Homebuyers could soon save about $1,000 on their closing costs thanks to a new plan from a government-backed mortgage lender.
Fannie Mae confirmed that buyers can now replace expensive title insurance with a cheaper alternative. The insurance is a one-time benefit that protects lenders and buyers against losses if an error is made with the title of a property.
In the future, they can use an Attorney Opinion Letter (AOL), which allows a real estate attorney to confirm that there are no issues with the title of a property. An AOL is, on average, $1,000 cheaper than title insurance, Fannie Mae said.
Such letters are already used in Midwestern states such as Ohio and Indiana, but until last year the government lender only accepted them for certain mortgages. In December, it confirmed that AOLs will now be allowed for the majority of the single-family loans it supports.
The move is part of an effort to make housing more affordable after mortgage rates soared last year while home prices remained high.
Homebuyers can soon save about $1,000 on their closing costs thanks to a new plan from government-backed mortgage lender Fannie Mae
The Biden administration has ordered Fannie Mae and fellow government-backed lender Freddie Mac to drive down housing costs, with a particular focus on closing costs.
Both organizations essentially buy loans from banks and mortgage companies and sell them to investors as mortgage-backed securities.
They underpin roughly half of the $14 trillion mortgage market, meaning any change in their policies has a huge knock-on effect on buyers.
When someone is in the process of purchasing a home, a title search company will check the ownership history of the property.
Ideally, the home will have “clear title,” meaning the seller has full ownership of the property and has never had any legal claims against it.
But title insurance effectively covers losses arising from undiscovered problems with the property’s ownership history.
There are two types of title insurance: one policy purchased for the homebuyer and one for the lender. While the former is optional, the latter is largely required by lenders as it protects their interest on the loan.
The cost of the lender’s policy is still paid by the buyer. Prices vary by state, but Fannie Mae said a home buyer can expect to receive up to 1 percent of the purchase price in some cases.
However, the organization claims that AOLs can significantly reduce costs while still posing low risk.
The Biden administration has ordered Fannie Mae and fellow government-backed lender Freddie Mac to drive down housing costs, with a particular focus on closing costs
It comes after housing costs rose exponentially last year as mortgage rates rose towards 8 percent, while property prices also continued to grow. According to Freddie Mac, in the week before January 11, the average interest rate on a 30-year loan hovered at 6.66 percent.
In a note, a spokesperson wrote: “Fannie Mae has also purchased more than 10,000 loans from AOLs since 2009 and has not suffered any losses due to ownership claims on these loans.
“In recent years, improvements in the searchability of title records have made title-related claims relatively rare, and losses resulting from these problems even rarer.”
Experts welcomed the change, but warned it was not enough to tackle the entire housing affordability crisis.
Professor Benjamin Keys of the University of Pennsylvania, who has studied the title insurance industry, told the Wall Street Journall: ‘Any injection of competition into this area is a big step forward, but it doesn’t necessarily mean that every homebuyer or refinancer is going to understand their options or shop around to get the best deal.’
It comes after housing costs rose exponentially last year as mortgage rates rose towards 8 percent, while property prices also continued to grow.
Mortgages – which were boosted by the Federal Reserve’s aggressive campaign to raise rates – have since eased slightly. According to Freddie Mac, the average interest rate on a 30-year loan hovered around 6.66 percent in the week before January 11.
However, it means buyers will still have to pay about $800 more per month on their mortgage than if they had purchased two years ago.
At the current rate, someone buying a $400,000 home with a 5 percent down payment would have to pay $2,442 per month on a 30-year fixed mortgage.
But if they had bought in January 2022 – when interest rates were hovering around 3.45 percent – they would have paid just $1,696.
