If we learned anything at December’s Digital Mortgage Conference in San Francisco, it was that the industry is ready for the electronic mortgage.
That should come as no surprise to anyone who has been in the industry for very long. A mortgage originated, sold into the secondary market, and then serviced in a completely electronic fashion, has been the dream of many mortgage industry technologists for almost two decades. That’s how long ago the federal government passed the Electronic Signatures in Global and National Commerce Law, also known as the E-Sign Act.
It All Started with E-Sign
When E-Sign was signed into law, a few forward-thinking mortgage professionals got a glimpse of our future. They saw a world in which our painful paper-based processes were abandoned in favor of all-electronic mortgage loan origination. It has remained a dream for most industry participants for the last 17 years.
E-Sign was passed on June 30, 2000, by the U.S. Congress to facilitate the use of electronic records and electronic signatures in interstate and foreign commerce. It created a national framework for conducting business electronically and formalized the acceptance of electronic signatures. Of course, we live in a country where a great many powers are reserved for the state. Ultimately, it’s state law that has determined when and how quickly the industry has been able to move toward the eMortgage.
Because our government leaders knew the federal government was not intended to direct the states but that, without consensus among these various governments, many problems—including a negative impact on interstate commerce—would result, the National Conference of Commissioners on Uniform State Laws (NCCUSL) has been working for the uniformity of state laws since 1892.
In the wake of E-Sign, this group created the Uniform Electronic Transactions Act, also known as UETA, to provide model legislation the various states could use to create state laws that would allow them to act in concert regarding the retention of paper records and the validity of electronic signatures.
To date, 47 of the 50 U.S. states have adopted UETA. The District of Columbia, Puerto Rico, and the U.S. Virgin Islands also use the legislation. The other three states wrote their own electronic commerce laws but still accept electronic signatures.
So, problem solved, right?
Well, not exactly. There are still some problems that hold financial services companies back from conducting all business electronically. These hurdles are not legal, nor do they have to do with technology. The challenges lenders face today is letting go of older, outdated technology. Until they do, they will be unable to fully grasp the next phase in our industry’s evolution.
The Power of the eMortgage
Mortgage industry veterans have heard about the benefits of the eMortgage so many times they have become part of industry lore. No one who is serious about improving their mortgage business can ignore the call of the digital mortgage.
It will save them time. Paper takes a lot of time, whether you’re buying it, stuffing it into printers, collating it into files, making corrections on the documents, storing them, or trying to find them once you do. Paper is incredibly expensive, which is why so many companies went paperless—at great expense—by installing scanners and double monitors throughout their enterprises.
It will save them money—hundreds of dollars per loan. All of the costly functions listed above have to be done by someone. When electronic files zip back and forth, technology handles all of that. While there are tick charges associated with some functions, the cost-savings enjoyed by lenders that go electronic are huge.
It will make compliance with new industry regulations easier. The CFPB’s TRID rule was the first really good example of how technology would become an essential element for regulatory compliance. Many experts have made it clear that without the right technology, demonstrating to the CFPB that the lender is employing a TRID-compliant document solution will not be possible. Therefore, the more electronic our operations become, the easier it will be to demonstrate compliance.
It provides a much, much better consumer experience. Instead of having to make an appointment to appear in someone’s office to wet-sign a stack of mortgage documents in front of a notary and then wait around for the key documents to be couriered down to the Courthouse and entered into the public record, consumers can wake up; walk to their computer in their bunny slippers; connect to a notary, closing agent, loan officer, real estate agent and anyone else who needs to be in on the transaction; and digitally sign the required documents in an electronic closing room. And that can happen at 7 a.m. on a Saturday morning if the borrower wants. Easy.
Though through a Power of Attorney, one spouse can sign closing documents for another who cannot be present, a real eMortgage means those potentially risky legal workarounds will no longer be necessary. Spouses or business partners, in the case of investment properties, no longer have to be in the same place to buy and sell real estate. This will have a huge impact on customer satisfaction.
It is becoming more important for good investor relations. Every year, Fannie Mae and Freddie Mac drive the industry closer to all-electronic loan origination. They don’t want to mess with the paper. They don’t have the staff to sift through it all, and they don’t have the time. They must employ advanced analytics to manage their businesses, and those tools only work on electronic data. There is no reason to assume that tomorrow’s investors, regardless of where they come from, will operate any differently.
Finally, a well-designed and streamlined eMortgage process will allow lenders to do more work with fewer full-time employees. While the industry tends not to talk about trimming staff, the truth is that FTEs are a huge element of the lender’s overall loan origination costs—which, according to the Mortgage Bankers Association, are in excess of $7,000 per loan now. The eMortgage will reduce those costs.
