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Fri, 02/28/2014

Some industry experts say there are too many barriers to developing a truly end-to-end e-mortgage process.

Will the e-mortgage soon be a reality? It’s been a long time coming - since 2000, in fact - and many in the industry have been wondering if it will ever fully arrive.

As we learned in Part One of this three-part series, most agree that the e-mortgage will one day come to fruition. However, it will continue to come in stages, most experts say, and a true end-to-end e-mortgage process is probably still a few years away.

Some say the e-mortgage will take a huge step forward on Aug. 1, 2015, when the Consumer Financial Protection Bureau’s (CFPB) new “Know Before You Owe” e-documents go into effect. The new rules mandate that lenders must use the same standard e-documents for processing mortgages. This, in turn, will result in borrowers having increased interaction with e-documents and e-signatures, driving further adoption.

Some say the e-mortgage will take a huge step forward on Aug. 1, 2015, when the Consumer Financial Protection Bureau’s (CFPB) new “Know Before You Owe” e-documents go into effect. The new rules mandate that lenders must use the same standard e-documents for processing mortgages. This, in turn, will result in borrowers having increased interaction with e-documents and e-signatures, driving further adoption.

Others, however, remain skeptical. They say there are still too many barriers to developing a truly end-to-end e-mortgage process, due to a lack of coordination between industry segments and a lack of a single standard to unify processes and technology (e.g., what are the standards for indexing, storing, packaging and shipping loan file documents?). They point out that just because lenders are using e-document, e-signature and e-disclosure solutions today, it doesn’t mean the e-mortgage has fully “arrived” - it means these lenders have merely taken another step toward automating their business processes.

Since 2000, the year former President Bill Clinton signed the ESIGN Act into law, various industry groups have worked hard to standardize the e-mortgage process and drive adoption. In particular, the Mortgage Industry Standards Maintenance Organization (MISMO), Mortgage Electronic Registration Systems Inc. (MERS), government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and the CFPB have played major roles in the e-mortgage’s development.

However, as Mark Mackey, executive vice president of International Document Services (IDS) explains, part of the problem is that “no single entity is taking ownership of the entire process.”

“I’d like to see someone take 100 percent ownership of it - whether it’s the GSEs, MERS or MISMO - and say, ‘Here are the specs for this,’” Mackey says. “That’s what we’re lacking. I think everyone is just sitting there, waiting for direction. I don’t want to say it’s not going to happen - it’s just not going to happen real soon.”

Indeed, there are a lot of moving parts that need to be taken into account. In order for the e-mortgage to become a reality, it’s going to require coordination between lenders (including wholesale and warehouse), servicers, the Federal Housing Finance Agency (FHFA)/GSEs, the Federal Housing Administration FHA)/U.S. Department of Housing and Urban Development (HUD), mortgage insurance companies, technology vendors, and investors - not to mention, appraisal management companies and title and settlement companies.

The lack of centralized coordination, however, doesn’t mean these entities have not already taken steps toward realizing the e-mortgage on their own. For example, the FHA recently announced it is now accepting e-signatures on mortgage documents, whereas previously, this was offered only on a limited basis.

“With the FHA finally releasing their acceptance of ESIGN, this effectively removes the last ‘perceived’ barrier to adopting a full e-mortgage process,” says Tim Anderson, director of e-services for DocMagic and a member of MISMO’s Residential Governance Committee. “There virtually are no more excuses not to implement e-closing to provide a better borrower experience, as well as retaining ‘electronic evidence’ to record the event in case you have to prove compliance in the future.”

Another barrier - also mentioned in Part One - is that many of the county assessors’ offices across the U.S., especially those in rural areas, lack the needed e-recording software in order to accept and record e-mortgage documents.

“If they get an e-signed mortgage, I don’t know if they necessarily have a good way to handle that,” Mackey says, adding that for the e-mortgage process to be truly end-to-end, “you have to have the borrower involved in it, you have to have the settlement agent involved in it, you have to have the county recorder involved in it - then you have to have your warehouse line set up for it, and your loan origination system has to support it.”

Mackey says although some barriers remain, they can and will be overcome.

“I do think the e-mortgage will happen,” he says, “but you have so many people and so many pieces involved. I mean, if it was just an e-docs company, or just a lender or just a servicing company, it wouldn’t be that difficult. But you have to have one industry segment finish it and then hand it off to the next industry segment. It all has to be integrated.”

Mackey says it will likely be up to the mega banks and large credit unions ­- “the ones that portfolio their mortgages, second mortgages or HELOCS” - to lead the way in terms of developing e-mortgage standards.

