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Attorney opinion letters (AOLs) may have been around in some form for a number of years, and Freddie Mac may have accepted loans with AOLs instead of title insurance policies for years, but the use of AOLs has garnered greater consideration in the last year following the government-sponsored enterprises’ (GSEs) efforts to make housing more affordable.

Freddie Mac

In Section 4702.3 of Freddie Mac’s Single-Family Seller Servicer Guide, Freddie Mac states that an attorney’s opinion of title is acceptable in lieu of a title policy if all of the following conditions are met without exception:

• “The opinion must be addressed to the seller and all successors in interest of the seller.
• “The opinion must provide the following statement: ‘We agree to indemnify you and your successors in interest in the mortgage/deed of trust opined hereto, to the full extent of any loss attributable to a breach of our duty to exercise reasonable care and skill in the examination of the title and the giving of this opinion.’
• “The opinion must be given by an attorney licensed to practice law in the jurisdiction where the mortgaged premises is located. The attorney must also be insured against malpractice in rendering opinions of title in an amount commonly prevailing in the jurisdiction, taking into account the volume of opinions rendered by the attorney.
• “The opinion must not take exception to survey matters. When the attorney’s opinion takes exception to survey matters, the seller must provide whatever information is required by the attorney to remove the exception. If the attorney will not issue the title opinion without a survey exception, Freddie Mac will not purchase the mortgage. In addition, the opinion must not be subject to any title exceptions other than those permitted under Section 4702.4.”

Since Fannie Mae made its announcement, there has been an increased interest in how attorney opinion letters (AOLs) operate in various states. Different states have various perspectives on how these new waves of AOLs should be performed and what they can cover.

“There are no limitations that would prevent the use of an AOL in any state as attorneys are permitted to issue legal opinions in all states,” said Stacy Mestayer, Voxtur chief legal officer. “From an economic perspective, some states do offer the opportunity for more savings to the consumer. The reason for that is that certain states have promulgated title insurance rates, which leads to higher title insurance rates in those states. Using an AOL in those states generally results in more savings for the consumer."

ACREL/ABA guidelines

On Jan. 15, 2003, the American College of Real Estate Lawyers (ACREL) Opinion Committee and the American Bar Association (ABA) Section of Real Property Probate and Trust Law Committee on Legal Opinions in Real Estate Transactions issued their Real Estate Opinion Letter Guidelines.

The guidelines discuss areas in which an attorney should and should not opine. Among other things, it states, “Because of the availability of title insurance, the existence of difficult factual issues, and the need for title searches beyond the capacity and expertise (and/or the scope of engagement) of most real estate attorneys, opinions requested as to the ownership of property, the effectiveness of the lien of security instruments or exceptions to or encumbrances on title to real property are inappropriate. Opinions as to the form of a mortgage or deed of trust necessary to create a lien against real property collateral and a recitation of the procedures necessary to perfect and provide record notice of such lien are, on the other hand, frequently given. Neither such a ‘form of documents’ opinion nor a general enforceability opinion implies a substantive title opinion, and no express disclaimer of such opinion is necessary.”

When it comes to what is included in a title insurance policy, many are familiar with the coverage. The new attorney opinion letters (AOLs) now on the market are a different story and many wonder what coverage is included.

Many are interested to know the basics of these AOL products.

“The coverage provided by an AOL can vary by provider,” said Stacy Mestayer, chief legal officer, Voxtur. “Our AOL was designed to provide comprehensive protection that is comparable to the protections provided by title insurance, while taking into account the ways in which title data and technology have evolved over the past 150 years since title insurance was created. The coverage underlying the Voxtur AOL covers the full amount of the loan and extends for the life of the loan. This coverage follows the loan into the secondary market, regardless of how many times it changes ownership. While certain coverage gaps may exist in other versions of the AOL, as the American Land Title Association (ALTA) has pointed out, those gaps have been accounted for in the coverage underlying the Voxtur AOL.

“The protections provided by the various versions of the AOL differ,” she continued. “Attorney opinion letters, in their traditional form, present certain risks because they may not be consistent from one to the next depending on this issuing attorney and coverage may not extend beyond the original recipient. There are also modern versions of the AOL that do not have comprehensive insurance coverage or that do not extend coverage to the borrower in a purchase transaction. These AOLs present their own risks. The Voxtur AOL was designed to protect against these risks, and to provide protection comparable to title insurance.”