What You Don't Know About Title Pt. 3

Imagine for a moment that you just purchased a beautiful log cabin in your favorite vacation spot, overlooking the water with a babbling brook as a soundtrack and remarkably strong internet connection. Now imagine that your homeowner’s insurance company thinks that your log cabin, being made out of wood, is a massive fire hazard. Because casualty insurance is risk mitigation, they will charge you an enormous premium for your homeowner’s insurance because of the risk of fire that they assess to your new property. If casualty insurance was in the risk elimination business, like title insurance, they would do things a little differently. Before you purchased your dream log cabin in the woods, they would evaluate the history of fire hazards in log cabins in your woods. They would evaluate this history of all potential issues that particular log cabin has ever experienced. They would make sure that any past hazardous issues were resolved properly by all the prior owners. Then they would make sure the seller of your log cabin completely fire proofed the log cabin before they sold it to you. They would eliminate the risk, driving down the cost of your insurance premium, and giving you massive peace of mind. Because they would have eliminated the risk, the chances of a claim would plummet. It wouldn’t drop to 0% chance, because there are always chances for things outside of the insurer’s and homeowner’s control, such as forest fires. But you’d be purchasing your property knowing that your new financial investment is protected from the possibility of a fire because your insurance company made sure of it and are experts in fire hazard mitigation and prevention. ¹

That’s not the way homeowners insurance or casualty insurance works; that’s the way title insurance works. While other lines of insurance are unable to predict or prevent events such as floods and fires that can impact a home, title professionals can identify and prevent many of the issues that might interfere with someone’s ownership rights or a lender’s mortgage priority. According to a study conducted by ndp | analytics, expert title professionals spend approximately 22 hours to close a standard transaction and 45 hours for more difficult transactions. While all standard transactions require important title clearance efforts prior to closing, difficult transactions require even more substantial work to correct more complex title issues prior to closing. In 2023, title insurance companies estimated 36% of transactions were in this more difficult category.²

Title insurance is a unique kind of insurance that does the work before you purchase the property to protect you against any identifiable issues using public records, state and federal laws, knowledge surrounding taxes, utilities, foreclosure proceedings, liens, mortgages, types of deeds, corporate authority, probate law, trust agreements, and title insurance underwriter standards. We’re not an industry where you can just type in your property address and risk can be immediately assigned to your property, as much as some companies may purport to be able to do just that.

Upon the heels of the March 7 announcement by Biden’s administration that The Federal Housing Finance Agency has approved policies and pilots to reduce closing costs for homeowners, including a pilot to waive the requirement for lender’s title insurance on certain refinances³, Doma’s CEO Max Simkoff claimed his company was one of the only title firms that had the proven technology and underwriting capabilities to participate in the Federal Housing Finance Agency pilot. “Because our technology operates using a completely automated front end, we can not only provide it as a licensed offering to the GSEs for the majority of refinances that they purchase from lenders… but also provide a seamless and instant integration with any lender who might choose to participate in this program,” Simkoff said on the company’s earnings call.⁴

And yet, if Doma does have this revolutionary technology, the company’s 2023 losses of $124M⁵ and recent buyout announcement⁶ indicate things aren’t quite as successful as they seem.⁷ Interestingly, following the Biden administration’s announcement of the FHFA title insurance waiver program, House Financial Services Committee member William Timmons (R-S.C.) is calling on Securities and Exchange Commission Chair Gary Gensler to conduct an “exacting investigation” into what Timmons called “irregular trading activity” in shares of Doma Holdings Inc. the day before the White House’s announcement. ⁸

But what do I know, right? I’m just a small business owner operating two title agencies in Michigan. I’m not in politics, not familiar with stock markets, companies going from private to public and back to private. So let me shed some light on what’s happening in my own backyard in Michigan.

