By Bryan Kay
The roadblock isn't technology, but acceptance
Two months wandering in a new compliance landscape makes the prospect of a seamless, paperless eMortgage even more compelling. In our increasingly digital society, an entirely paperless process for mortgage loan origination seems to be the next logical step.
The conventional wisdom says this eMortgage would keep all parties happy, with borrowers gaining more transparency, regulators and secondary market players ensuring greater compliance and lenders safeguarding a more reliable bottom line. Not to mention, it would be another step toward a greener society.
Tim Anderson, regarded as one of the most outspoken advocates of the eMortgage over the past decade, and winner of the Steve Frasier award from Mortgage Technology for his evangelism of the all-electronic process, is firm when asked when this will happen. Now the head of eServices at DocMagic, Anderson confidently exclaims, “Aug. 1, 2015.”
That is the date, of course, when new rules regarding simplified and improved mortgage disclosures — part of the Truth in Lending Act — must go into effect. And for Anderson, the completion of the paperless eMortgage equation hinges on the complexities of private-label market acceptance. “It really has never been a technology issue,” he said, but getting the major investors to accept it.
About two years ago, just under two-thirds of mortgage lenders surveyed by Xerox declared they had implemented software to handle eMortgages, up from under half a year before. Of those contacted, HousingWire reported at the time, 78% believed half of all mortgages would be processed electronically in the next three to seven years. At the earliest, that would be sometime later this year.
Compound those eye-catching statistics with an Accenture Credit Services market analysis released late last year that claimed 35% of traditional banks’ market share would be available on the open market within six years. Strikingly, some 15% of that figure, Accenture estimates, could transfer to companies operating exclusively online. These might include completely branchless banks and new technology entrants, the credit services provider noted.
Together, they help paint the picture of what is seen as this unassailable reality: that the adoption of the completely paperless mortgage is not some forlorn fantasy, forever dangling tantalizingly on the horizon, but just a matter of time.
And the conclusion seems to be the ever-greater imperative forcing banks to act now.
“There is little question that branches remain important in the minds of U.S. consumers today,” said Mike Goodson, a managing director and head of management consulting for Accenture’s North America banking practice at the time the statistics were released.
“They are cited as the No. 1 reason for loyalty, and eight out of 10 consumers see themselves using branches as often or more often in five years’ time. But this is changing quickly, as profitability pressures motivate banks to promote less costly and more convenient ways of banking to customers. The rapid rise of mobile banking illustrates how quickly customer behaviors can change through digital technologies,” Goodson said.
In a recent interview with HousingWire, Accenture executive Kelly M. Adkisson referenced some of the more bleak statistics that accompanied earnings report announcements. Among the top banks, she pointed out, there were consistent reports of “greater than 50% drop[s] in volume from the fourth quarter a year ago.” She understands how those numbers raise the stakes, making growth, profitability and efficiency more important than ever.
“Lenders need to become more agile and innovative to address the wave of regulatory and competitive challenges in an age when consumers are more demanding than ever,” explained Adkisson. “Digital capabilities are a key enabler of growth. We see the banking industry undergoing fundamental structural change, with digital players in particular grabbing substantial market share from traditional lenders.”
She points to Quicken Loans as a good example. It has become an industry leader in its use of digital, she says, growing by more than 480% between 2008 and 2012 to become the No. 3 lender in that segment of the market.
It boils down to a generation of buyers who demand the transformation, noted Anderson. In the past, he says, the eMortgage option was “nice to have.” Today, he insists, it stands as the “only way to ensure compliance.” Automation will make it possible to comply with the slew of current and future regulations, along with the likes of the Federal Housing Finance Agency Uniform Mortgage Data Program.
It’s about electronic notification and evidence — “an audit trail,” Anderson said.
But on the complexities of making the transition complete, Anderson is resolute. Esign is only the first hurdle of the technology needed, he says. “To support a total paperless eClosing you need the lender, buyer, seller, closing title agent and notary to all buy into and participate. You also need the state and county to support eRecording and finally you need — because Fannie Mae requires it — in terms of technology, a MISMO category- one SMART Document eNote to be able to submit it to MERS eRegistry and electronically deliver it to an eVault that can store both the source data and image document.”
But the elimination of the paper mortgage and the ramifications further down the road are not without their skeptics. Mark Dangelo, president of MPD Organizations, said it’s not just up to the industry or even a single association. The former Ocwen chief technology officer and author of “Innovative Relevance” said a smorgasbord of professionals and agencies form part of the necessary footprint.
“When you consider not just mortgage professionals, but legal personnel, state, local and federal agencies and officials, real estate personnel, office staff, records retention firms, a host of ancillary firms that have touch points — for example paper, vaults, fire protection, security, climate controls, etc. — not to mention technology changes surrounding storage and document integrity, then the challenge with these stakeholders becomes more and more complex.
“To digitize a document or to capture the relevant fields using innovation is today straightforward.” It’s not that it can’t be done, Dangelo mused, but that industry practices and investments are outweighing adoption. “With the GSE questions and disposition still hanging in the wind, who is willing to risk the political capital to displace workers and take on the host of special interest groups before the answer to private securitization is known?
“It is my belief that with the elimination of the GSEs and the formation of new private securitization instruments, the markets will actually demand digitization of these documents due to the need of instantaneous reporting supported by a comprehensive and very detailed life of the loan package that will have to be part of the asset pool due diligence before any investor will shell out a penny for non-government guaranteed loans,” Dangelo said.
That is to say, it would be the investors who are ushering in the change.
So when? This is where Dangelo’s ambivalence finds firm footing. Late 2015 is the key time frame, he said, but the prep work must start now.
Dangelo sees the eMortgage scene akin to a manufacturing supply chain where a product is built. At each step of the way, he says, value is added as the product makes its way to the consumer. In the mortgage world, Dangelo concedes, not every asset can be portfolioed. As a result, assets need to be pooled to lure qualified investors to take these assets off the banks’ — or even GSE’s — books, spreading the risk and returns out into the markets.
“Yet, to do so in a post-GSE world demands, as money moves around the world in a fraction of a second, that due diligence of these issues also moves with the loans and their payments,” Dangelo said. “If the assets are completely disclosed and traced from the investor back to the original documentation — this is big or vast data — then the transparency of the asset becomes clear and less of an investment risk.”
Therefore, Dangelo concludes, banks that provide this private service will be able to offer securities as lower bps spreads than those institutions that fail to provide the comprehensive package to the investors in the secondary market.
Adkisson, meanwhile, lauds the progress toward full electronic mortgage transactions, but agrees that coordination with key third parties remains a significant challenge. “In order for mortgage transactions to become fully electronic, it will require ongoing investment in digital capabilities by lenders as well as these third parties,” she said.
And there is also the central role played by the buyers, she adds, as people will have to accept a complete break with the past model of face-to-face interaction during a purchase that will, in the vast majority of cases, represent their largest lifetime purchase.
In the end, says Anderson, the eMortgage horizon beckons, with an informed marketplace embracing the change. “There is virtually no resistance from the borrowers — they would prefer it,” he said. “It’s really about educating that this is real and supported today. Once the FHA formally accepts eSign, any day now, there really are no excuses to not do it.
“If, according to the CFPB, it’s all about consumer accuracy, simplicity and transparency and by the same token, from the FHFA about ensuring a legally compliant process and loan quality, [data and document integrity] you just cannot do this anymore in a paper world and be compliant.”