The Federal Reserve cut interest rates earlier this month for the first time in four years. This move did not come as a surprise to Wall Street given that Fed Chairman Jerome Powell has been saying that rate cuts are on the table. It’s a move that should ease some of the financial burdens on Americans and hopefully facilitate more homeownership. Although lending rates are capped at the 10-year Treasury yield, they are still influenced by the central bank. This is good news for would-be homeowners who have been locked out of the housing market, due to high interest rates over the past few years. Rates began to fall in anticipation of the Fed’s rate cut, which hit the lowest mark since February 2023. This caused financial activity to jump 14.2% for the week ending September 13, while applications for refunds increased 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 loans. As homeowners consider reinvesting, however, it’s important that they understand all the important things that come with it. One of these is lender’s title insurance, which is just as important when refinancing as it is when buying real estate.
Title insurance protects the homeowner’s property rights and the lender’s investment (loan) against any acquired title problems or risks that may arise years later. When a buyer refinances, they get a new loan, even if they stay with the original lender. Lenders will usually need to search for a new title and title policy on the loan to protect their investment in the property, but homeowners do not need to purchase a new owner’s title policy. The policy they originally purchased is good as long as they or their heirs have an interest in the property.
These title insurance requirements by lenders are important; lenders secure the loan by ensuring that the homeowner has clear title to the property, free and clear of any other ownership claims since the homeowner first purchased the property.
For example, there may be a new lien against the property that serves as security for the payment of the obligation, such as an unpaid court judgment; delinquency for failure to pay real estate taxes or receive child support payments. An old claim, such as a claim of fraud or an unknown heir, may arise, casting doubt on the authenticity of the title. There may be covenants in place from the actual sale, either by contract or improper prescription (right of way for utilities).
Importantly, buyers benefit from the lender’s title insurance as well. When a buyer executes a deed of trust or mortgage, he makes several representations and warranties about the title of the property. Borrower’s title insurance reduces the financial risk that buyers face through the guarantees they make to lenders, investors and the federal government. If there is a challenge to the homeowner’s title, the 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 discount or a discount if the homeowner uses the same lender for their refinance loan.
During refinancing, title insurance provides an important layer of fraud protection for buyers and lenders. If lender’s title insurance is no longer required, it can open the door for fraudsters and other bad actors with only a partial interest in the property to easily take out loans without anyone’s knowledge.
Unfortunately, the Biden Administration ignored the requirement for title insurance on refinance loans. It proposed repealing borrower’s title insurance on refinance loans, which would shift the responsibility of protecting property rights from experienced title companies to government-sponsored enterprises (GSEs), which are licensed and unregulated for such a purpose. Title insurance is fully regulated at the state level by insurance departments, which in turn require title companies to be adequately funded and maintain a legal set premium.
If a title issue were to arise in this situation, rather than the title companies paying to settle the issue, it would be the existing GSEs—meaning the taxpayers would ultimately pay. It wouldn’t be the first time, as Fannie Mae and Freddie Mac cost Americans more than $200 billion the last time they ventured out of their house on wheels.
All of this underscores why title insurance is important to both lenders and homeowners. Homeowners want to protect their dream home, yet there may be unknown title claims that linger for years before seeing the light of day that could affect their land rights. Likewise, whether it’s nine months or nine years between buying and refinancing a home, there are many possibilities that can jeopardize the lender’s investment and risk-free homeowners.
A Fed interest rate cut would open the door to the housing market for millions of Americans. Let’s not close it again by banning title insurance and introducing greater risk to lenders, taxpayers and consumers.
Diane Tomb is the CEO of the American Land Title Association.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this piece: [email protected].
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