Many people in the real estate industry aren’t aware that Michigan boasts the two largest lenders in the country – Rocket Mortgage and United Wholesale Mortgage. Rocket Mortgage, like most large lenders in the country, has an affiliated title insurance agency. UWM does not, to my knowledge, own a title insurance agency. Instead, UWM announced its TRAC program in October of 2022, where CEO Matt Ishbia said brokers leveraging attorney opinion letters (AOLs) through TRAC could save borrowers up to $1,100 on purchase loans and about $800 on refis.⁹ A few weeks ago, the TRAC+ program was announced, “With TRAC pricing incentives applied based on loan amount, a flat TRAC+ fee of $1,850 with no additional settlement agent fees, brokers will be able to save borrowers thousands of dollars and provide a simplified process that is streamlined through UWM.”¹⁰

How is the FHFA title insurance waiver pilot program related to UWM’s AOLs and TRAC program? Bear with me here. The US government has government sponsored enterprises (GSEs) like Federal National Mortgage Association (Fannie Mae) (est. 1938) and Federal Home Loan Mortgage Corporation (Freddie Mac) (est. 1970). These GSEs are privately owned, but publicly chartered. Fannie Mae is a leading source of mortgage financing in the United States. It doesn’t originate mortgage loans or lend money directly to borrowers. Instead, it purchases mortgage loans made by lenders, who are then able to use those funds to offer mortgage loans to more people.¹¹ The GSEs created a secondary lending market, and these programs have attempted to move beyond their charters, notably being placed in conservatorship in September of 2008, which they still remain in to this day. GSEs purchase loans from lenders, like UWM. If the GSEs require every loan that they purchase to have a title insurance policy, then any lenders that want to sell their loans to GSEs would make sure that there’s title insurance on that loan. If GSEs stop requiring title insurance and instead require something less than, like an AOLs, then lenders will also stop requiring title insurance.

There are a lot of problems with this. First, let’s start with the premise that the title insurance industry exists for a reason. It wasn’t just a scam industry with junk fees dreamed up by some billionaire to add yet another cost to purchasing or refinancing a home. The total economic contribution of U.S. title and settlement companies in 2022 was an estimated 560,000
workers earning $43 billion in wages and benefits and generating $82 billion of GDP in the United States.¹²

If title insurance is a valuable protection for consumers and lenders, but the government says certain loans don’t require it, does the risk evaporate? No. Instead, lenders will pay Fannie Mae a fee to cover the risk if there is an unexpected title defect. The program essentially turns the government sponsored entities (GSEs) into primary market insurers and expands authority beyond their mission and charter.¹³ Now this is where lenders like UWM can utilize a lesser product like an AOL to charge the borrower for that fee the lender owes the GSE for any unexpected title defects.

That’s the second problem I want to get into: cost savings. If we look at the big WHY for all of this – why is the Biden administration, the FHFA, the GSEs all on board for waiving title insurance on certain loans – its under the guise of housing affordability. The White House says it will save up to $1500, and an average of $750¹⁴. In October 2022, UWM said using AOLs on loans instead of title insurance would save up to $1,100 on purchase loans and about $800 on refis.⁹ This year, UWM’s TRAC+ program will now save borrowers thousands of dollars.¹⁰ And yet, the pilot only covers refinancings – which would exclusively benefit existing high-income homeowners and would not affect first-time homebuyers at all.¹⁷ At a hearing held on March 20 by the House Financial Services Subcommittee on Housing and Insurance, Michael Fratantoni, chief economist for the Mortgage Bankers Association, stated the pilot to eliminate title insurance on refinances would NOT help first-time homebuyers purchase their first home.¹⁸

Let’s run the numbers. Here’s a list of 9 refinances, in Michigan, that closed with UWM’s TRAC+ program which waives title insurance, uses AOLs, and charges a flat TRAC+ fee of $1,850 .¹⁰ The number on the right indicates the cost of title insurance for that loan amount, and keep in mind, the title agency would also charge a closing fee, which for this particular agency would have been around $300.

Loan Amount $475,000.00 – Refinance, closed 04/02/2024 – $1387.00
Loan Amount $291,857.00 – Refinance, closed 04/06/2024 – $1056.00
Loan Amount $455,387.00 – Refinance, closed 04/06/2024 – $1354.00
Loan Amount $458,500.00 – Refinance, closed 04/15/2024 – $1360.00
Loan Amount $385,609.00 – Refinance, closed 04/12/2024 – $1228.00
Loan Amount $483,000.00 – Refinance, closed 04/22/2024 – $1403.00
Loan Amount $422,000.00 – Refinance, closed 04/09/2024 – $1293.00
Loan Amount $750,000.00 – Refinance, closed 04/11/2024 – $1883.00
Loan Amount $90,000.00 – Refinance, closed 05/20/2024 – $564.50

The cost seems comparable for some of these loans, right? Like the loans for nearly half a million. But pay close attention to the last one, a refinance for $90,000. The UWM TRAC+ fee is more than three times the cost of title insurance. If the title waiver program is touted as a housing affordability initiative but loans would need to be close to $500k to cost less than a lender’s AOL, it’s clearly missing the mark.

