The Federal Reserve cut interest rates earlier this month for the first time in four years. The move came as no surprise to Wall Street given that Fed Chairman Jerome Powell had been hinting a rate cut was on the table. It’s a move that should ease some of the financial burdens on Americans and hopefully facilitate an increase in homeownership. Although mortgage rates are fixed to the 10-year Treasury yield, they are still influenced by the central bank. This is good news for prospective homeowners who have been shut out of the housing market, due in part to the high interest rates over the past several years. Rates started coming down in anticipation of the Fed rate cut, hitting the lowest mark since February 2023. This has resulted in refinance activity jumping 14.2% for the week ending Sept. 13, while refinance applications spiked 24% from the previous week and 127% year-over-year, according to the Mortgage Bankers Association.
It’s also good news for current homeowners who have been waiting for lower interest rates to refinance their mortgages. As homeowners consider refinancing, however, it is important for them to understand all the important considerations that come with it. One of these is lender’s title insurance, which is as essential when refinancing as it is when buying a property.
Title insurance protects the property rights of the homeowner and the lender’s investment (the loan) from any title defects discovered or risks that may appear years later. When a consumer refinances, they are obtaining a new loan, even if staying with the original lender. Lenders will usually require a new title search and title policy on the loan to protect their investment in the property, but homeowners don’t need to purchase a new owner’s title policy. The policy they originally purchased is good for as long as they or their heirs have an interest in the property.
These requirements for title insurance by lenders are important; lenders are safeguarding the loan by ensuring the homeowner has clear ownership rights to the property, free and clear of any other claims to ownership since the homeowner first purchased the property.
For instance, there could be a new lien against the property that serves as security for the payment of an obligation, such as a lien for an unpaid court judgment; lien for failure to pay real estate taxes or for recovery of child support payments. An old claim, like a claim of fraud or an unknown heir, could also emerge, throwing doubt on the title’s veracity. There could be easements put in place since the original sale, either by contract or adverse prescription (right of way for utilities).
Importantly, consumers benefit from lender’s title insurance as well. When a consumer executes a deed of trust or mortgage, they make several representations and warranties regarding the title of the property. Lender’s title insurance reduces the financial risk consumers face through these warranties they make to the lender, investors and the federal government. If there is a challenge to the homeowner’s title, lender’s title insurance provides coverage and compensation to the homeowner.
To make the purchase easier for homeowners, many title companies also offer a refinance transaction discount or discount if the homeowner uses the same lender for their refinance loan.
During refinancing, title insurance provides a critical layer of anti-fraud protections for consumers and lenders. If lender’s title insurance stopped being required, it could open the door to fraudsters and other bad actors with only a partial interest in the property to take out loans more easily without anyone’s knowledge.
Unfortunately, the Biden Administration has overlooked the necessity of title insurance on refinance loans. It has proposed waiving lender’s title insurance on certain refinance loans, which would shift the responsibility of protecting property rights from experienced title companies to government-sponsored entities (GSEs), which are neither licensed nor regulated for such a purpose. Title insurance is comprehensively regulated at the state level by departments of insurance, which also require title companies to be adequately capitalized and maintain a statutory premium reserve.
Should a title issue arise in this scenario, rather than title companies paying to settle the issue, it would be the GSEs on the hook—meaning taxpayers will ultimately be the ones that pay. It wouldn’t be the first time, as Fannie Mae and Freddie Mac cost Americans over $200 billion the last time the ventured outside their wheelhouse.
All of this underscores why title insurance is critical for both lenders and homeowners. Homeowners want to protect their dream home, yet there could be unknown title claims lurking for years before seeing the light of day that could impact their property rights. Likewise, whether it’s nine months or nine years between purchasing and refinancing a home, there is much that can happen that would jeopardize a lender’s investment and imperil homeowners.
The Fed’s interest rate cut could open the door to the housing market for millions of Americans. Let’s not shut it again by shutting out title insurance and introducing significant risks for lenders, taxpayers and consumers.
Diane Tomb is the CEO of American Land Title Association.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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