Every April, more than 30,000 runners take off from Hopkinton, Mass., to compete in the world’s most famous marathon – the Boston Marathon. And as they do, thousands of them encounter what is known as “the wall” – the point during the race, usually about two-thirds of the way through the course, where they experience severe and sudden fatigue. At this point, only good preparation and training, and some extra carbs, will get them to the finish line.
Indeed, marathons are not for the weak of heart, body and mind. In some ways, the same is true for the mortgage industry, which is experiencing its own marathon of sorts when it comes to a true paperless mortgage. In fact, it seems much longer than 17 years since the first paperless mortgage was completed in Florida. With most lenders preoccupied today with compliance or an improving purchase market – or both – one might wonder if we’re ever going to reach the electronic finish line.
The reality, however, is that we’re in the home stretch. Little by little, many pieces to the mortgage transaction have been automated and made paperless, forming the building blocks that will eventually lead to most mortgages being closed electronically. That’s not to say there are hurdles, as there are more than a few.
The legal bedrock for electronic closings was created nearly two decades ago through the Uniform Electronic Transactions Act and the Electronic Signatures in Global and National Commerce Act (ESIGN). Both laws established equal legal status between electronic transactions and paper signatures. ESIGN also removed barriers to electronic interstate commerce and international financial transactions, as well as legalized notarizations in which the notary signs electronically.
Although the progress of electronic closings seems to be crawling at a snail’s pace, 16 states now permit e-notarization for face-to-face transactions. An e-notarization is the same as a paper notarization except the document is in digital form and the notary signs it with an electronic signature. Depending on the state law involved, the notary’s seal could be placed on the document electronically through a graphic image or other means.
The most convenient form of an e-notarization will take place over the Internet. But right now, there is little legal standing for remote notarizations. No title insurance company will insure them, and Fannie Mae and Freddie Mac will only support e-notarizations if they take place face-to-face. Although the technology for remote notarizations exists, it creates a very large risk most lenders are unwilling to take.
Recently, there have been efforts to remove this barrier. Virginia, for example, recently enacted a law that allows notaries with the proper audio/video equipment to conduct online notarizations by letting those signing a document “appear” before the notary by using a webcam or other technology. Both face-to-face and long-distance e-notarizations are also permitted in Montana. Similar pending legislation in other states is drawing support from those who believe remote notarizations will create a new business-friendly option for consumers.
Other players out there are helping, too. For example, Pavaso, a company that provides an electronic closing platform for settlement service providers, is also working on an e-vault. It has a very close relationship with closing agents, who are the boots on the ground in closing environments. Pavaso is training agents on how to conduct electronic closings and walking them through the entire process. It’s quite a different approach to providing closing services, but in some cases, it will take outside-the-box thinking to make electronic closings a reality.
And though many county recorders now allow electronic recording of lien releases, some do not allow e-recording for the seven other common types of mortgage documents, such as the mortgage/deed of trust and loan modifications, which creates another hurdle. Efforts should be made to find out why certain states are holdouts. Is it a lack of technology at the county level or a lack of understanding on how e-notarizations are done? The Property Records Industry Association is one of the entities taking lead on removing this hurdle by conducting direct outreach to county recorders offices and with state officials and by working with the Mortgage Industry Standards Maintenance Organization (MISMO) to educate and train public agencies on the benefits of e-recording.
Cost and awareness
Of course, the mortgage industry has its own barriers to overcome. For example, lenders’ reluctance to adopt electronic closings remains a significant obstacle. To understand this obstacle better, as well as how to remove it, it’s helpful to understand the two types of electronic closings. Most e-closings, for example, are not fully paperless closings but hybrid e-closings. These are loans with documents that are signed in ink and then scanned and submitted electronically for recording or loans in which the note and mortgage are signed in wet ink and the remaining closing documents are signed electronically. Far fewer e-closings are fully paperless, in which the loan is electronically signed with an e-note. By definition, e-notes are created using either SMARTDoc v.1 or SMARTDoc v.3 standards, and after closing, the loan file is registered on the MERS e-registry and in its e-vault. In addition, each party to the transaction will need its own e-vault provider.
For obvious reasons, e-notes are the better option for everyone involved. Not only are they more convenient for consumers, but they also ensure higher data quality. e-notes also make it much easier for lenders and third parties to perform automated reviews, as opposed to reviewing loan files manually, which is a leading cause of soaring loan costs.
So why aren’t more lenders doing e-notes? One big reason is money. Lenders that choose to do e-notes often discover that many of their partners do not currently accept them. These lenders have the option to do both e-notes and hybrid e-notes, but that is expensive. If paper processes still work, many lenders are simply deciding to stick with them.
Another hurdle involves education. Many lenders simply don’t know how to get started. For example, e-notes require lenders to partner with a vendor that offers SMARTdocs. Many lenders are unaware of what these vendors are. Once they find one, they still need to spend time and money training their staff on how it works.
To help move things along, Street Resource Group has been participating in an eMortgage Educational Webinar Series created by MISMO and the Mortgage Bankers Association and administering monthly calls for the e-Warehouse Workgroup. Since the beginning of the year, we have been hosting a series of workshops designed to educate mortgage bankers and warehouse lenders on the benefits of electronic closings. We recently held workshops on e-mortgages, and later this summer, we will hold workshops on e-closings, post-closings and delivery. In October, our workshop series wraps up with a workshop on how to sell e-notes to the secondary market.
Already, we’re seeing considerable progress and increased adoption of e-notes in the warehouse sector. Merchant’s Bank of Indiana, Santander Bank and FirstFunding are just a few warehouse lenders that have begun using e-notes. These adoptions offer proof to other industry participants that e-notes can and do work.
Heading down the home stretch
Although we have been focused on the remaining hurdles to e-closings, it helps to remember how much progress has already been made toward paperless mortgages over the past two decades. More than half of all borrowers now turn to the Internet when shopping for mortgages, according to a recent survey by Fannie Mae, and many of these borrowers are filling out applications, too. They can expect approvals in minutes, thanks to new automated verification tools. Electronic disclosures are widespread, thanks, in part, to the Consumer Financial Protection Bureau and the TILA-RESPA Integrated Disclosures rule. MISMO has created a data dictionary that allows lenders and the secondary market to deliver and authenticate disclosure data with greater efficiency. And today, roughly half of all county recorders offices nationwide allow mortgage documents to be recorded electronically.
Indeed, it appears we’re in the final stretch of the marathon to make paperless mortgages a reality for all. In the next several years, it’s very likely the mortgage industry will have achieved a true end-to-end, standardized e-mortgage, with e-notes that can be compliantly and securely transmitted from vault to vault, as well as e-notarization that makes investors feel confident.
To reach the finish line, it will take the collective, concerted efforts of all of the parties involved in the mortgage business to not only understand the benefits of these innovations, but also create a path for them to be adopted. It will also take continued grassroots efforts with mortgage bankers to help them make the transition to e-notes and continued outreach to public officials to support these efforts.
It can be frustrating to see so clearly the benefits of paperless mortgages without seeing widespread adoption. On the other hand, it wasn’t meant to be easy. It really is a marathon – and like a marathon runner who reaches “the wall,” the ability to move forward can only happen when the runner has prepared properly and put in the required work, which would have begun months or even years prior.
It may help to know that, as challenging as the Boston Marathon is, over 95% of entrants finish the race. When it comes to paperless mortgages and e-closings, there should be no doubt we’ll make it to the finish line, too.
Stanley Street manages the strategic vision of Street Resource Group Inc., a provider of information systems and business process consulting to the financial services industry. He can be reached at firstname.lastname@example.org.