But the biggest thing that isn’t encapsulated in this list is that title insurance is an actual policy and AOLs are not. Remember that a title agency not only researches your property, but provides those hours of curative work to eliminate any and all risks before you purchase or refinance. But even after closing, that policy protects you from unforeseen title issues. Each title insurance policy contains a duty to defend. Should anyone challenge your ownership of the property, or your lender’s priority, the title insurance underwriter hires attorneys to defend you in court. If the same title defect pops up and your lender utilized an AOL under the title waiver program, you’re hiring your own attorney. And also, your recourse is substantially different. You would have to sue the firm that issued the AOL, and then that firm would have to file a claim with its professional liability insurance provider. It’s a bit ironic that your recourse, while waiving title insurance, would still be protected by, you guessed it, insurance.

There is SO MUCH to unpack with this. As an attorney with professional liability insurance, and as an owner of two title insurance agencies, with Errors & Omissions insurance, I can confidently tell you that E&O and professional liability insurance providers do NOT want to insure this industry and it costs us a LOT of money to maintain coverage on our companies. They will not allow attorneys to issue AOLs under their coverage because it’s risky. They charge title agencies so much in premiums because it’s risky. Why? For all the reasons you should REQUIRE title insurance on your property purchase or refinance: seller impersonation fraud, deed fraud, wire fraud, mortgage fraud, etc.

UWM isn’t limiting its use of AOLs to refinances, however. It’s also using AOLs for purchases, which is not a part of the title waiver pilot program. These transactions are still being insured for the buyer, but not the lender. You might wonder – if the lender is the one insured by title insurance, and they don’t want it anymore, what’s the big deal? I asked this recently to a lender – what happens when you sell your mortgage to a GSE and a title issue arises? Does the GSE take over as the insured on the policy and deal with the claim? The answer was no. The GSE will determine if its the original lender’s obligation to deal with the title defect, effectively passing the risk back to the lender. There are many scenarios in which a lender would be at risk by allowing a borrower to purchase an AOL instead of a title policy. By accepting an AOL in lieu of a title policy, lenders are effectively self-insuring. Under state insurance laws, only licensed title insurers are permitted to underwrite specific coverages afforded by title insurance. AOLs simply do not cover certain title risks. In contrast, title insurance policies insure against hidden risks that are not discoverable during public record searches.²⁰ Which means the title waiver program not only doesn’t save the consumer any money, it is also bad for the lenders.

Lastly, the title waiver program hurts my industry, title insurance. “With TRAC+, UWM can now handle everything throughout title review, closing and disbursement. As a result, a broker will no longer need to work with a title company or settlement agent for title work, balancing fees, scheduling closing or any related communication when they use TRAC+.”²¹ How has UWM replaced the crucial services that a title agency provides outside of its actual title insurance policy? It hasn’t. Instead, it’s incentivizing its brokers to get their title agencies to sign up for the TRAC program²², while sending refinances to local title agencies under the TRAC+ program. The title agency does primarily all the same work as it would normally do – but for 60-70% less cost. Why would any title agency participate in this? Because the real estate market has contracted dramatically and title agencies are resistant to turning away any business, even business that erodes the very foundation of our industry.

Five years ago, if you had asked me if I’m passionate about title insurance, I would have shrugged and said not really, I’m passionate about helping people. That has completely changed over the last few years. This industry is comprised of 90% small businesses, like myself. I put my money where my mouth is.²³ If you want to help support title insurance, please join the Title Action Network today.

What You Don’t Know About Title Pt. 3

Doing Business with You v. Your Company

The Dark Side of Conferences

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But is it Your Best?

Seller Impersonation Fraud – Change Your Mindset, Now.

Doing Business with You v. Your Company

Being OF Service v. Being IN Service

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