there’s a reason title insurance has always been required for loans, whether a refinance or a loan to purchase property. If there’s a problem with the ownership or mortgage lien, title insurance pays the expense to fix the issue (including litigation costs) or pays the loss to the lender. Without title insurance, the government takes on the risk of a title insurer, and any losses and expenses from title claims must ultimately be paid by the taxpayers.

Finally, targeting title insurance will not have a significant impact on affordability because other home expenses are much greater. According to a study by Fannie Mae, the title insurance premium is less than 0.5% of a borrower’s total life-of-loan costs. “Life-of-loan costs” is the total amount a borrower pays before the loan is repaid, usually when the property is sold. [2] [3] This is based on an average purchase price of $318,000 and a typical ownership period of 7 years. Compare that with other costs:

This amount is the average cost of title insurance for a purchase transaction, which usually includes both an owner’s policy and a loan policy. The cost of a loan policy for a refinance is typically much lower. A title insurance cost calculator is available here. Instead of addressing more burdensome costs, the government instead chose to focus on title insurance, which represents only a tiny portion of expenses, but can prevent major losses.

An Example of Title Insurance at Work

The loss from a title claim can be significant. In a recent example, a lender loaned $350,000 to “borrowers” who claimed they were going to use the loan to flip properties. [4] After closing, the lender discovered that the owners of the property were impersonated by fraudsters who took out the loan and stole the money. Luckily, the lender in this situation had title insurance to cover the $350,000 loss. It’s no surprise that Edward DeMarco, former director of the Federal Housing Finance Agency, which oversees Fannie Mae, stated “it is disturbing to think that Fannie Mae or Freddie Mac might displace title insurance by taking on the insurance itself.” [5] [6]

The Value of Title Insurance

Title insurance serves as a fundamental safeguard of property rights. The small short-term cost savings from eliminating title insurance do not justify the long-term risk. Without the protection of title insurance, owners and lenders could face future claims and legal battles with financial losses far greater than any initial savings.