The Risks of Alternative Title Products
Title Insurance vs Alternative Title Products. What is the right choice for lenders?
If you’re a lender, you’re familiar with alternative title products. They come in the form of attorney opinion letters, lien protection, mortgage lien reports, etc. You may be asking yourself if they are actually useful in specific circumstances? Or simply—what is the right choice? For starters, choosing alternative title products instead of title insurance poses some significant risks to lenders.
The Shifting of Risks
An attorney opinion is an alternative title product that provides assurance regarding the legal status of a property’s title. However, it’s not a guarantee or warranty of the title’s validity and does not provide the same level of protection as title insurance.
Title insurance typically includes an underwriting service so that lenders can define clear ownership to the borrower so that there are no other holds on said ownership. In this case, it’s better to choose title insurance over other alternative products. It will provide more coverage and protection for the lender while eliminating and covering major risks.
Protecting Against the Unknown
Title insurance is basically the evolution of an attorney opinion letter. The protections that title insurance offers stemmed out of the shortcomings of alternative title products; ultimately, replacing attorney opinion letters. A good example is to examine the difference between coverage because of underwriting, as attorney opinions letters do not include underwriting services and title insurance does. This process allows underwriters to discover items such as federal tax liens, mis-indexed items, or HOA liens, that are not discoverable from a public records search.
This process extends into coverage for fraudulent activity and forgery of title documents. This can even be affected by fraud of a previous owner’s will. If title insurance is not there, all of that responsibility falls back onto the lender and homeowner. Furthermore, there are times when a deed is forged, which is scary to think about. So, we’d say coverage for these items is a significant reason to choose title insurance over alternative title products.
Title Insurance Has Backup
Title insurance actually provides lenders with a defense. This defense comes in the form of coverage, including attorney fees and costs, when it comes to matters involving a property. Attorney opinion letters and other alternative title products fall short here—and won’t cover costs or losses during a dispute or lien priority situation.
Additionally, there are financial reserves that are statutorily required with title insurance policies. This essential backup plan means that there are finances available to cover future claims risks meaning more protection for lenders. Title insurance really takes the cake here again and is the right choice for more extensive coverage and extended protection for lenders.
Protection for Homebuyers
Without title insurance, a buyer may be on the line to prove negligence on the part of the attorney if a title issue is discovered. This means the consumer is responsible for actively proving that they had nothing to do with the issue that arises—meaning time, energy, and finances are at stake. Along with that risk, there’s also the fact that these alternative products make consumers more prone to foreclosure as it’s a condition to make a claim under the terms of this type of coverage.
In our opinion, we all work with people and that’s who we should have as our priority. These alternative products do not necessarily offer the peace of mind and security we want homebuyers to experience. Don’t take on more risk and impose financial burdens on consumers by forgoing title insurance.
Special Circumstances
You might have this question now, “Are there certain situations where these alternative title products make sense?” The short answer is yes. But it should be considered carefully and discussed with the homebuyer. If a potential homebuyer is adamant about using an alternative title product, it’s on the lender to either accept or decline the transaction. Just remember the risk we discussed here.
Let’s Talk More About Titles
We’d love to chat more with you about your goals for your business and your clients. Hey, who knows, we might just become partners.