Turning Fannie Mae into a title insurer won't solve housing challenges

Andrey Popov/Andrey Popov - stock.adobe.com

Title insurance, which protects homeowners' property rights to their homes, has become an unlikely scapegoat in the Biden administration's efforts to lower housing costs for American families.

Addressing housing affordability is important. Housing costs are certainly high, mostly due to lack of supply, inflation and interest rates. Regrettably, the administration is pursuing a plan that will place consumers, lenders and taxpayers at greater financial risk — instead of focusing on removing these true barriers to homeownership.

Purchasing a home is the biggest financial investment of many Americans' lives, a culmination of a dream and an opportunity to put down roots and build wealth for generations to come. Title insurance protects that investment — from the upfront work that title professionals do to ensure clear property ownership to the protection they provide on any future claims to challenge that ownership.

Title insurance has a significantly lower claims rate than other lines of insurance. That's a good thing. It's an important facet of the title insurance industry that the Biden administration fails to understand. The success of title companies protecting lenders and homeowners is not measured only in claims paid, but preventing claims in the first place. In other words, fewer claims mean title professionals have done their job at the onset of a home purchase to resolve title issues, reduce risk and provide coverage. 

Simply put, purchasing a home with a faulty title can wipe out both the homebuyer's and the lender's interest in the property. A 70% claims rate — standard for other insurance lines — on property rights would be catastrophic to our economy. There's nothing that can be done to prevent storm damage to a home. A check can help pay for repairs. A claim against a property could mean someone loses their home. 

During the State of the Union last month, President Biden announced that his administration was launching a new title insurance waiver pilot program. The program will waive the lender's title insurance policy requirement for certain refinance loans purchased by Fannie Mae. This would be the same Fannie Mae, which remains in conservatorship due to inflating the housing bubble in 2007 and which contributed heavily to the 2008 economic crisis before being bailed out by taxpayers.

Under the pilot program, the responsibility of insuring property rights would be transferred to Fannie Mae, moving it beyond its current chartered mandate to provide liquidity in the secondary market and into the primary insurance market, a state-regulated business. Despite an inability to operate within its own wheelhouse, the federal government is prepared to turn Fannie Mae into a title insurer that would be responsible for resolving any title-related claims that arise. Let that sink in for a minute. 

It's hard to fathom the reasoning behind handing over such a responsibility to an entity which has zero experience with title insurance. Importantly, the program would harm thousands of small businesses that have decades of experience and already comply with rigorous regulations to protect consumers and their homeownership. 

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The title industry, which is 90% small businesses, employs 155,000 individuals across the country and directly contributes $30 billion annually to our gross domestic product. Under this pilot program, many of these jobs could be eliminated by Fannie Mae. 

It should also be noted that the elimination of a lender's policy could increase the financial risk for borrowers who face an uninsured title defect. In addition, consumer title policies benefit from the work done to supply a lender's policy, so the incremental cost is small. Waiving the lender's title policy shifts more of that cost onto the consumer policy.

This pilot program is not new. After reporting about the program broke last year, Democrats and Republicans in Congress raised concerns in a rare display of bipartisanship that caused the program to be abandoned. Rep. Wiley Nickel, D-N.C., said during a House Financial Services Committee hearing last May, "This proposed pilot from Fannie Mae to become a de facto title insurance company really concerns me. … Consumers could lose critical protections for their homes." 

While the Biden administration is sticking to its messaging that this pilot program would improve housing affordability, it is worth noting that it only applies to higher-wealth homeowners who apply to refinance — those least in need. This program will do nothing to make housing more available nor affordable for most Americans, especially first-time homebuyers.

In addressing concerns over homeownership costs, why attack the one product that has experienced a 7.8% decrease in the cost since 2004 while practically all other costs associated with homeownership have risen? 

Waiving title insurance makes a great talking point on the campaign trail, but it will do nothing more than inject more uncertainty into the American Dream of homeownership at the expense of U.S. taxpayers. Instead, the Biden administration would be wise to focus squarely on the true barriers to homeownership, such as reducing regulatory burdens to development and increasing the supply of homes available.