Risk Management for Legal Opinions: Limiting Who May Rely on Your Opinion Letters – Fannie Mae and Freddie Mac Loans

This is the fifth of a series of articles examining the question of who should be allowed to rely on an opinion letter issued by a real estate lawyer in a financing transaction and how that reliance should be expressed (and limited) in the opinion letter.

As noted in the previous articles in this series, lawyers do get sued over legal opinions, and many opinion claims are asserted that never make their way into a court. One important risk management tool by law firms who issue third-party opinion letters is to limit expressly who may rely on an opinion letter because courts recognize that a legal opinion may be relied upon only by its addressee and by any other person expressly authorized to rely. Limiting who may rely on an opinion letter, therefore, necessarily limits the potential plaintiffs when things go wrong.

In examining the issue of who should be allowed to rely on opinion letters issued by real estate lawyers in financing transactions, I previously noted that the appropriate reliance parties are determined in large part by the type of financing transaction. As indicated, most financing transactions in which real estate lawyers issue opinion letters (as lead counsel or as local counsel) tend to fall into one of these categories: portfolio loans, conduit loans, HUD-insured loans, Fannie Mae/Freddie Mac loans, syndicated loans, and debt securities. This article examines the appropriate reliance parties in loans to finance a specific real estate project (e.g., multifamily housing) originated by financial institutions referred to as “seller-servicers” who will transfer the loans to either Federal Home Loan Mortgage Corporation (“Freddie Mac”) or Federal National Mortgage Association (“Fannie Mae”), which are sometimes referred to as governmental-sponsored entities (or “GSEs”).

Opinion Letters in Fannie and Freddie Loans

The forms of opinion letters promulgated by Freddie Mac and by Fannie Mae for use in the closing of multifamily housing loans can be found on their respective websites, along with separate instructions as to their use. The promulgated forms require that an opinion letter be addressed to the originating lender (i.e., the seller-servicer), which is entirely appropriate and entitles such lender to rely on the opinion letter. The Fannie Mae form also requires that the opinion letter be addressed to Fannie Mae, and usually the seller’s servicer’s counsel for Freddie Mac loans will require that the opinion letter be addressed to Freddie Mac, all of which is entirely appropriate because the loan will be transferred to the GSE shortly after closing. Because Freddie Mac often securitizes such loans, the trustee of the real estate mortgage investment conduit (or “REMIC”) to which Freddie Mac may transfer the Loan is also an appropriate reliance party (although it is not usually listed as an addressee).

Ideally then, at least from the standpoint of the opinion giver, the reliance parties for an opinion letter issued for a Freddie Mac or a Fannie Mae loan should be limited to (a) the originating lender or seller/servicer, (b) Freddie Mac or Fannie Mae, as applicable, and (c) in the case of a Freddie Mac loan, a REMIC trustee to whom the loan will be transferred for securitization. As noted in an earlier article, allowing other, unidentified parties in the future to rely on the opinion letter exposes the opinion giver to a possible claim by someone who may have a purpose in acquiring the loan and an approach in loan enforcement that is markedly different than that of the original lender, someone whom the opinion giver did not contemplate. Possibly, such party may not fully appreciate some of the qualifications or limitations in the opinion letter, some of the circumstances involving the loan that are not readily apparent from simply reviewing the opinion letter or the loan documents after the fact, or customary opinion practice in the jurisdiction in which the opinion giver practices.

Opinion Letters for Freddie Mac Loans

The last paragraph of the Freddie Mac form of opinion letter provides as follows:

This opinion letter is furnished to you solely for your benefit, the benefit of subsequent holders of the Note, and any statistical rating agency that provides a rating on securities backed in part by the Loan, all of which we understand may receive copies of this opinion letter. This opinion letter may not be used, quoted from or relied upon by any other person without our prior written consent; however, you or a subsequent holder of the Note may deliver copies of this opinion letter to (a) independent auditors, accountants, attorneys and other professionals acting on behalf of you or a subsequent holder of the Note, (b) governmental agencies having regulatory authority over you or a subsequent holder of the Note, (c) designated persons pursuant to an order or legal process of any court or governmental agency, and (d) prospective purchasers of the Note.