“You could see it there, because they have control over the entire process,” he says. “They close the loans internally in their own branch - they draw their own docs, and they service their own loans: They are their own warehouse line. So they have everything bottled up.”

Mackey says standardization will likely be more influenced by market factors than regulation. Should the big banks decide to embrace the e-mortgage, he says, they will likely work closely with their software vendors to develop new software and standards - and their vendors, in turn, will bring those standards to the rest of the industry.

MERS, Mackey says, will likely play a “pivotal” role in the development of the e-mortgage, moving forward, “because you need someone to be the owner of the process.” He points out that although e-signatures are legally valid - if done properly, in all 50 states, under ESIGN - whoever takes the lead on the e-mortgage should nevertheless be prepared to face some legal battles. For example, unions representing county recorders may bring suits for the development of technology that, in essence, makes their jobs obsolete.

MERS, Mackey says, will likely play a “pivotal” role in the development of the e-mortgage, moving forward, “because you need someone to be the owner of the process.” He points out that although e-signatures are legally valid - if done properly, in all 50 states, under ESIGN - whoever takes the lead on the e-mortgage should nevertheless be prepared to face some legal battles. For example, unions representing county recorders may bring suits for the development of technology that, in essence, makes their jobs obsolete.

Still, “it makes sense to go after it,” Mackey says of the e-mortgage, “because it’s the Holy Grail in a number of ways. Once you have that, you’ve streamlined everything, you have all the data right there. And with that level of transparency, you can satisfy investors’ needs, regulators’ needs and borrowers’ needs, while also achieving significant cost saving on operational efficiencies.”

As mentioned, getting the e-mortgage process to work end-to-end essentially comes down to integrating the pieces of the process. That means having one standard set of docs that everyone who touches the loan will be required to use. It also means integrating communications technology and data storage so that, for example, e-closings can be recorded, securely archived and then accessed later when needed. The e-mortgage presents an unprecedented opportunity to archive and bundle loan data in such a way that every stage of the loan’s life is documented and verifiable.

“When you come down to it, the e-mortgage is all about integrations,” says Scott Stucky, chief operating officer for DocuTech. “It is about exchanging data.

“The advantage of the e-mortgage is that the Smart Doc format gives you the metadata that goes along with the document,” Stucky adds. “And if you look at the class action lawsuits that have plagued the industry for the past five years, relative to foreclosures and custodial issues, all of that goes away with an electronic mortgage. It is, ‘here’s the document’ and ‘here’s the data that goes on the document,’ and they have to match.

“The advantage of the e-mortgage is that the Smart Doc format gives you the metadata that goes along with the document,” Stucky adds. “And if you look at the class action lawsuits that have plagued the industry for the past five years, relative to foreclosures and custodial issues, all of that goes away with an electronic mortgage. It is, ‘here’s the document’ and ‘here’s the data that goes on the document,’ and they have to match.

“And because of the technology, the docs are tamper sealed - so we don’t get into this business of ‘who shuffled paper and sent it to the wrong place?’ or if some custodian did or didn’t have this, or if someone robo-signed or didn’t robo-sign,” he adds. “All that goes away with an e-mortgage.”

Beyond this, the e-mortgage presents a tremendous opportunity for lenders to streamline their operations and gain new efficiencies. Manual, paper-based processes are repetitive and costly - for example, paper docs are cumbersome to fax, scan and/or mail, plus difficult to track and often require verification multiple times prior to closing. Manual processes can also lead to keystroke errors.

With e-documents, however, all parties involved have access to advanced features and functionality that only e-docs can deliver, such as the ability to quickly and easily make changes that are automatically updated in related loan docs, get real-time data, run analytics and run automated fraud detection, among other advantages. Servicers and lenders can even provide investors with status updates on borrower health in the secondary market by way of automated updates to the documents.

“The investors are also playing a major role in the e-mortgage’s development,” Mackey says. “The investor community is embracing it because of the transparency and ease of exchange - you can save money on every file.”

Stucky points out that about 70% of the loan origination systems on the market today are now able to deliver docs electronically, which has created “a huge advantage for investors because it speeds up the process of buying closed loans on the secondary market - but more importantly, it gives them full transparency.”

“I think you’re starting to see some investors who are encouraging their correspondent channels, in particular, to do things electronically,” he adds. “Wells Fargo is leading that charge. Investors are buying closed paper - the loan has already been funded - so it makes sense for them to accept the docs electronically. In correspondent [lending], a big part of the deal is validating the paper - running it through quality control and validating what you’ve just bought. That happens a lot quicker with an e-mortgage.” s

(Tune in next month for Part Three, when we will look at how the e-mortgage is changing the borrowing experience for consumers.)

As featured by MortgageOrb Magazine, March 2014