The Biden administration pushed to save homeowners thousands of dollars in closing costs on certain mortgages, part of a broad effort to slash fees and save Americans money. Objections from an obscure industry and from lawmakers helped kill the plan.
Government-controlled mortgage giant Fannie Mae was preparing this summer to finalize a program to test out eliminating one of the biggest fixed costs associated with closing on a mortgage: title insurance.
The Biden administration has directed Fannie and its sister agency Freddie Mac to find ways to make housing more affordable, current and former administration officials say. Blowback to Fannie’s title insurance pilot shows how difficult that could be.
A title declares who has legal ownership of a property, and title insurance offers protection in case someone later says they had a claim against it. Critics say that title insurance is overpriced and rarely used.
Most everyone who has a mortgage has come into contact with title insurance. Fannie and Freddie generally require it on the loans they purchase from lenders. The policy, known as “lenders’ title insurance,” typically costs the borrower around 0.5% of their loan amount, so it could cost about $1,500 for a $300,000 mortgage.
Under the planned pilot program, Fannie would have covered those costs itself for a relatively small number of mortgage refinancings offered by seven or eight lenders. The pilot could have expanded over time to cover more lenders and other types of mortgages, according to people familiar with its development.
Critics in the title and settlement industry, which employs about 155,000 people according to industry estimates, objected. Hundreds of members of an industry trade group met with and wrote to lawmakers and to the Federal Housing Finance Agency, which oversees Fannie.
Their objection: Fannie had no experience with title insurance, and after taxpayers rescued it in the 2007-08 financial crisis, it didn’t need this new risk on its books.
Lawmakers from both parties criticized the project at a House hearing in May. Rep. Andrew Garbarino (R., N.Y.), a former real estate attorney, said the pilot would “end up hurting consumers.” FHFA Director Sandra Thompson, seemingly caught off-guard, said she wasn’t familiar with the project.
Fannie abandoned work on the program in August after FHFA officials instructed the mortgage-finance giant not to submit a formal request for approval, according to people familiar with the matter.
An FHFA spokeswoman said the agency doesn’t comment on potential pilot projects. Closing costs such as title insurance can be regressive, she said, affecting low-income and minority borrowers more than other borrowers. FHFA will continue to work with Fannie and Freddie on ways to reduce closing costs, she added.
A Fannie spokesman declined to address the scuttled pilot program but said the company is looking for ways to reduce closing costs.
Rising interest rates and home prices have put mortgages out of reach for many would-be homeowners. Another major cost for home buyers, commissions for real-estate agents, has come under pressure following a jury verdict against the National Association of Realtors and major brokerages last month, analysts say. The jury said they had conspired to keep commissions for home sales artificially high and found them liable for $1.8 billion in damages.
NAR has said it would appeal the verdict, and some brokerage executives have said they don’t expect big changes to the commission structure.
Title insurance is essentially a guarantee of clear ownership—i.e., that a property title has no debts or other liens.
Title insurers typically pay very little in claims costs, unlike other types of insurers, because agents and insurers can often catch any problems in advance.
But Fannie and Freddie generally require the insurance to guarantee no past taxes, liens or judgments on a property would interfere with the lenders’ ability to reclaim the home after a default. Without the insurance, lenders would be on the hook for any losses suffered by Fannie or Freddie.
Fannie’s project would have covered only lenders’ title insurance, not another policy called “owners’ title insurance.” Pricing for both title insurance products varies widely. On the purchase of a new home, both products together typically range in price from $600 to $3,500, according to Fannie.
Critics say title insurance is overpriced. Iowa doesn’t allow private companies to sell title insurance and instead operates a public title guarantee program.
Supporters of the pilot say the process of verifying that a property title is “clean” could be done efficiently by Fannie with the click of a mouse, thanks to innovations in title search capabilities and the digitization of property records. Any remaining risk of a title issue could be safely insured by Fannie itself, they said, noting such risk is especially low on a refinancing compared with a new purchase.
“The amount they’re charging for the insurance premium is well and above the value that the buyer is getting,” said Ted Tozer, a former federal housing-finance regulator who is now a nonresident fellow at the Urban Institute. He said the bulk of the premium—as much as 80%—goes to a title agent as commission, citing industry reports.
The American Land Title Association, a national trade association that opposed the pilot, said insurance pricing isn’t out of sync with the costs of collecting and reviewing local land records to verify a clean title.
By wading into the insurance market, ALTA said, Fannie was seeking to stray beyond its typical role of buying home loans from lenders and packaging them into securities to sell to investors.
“From our perspective, it was really having them go beyond their charter and imposing greater risk to taxpayers, increasing costs, and ultimately harming consumers,” said Christopher Morton, ALTA’s chief advocacy officer and senior vice president of public affairs.
Garbarino, the New York lawmaker, said in an interview that he questioned whether Fannie had the expertise to underwrite the insurance and said he didn’t believe it was part of their business model. “They’re taking on an unauthorized risk without the expertise,” he said.
People familiar with the pilot’s development said it stemmed from an FHFA directive for Fannie and Freddie to develop “equitable housing finance plans,” which identified closing costs as a barrier to homeownership.
Fannie originally sought to work with a title company and approached some last year, but couldn’t get them interested, the people said. Instead, Fannie worked with a financial technology company called Doma to develop the pilot, they said.
“Modernizing title insurance would save American borrowers hundreds or even thousands of dollars on every home purchase or refinancing,” Max Simkoff, Doma’s chief executive, said in a statement. “That’s billions of dollars across the real-estate ecosystem.”