Providing that the opinion letter is for the benefit of “subsequent holders of the Note” is unnecessarily broad, especially in view of the fact that the actual subsequent holders of the loan (Freddie Mac and a REMIC) can be identified at the loan closing. In addition, as explained in the earlier article on the appropriate reliance parties for “conduit loans,” most rating agencies, including Standard & Poor’s and Moody’s, do not require that they be named as a reliance party in opinion letters issued at the origination of loans intended for securitization.

However, the reality for borrower’s counsel issuing an opinion letter in a Freddie Mac loan transaction is that they lack the bargaining position to insist upon reliance language that is carefully tailored and limited to those parties who can be identified at the time of closing as properly needing to rely upon the opinion letter. Seller/servicer counsel is mandated by Freddie Mac’s written policies to use the Freddie Mac form of opinion letter without substantial deviation and is not likely to be sympathetic to arguments that the standard reliance language is overly broad (even though it is). On the other hand, the Freddie Mac form of reliance language does limit reliance to only certain parties (i.e., the addressees, subsequent holders of the loan, and rating agencies) and also limits disclosure of the opinion letter to certain other parties. An opinion giver may certainly prefer to use its own language in limiting reliance and disclosure, but at least the standard Freddie Mac form does not include reliance parties such as lender’s counsel and any loan participant, and it limits disclosure to an identifiable group of parties.

Opinion Letters for Fannie Mae Loans

The form of Fannie Mae opinion letter contains the following language relating to reliance:

We have been advised by Lender that it expects to sell the Mortgage Loan to Fannie Mae, pursuant to the terms of Fannie Mae’s Multifamily product line. Borrower [and Guarantor] [has/have] requested that we deliver this opinion to you, [has/have] consented to reliance by Lender and Fannie Mae on this opinion in making and purchasing, respectively, the Mortgage Loan, and [has/have] waived any privity between Borrower [, Guarantor] and us in order to permit you to so rely on this opinion. We understand and, with the consent of Borrower [and Guarantor], consent to your so relying on this opinion.

. . .

The foregoing opinions are for the exclusive reliance by Lender, Fannie Mae and by any subsequent holder of the Note.

It is by no means entirely clear why the Fannie Mae form includes a consent by the borrower and the guarantor to Fannie Mae’s reliance on the opinion letter. After all, the opinion letter is issued by the borrower and guarantor’s counsel, and it is such counsel who needs to consent to reliance, not the borrower or the guarantor. Moreover, because the opinion letter is already addressed to both the lender and Fannie Mae, and under customary opinion practice it us understood that the addressees may rely on the opinion letter, a statement of consent by the opinion giver is also unnecessary. Somewhat more troubling is the statement that the borrower and guarantor have “waived any privity between Borrower [, Guarantor] and us in order to permit you to rely on this opinion.” This statement presumably was included based on a couple of early state court decisions that ruled that an opinion giver was not liable to an addressee of an opinion letter because there was no attorney-client relationship between the opinion giver and the opinion recipient. Those decisions have since been largely ignored, and the liability of opinion givers to the addressees of an opinion letter is now universally recognized. On the other hand, while the consent by the borrower and guarantor and waiver of privity “in order to permit you to rely on this opinion,” are unnecessary, it is not worth the time and effort required to negotiate their deletion, especially when compared to other language in the form that should be modified.

Like the Freddie Mac form, the Fannie Mae form of opinion letter allows reliance by “any subsequent holder of the Note,” which is subject to all of the concerns noted above related to such language but which, as in the case of Freddie Mac, will likely prove difficult (if not impossible) to delete. Unlike the Freddie Mac form, the Fannie Mae form of opinion letter does not limit the parties to whom the opinion may be disclosed. An opinion giver may have more success in persuading seller/servicer counsel to add some limiting language in this regard, perhaps comparable to what is found in the Freddie Mac form.

Task Force on Freddie Mac/Fannie Mae Opinions

In view of the perceived need to conform the Freddie Mac and Fannie Mae forms to current customary opinion practice, with regard to reliance parties as well as other issues, the ABA/RPTE Committee on Legal Opinions in Real Estate Transactions and the Attorneys’ Opinions Committee of the America College of Real Estate Lawyers are forming a task force to examine Freddie Mac’s and Fannie Mae’s promulgated forms of opinion letters and to discuss directly with the GSEs ways in which their opinion letter forms and the process for negotiating such opinion letters can be updated and revised. So, stay tuned for further developments.