In April 2022, Fannie Mae and Freddie Mac began using attorney opinion letters (AOLs) nationwide in an attempt to reduce closing costs. While these unregulated products may appear cheaper than title insurance for buyers or those refinancing property, their coverage details are limited.
Attorney’s Title Opinion
A title opinion, usually done by an attorney, reveals only those defects visible in public records after a thorough title search. It reflects the attorney’s judgment on property rights. If the attorney errs, the owner can file a negligence claim. This method, often cheaper than title insurance, provides insight into the property’s legal status. However, it does not guarantee the status of the title, and there is always a possibility the owner will lose the title based on a title defect.
Owner’s Title Insurance
Owner’s title insurance offers more protection against title defects compared to a title opinion. It covers payment and damages from loss of property due to title defects. Title insurance reveals defects from public records and insures against undiscoverable risks. Due to this extra protection, it is generally more expensive than an attorney’s title opinion.
Common Defects Covered by Title Insurance
- Forgery
- Fraud in the execution of documents
- False impersonation by someone purporting to be the owner of the property
- Errors in surveys
- Undisclosed or missing heirs
- Wills not properly probated
- Transfer of title by a minor
- Incorrect legal descriptions
- Non-delivery of deeds
- Clerical errors in recording legal documents
- Property rights resulting from a marriage or divorce not disclosed by public record
- Abstracting errors
- Delivery of deeds after the death of the grantor
Title insurance is retrospective in nature as it protects against defects that occurred in the past but are discovered in the future. The premium is paid only once, but coverage extends for as long as the insured has an insurable possessory interest in the property or is liable to a subsequent owner for failure to convey marketable title.
There is also a more comprehensive ALTA Homeowner’s title insurance policy that offers extensive protection to homeowners on future issues that may occur after purchasing the property, including post-closing fraud and forgery, inflation protection, and survey coverages among others.
Considerations for Real Estate Owners
Owners of real estate should consider the pros and cons of a title opinion vs. owner’s title insurance. Owner’s title insurance generally provides greater title protection against certain title defects than a title opinion.
Key Arguments Against Attorney Opinion Letters (AOLs)
- Reliability: AOLs rely on the individual attorney or firm, which may not provide the same level of reliability as national title insurance companies.
- Liability: Attorneys may not be held liable for mistakes in their opinion letters, leaving consumers with little recourse if issues arise.
- Lender Acceptance: Many lenders prefer title insurance over AOLs, and some may not accept AOLs at all.
- Protection Level: AOLs do not offer the same level of protection as title insurance, which can cover a wider range of potential issues, including inaccuracies or omissions in the public record, forgery or fraudulent execution of documents, taxes and special assessments not shown of record, survey matters, right of persons in possession, validity of mobile home titles, claims or interests of heirs, and more.
- Fraud and Forgery: AOLs do not protect homebuyers in the event there is a defect in the chain of title that title insurance would not cover, including fraud and forgery.
- Limited Use: AOLs are not accepted in certain types of transactions, such as loans secured by condos, co-ops, or manufactured homes.
In summary, while AOLs may seem cheaper than title insurance, their coverage is limited. Neither an owner’s title insurance policy nor an attorney’s title opinion guarantees title status; defects can still cause loss of title. Owners should carefully weigh the benefits and risks of each option to make an informed decision.