Given all of this, you would think that the industry would be completely electronic by now, but we’re not. So, what gives?
The Imaginary Hold-up
So why aren’t we, as an industry, offering eMortgages yet? There are plenty of excuses we hear every day.
Some argue that the law isn’t clear on the legality of eMortgages or eNotes. It is. We now have clear laws governing electronic transaction of real estate business in all 50 states. American consumers have been doing brisk business in everything imaginable in a completely electronic fashion now for 17 years. Amazon would not be the company it is today if electronic commerce could be challenged successfully in court.
Some argue that we don’t have the right technology. This argument hasn’t been true for many, many years. No one who attended a recent industry conference, especially not the recent Digital Mortgage Conference, would make this argument. It just doesn’t stand up anymore.
Some argue that it’s the warehouse lenders that are holding us back, unwilling to give up the interest income they earn while they wait for paper transactions to inch across between industry participants. While this may have been true in the past, it is no longer true. We’re hearing plenty of stories about warehouse lenders that are embracing the eMortgage, from companies like First Funding, Guaranty Bank & Trust, Merchants Bank of Indiana, Santander, and more.
Others claim that consumers don’t trust electronic processes. Not even close. Borrowers are the ones pushing for a simpler, paper-free process, like the ones they use every day at the grocery and hardware stores. One look at the success enjoyed by Rocket Loans, LoanDepot, or Guaranteed Rate will show you that.
Some say investors won’t buy them, but this isn’t true. Fannie Mae and Freddie Mac have been buying eMortgages for well over a decade. When non-government investors return to the market—a movement some experts claim has already begun—they will undoubtedly be open to accepting business electronically.
In truth, no third-party is responsible for the slow rate of eMortgage adoption. It is true that the title industry has not been particularly quick to help lenders get across the finish line, but as lenders have begun to take vendor management more seriously (partly due to compliance concerns), they are beginning to choose title partners that are more capable of helping them grow their businesses. More title companies are beginning to see a clear path to the future, one that includes the real eMortgage.
The responsible party for the lender’s slow adoption of the eMortgage is the lender themselves. But it’s not all their fault. Many of them are currently being misled into thinking the paperless mortgage origination of the last decade is the real eMortgage. Sadly, that is not the case.
What eMortgage Really Looks Like
We’ve heard a lot of stories lately about how we have finally achieved the “paperless” mortgage. Actually, we were closing these paperless loans 12 years ago in 2004, using the same laptop computers and digital signing pads we’ve read about in recent news.
We stopped using the “paperless” designation for digital lending back in the mid-2000s because it had already been used by technology vendors who sold expensive document scanning and storage equipment to mortgage lenders and closing companies. Those systems took paper loan documents and scanned them so that lenders could enjoy some of the benefits of the true eMortgage without re-engineering their loan origination processes.
Let me say that again: Lenders did not want to change a set of processes that was working for them and so instead of jumping ahead to the digital mortgage that the new federal and state legislation made possible, they purchased expensive equipment to render paper loans digital files.
Now, it’s very difficult for many of them to let go of that investment and move forward. But the moral of the story is simple: If there is paper in the process, it’s not a true eMortgage.
If you look closely at the recent “paperless” mortgage originations, you’ll find that, at the end of the process, documents were papered out and wet-signed. In this case, the paper comes at the end of the process instead of the beginning, but the paper is still there. It’s still not an eMortgage. Paperless will not give lenders the same advantages as the eMortgage will.
A real eMortgage is a financial instrument originated electronically, sold into the secondary market electronically, and boarded onto the servicing platform electronically. The signatures are all electronic, the note is electronic (an eNote), the notarization is electronic, and the key documents are recorded into the public record electronically. If that’s not happening, it’s not an eMortgage. It may be “paperless,” but that’s been around for more than a decade.
The Bright Side
The good news is that real eMortgages are being originated by lenders today. Those who attended the Digital Mortgage Conference last month saw a live demonstration, with the documents signed electronically before a notary signing agent who was 3,000 miles away. Most of the work was finished by the time the eight-minute demo was complete.
The eMortgage is here now, but lenders won’t get to it by holding on to outdated technology or using “bridging” technology. They must not be distracted by the lure of “paperless,” when the advantages come from the true eMortgage. There are enough reasons for any lender to want it, and so we expect to see more achieving it this year. Within five years, all lenders will be originating true eMortgages, end to end, and paper will be nowhere in sight.