Attorney Opinion Letter vs. Title Insurance Policy: Do They Provide the Same Coverage?

By Marc Shaw

To make real estate purchases and refinancing more accessible to people on the lower end of the income spectrum, Fannie Mae has begun a pilot program in which, among other things, they will accept an Attorney Opinion Letter (AOL) with liability wrap instead of a title insurance policy in limited circumstances. This change is intended to reduce closing costs when buying or refinancing real estate. While many of the other updates to Fannie Mae’s selling guide enjoy broad support, this particular change has given those in the lending and real estate industries pause.

Donnell Williams, President of the Black Real Estate Professionals Alliance and former President of the National Association of Real Estate Brokers warns that allowing buyers to submit AOLs instead of title insurance policies could result in a repeat of the 2008 housing market bubble that brought the global economy to its knees.

“While there is a critical need to continue to work on affordable homeownership solutions, especially at a time of record inflation and housing price escalation, unproven shortcuts like accepting unregulated attorney opinion letters instead of a title policy could ultimately expose both consumers and lenders to greater financial challenges,” wrote Williams in a blog post.

Although choosing an AOL over a title insurance policy may save buyers money in the short term, it is important to recognize that an attorney opinion letter does not provide the same coverage as title insurance. Many of the most common title defects are not covered by an AOL at all, meaning homebuyers who come across them will have to pay out of pocket for any associated legal costs and may not be able to purchase the property they want.

What is an Attorney Opinion Letter?

In real estate, an AOL is a letter issued by a legal counsel containing their expert opinion about whether or not a title is clear. This letter can be submitted to a lender to help them decide if they want to lend to a borrower. In the past, lenders would require a buyer to purchase title insurance before lending them money, but with Fannie Mae’s relaxed rules, an AOL is now acceptable in certain circumstances.

The Risks of Using an AOL Instead of Title Insurance

While many purveyors of AOLs describe them as providing “similar” coverage to a title insurance policy, nothing could be further from the truth. Many of the situations that are explicitly covered by title insurance are either not covered by an AOL with liability wrap, or are not explicitly covered.

The American Land Title Association has developed a convenient coverage comparison chart to help you understand the differences between an AOL and a title insurance policy. Here are some of the many title defects and other situations that are covered by a title insurance policy, but not by an AOL with liability wrap:

1. Many types of undisclosed liens, including mechanics liens, child or spousal support liens, and real property tax liens
2. Encumbrances caused by forgeries or mistakes in the form of ownership
3. Fraud, forgery, duress, incapacity, and impersonation
4. Improper execution of documents
5. Defective judicial proceedings
6. Title defects uncovered outside of a public records search
7. Claims made during the policy period which were triggered by an event that occurred outside the policy period

In addition, the coverage provided by an AOL with liability wrap can be canceled by the insurance company at any time and must be renewed regularly. Title insurance coverage, on the other hand, lasts as long as you own the property in question, and requires only a one-time payment to go into effect. While an AOL may save you a small amount of money at the time of your closing, regular renewal fees and the potential to incur legal fees if a title defect is found mean that you will likely end up spending more money in the long run.

It should also be noted that our own Marc Shaw has had an article discussing Attorney Opinion Letters and how they differ from Title Insurance. 

New York Title Insurance Company 

If you have questions about the difference between an AOL and a title insurance policy, a representative from World Wide Land Transfer will be happy to assist you. We have been providing title insurance policies to homebuyers, sellers, and lenders all over the country since 2005, and we can give you all the information you need to make the best decisions about title insurance for yourself. Get in touch with us if you are looking for title companies in New York or anywhere in the U.S. by calling our Pennsylvania corporate office at (215) 245-5650.

World Wide Land Transfer is a service-oriented PA title company with offices in Philadelphia, New York, and Washington, D.C. With a record of going above and beyond, we are trusted to close everything from complex commercial transactions to residential refinance and purchase transactions.