Cutting Closing Costs: FHFA’s Title Acceptance Pilot Explained

On March 7, the Administration announced new initiatives to lower closing costs associated with buying a home or refinancing a mortgage. One of these initiatives is the approval by FHFA of a Title Acceptance Pilot, which will waive the requirement for lender’s title insurance or an attorney opinion letter on certain low-risk refinance transactions.

Read The White House Fact Sheet
Read Director Sandra Thompson’s Statement on Title Acceptance Pilot

What You Should Know About FHFA’s Title Acceptance Pilot

What does the Title Acceptance Pilot mean for Attorney Opinion Letters?

FHFA’s Title Acceptance Pilot program is a huge step toward industry-wide acceptance and adoption of alternatives to traditional title insurance, like Alita’s insured attorney opinion letter (AOLPro).

In her statement, FHFA Director Thompson makes multiple references to the use of an attorney opinion letter as an alternative to title insurance. This is the first time that FHFA has spoken publicly about AOLs, and this is an overt statement that it considers AOLs to be on par with title insurance.

While FHFA’s pilot program will allow certain low-risk refinance transactions to close without any title coverage, this leaves a substantial number of refinance and purchase transactions that will require title coverage. As the only fully insured alternative accepted by Fannie Mae, Freddie Mac, VA and FHA, Alita’s AOLPro can provide this coverage at a cost that is substantially less than title insurance.

How does the Title Acceptance Pilot impact lenders?

Lenders can benefit directly from the Title Acceptance Pilot when they originate refinance loans that meet FHFA’s eligibility requirements. Although FHFA has not defined these requirements, it has indicated that eligibility will be extended to certain low-risk refinance transactions where there is confidence that the property is free and clear or any prior lien or encumbrance.

When a lender meets these qualifications, the lender will not be required to obtain title insurance or an AOL to sell the loan to Fannie Mae or Freddie Mac. As a result, the lender can offer the benefit of a refinance loan with substantially lower closing costs to its customers.

In addition, lenders can benefit from the larger impact of FHFA’s announcement, which is broader acceptance and normalization of title insurance alternatives, by offering a more cost-effective alternative to title insurance on loans that do not qualify for the waiver.

By offering a fully insured AOL to its borrowers, a lender can gain a competitive advantage by offering substantially lower closing costs to its customers on all purchase and refinance transactions.

How does the Title Acceptance Pilot impact homeowners?

Homeowners refinancing their mortgage loans may benefit from the Title Acceptance Pilot if their loan meets FHFA’s eligibility requirements. In a refinance transaction, the homeowner is typically responsible for the cost of lender’s title insurance, which can add thousands of dollars to closing costs. If the loan qualifies for a waiver through the Title Acceptance Pilot, the homeowner will benefit from substantially lower closing costs, saving an average of $750.

In addition, if their lender chooses to offer the insured AOL as an alternative to title insurance, homeowners and homebuyers can save thousands of dollars on closing costs in purchase and refinance transactions, even those refinances that don’t qualify for the Title Acceptance Pilot. For more information on whether title insurance is required and how it can impact your closing costs, visit our detailed guide.

How many refinance transactions will be eligible for the Title Acceptance Pilot?

FHFA has not yet defined eligibility requirements for the Title Acceptance Pilot, but it has indicated that eligibility will be extended to certain low-risk refinance transactions where there is confidence that the property is free and clear or any prior lien or encumbrance. Once eligibility requirements are released from FHFA, we will have a better understanding of the overall percentage of transactions that will be impacted by the pilot.

Does the Title Acceptance Pilot create additional risk for lenders or consumers?

No, the Title Acceptance Pilot does not create additional risk for lenders or consumers.

Lenders are permitted to sell mortgage loans to Fannie and Freddie 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 have also traditionally been required to provide independent verification through an AOL or a lender’s title insurance policy. The pilot is not a mandate to lenders that they forego title protection – it is the removal of a mandate that provides lenders greater flexibility to determine how best to manage their risk profile.

The pilot does not create risk for consumers because it is limited to refinance transactions, where the homeowner already owns title to the property and does not typically obtain additional owners’ coverage. Because the waiver only removes the requirement for lender’s coverage, which does not protect the homeowner, homeowners will not be impacted negatively by the Title Acceptance Pilot.