The state of global e-mortgage
Two global e-mortgage experts joined an ESRA panel at a recent event to discuss the current state of the industry.
The participants were:
- Tim Roberts, Senior Manager of Product and Quality, Westpac (from Australia)
- Brenda Clem, eWarehouse Director, Street Resource Group (from the US)
Roberts started by asking: “Why did we get on the ESIGN journey? Three years ago, we were hearing from our customers that they were missing their settlement dates. We have about three or four weeks before the settlement in Australia, and since we’re paper-based, we were taking too long.
“I broke the process down and analyzed it, and could see that a big chunk of the process was sending off the documents in paper, getting customers to meet with lenders, and then sending the paper documents back to be scanned and imaged and sent back to where they needed to go. We found that the process didn’t get the customer ready to settle, which meant they were ready to move into the house but couldn’t because the process wasn’t finished.
“We thought about delivering the documents electronically, and they said, ‘Why don’t you make that happen?’ We now have ESIGN live and have moved into a virtual product cloud. We’ve got one state, Victoria, in Australia that accepts e-signatures on mortgage documents without a witness, which means we can have a paperless post-approval process. So the lender doesn’t have to be involved in that part of it, and within minutes we can have them back and ready for certification and settlement. It used to take 11 business days and sometimes it can now take minutes. We can even do it on a mobile device.
“The documents can be hundreds of pages long, with small text and tables, so it can be hard to read on mobile devices, which the lawyers don’t always like. We’ll probably have to stop using mobile devices. We’ve moved from paper-based into a digitized paper-based process. We’re moving PDF documents around, but we can now see the future, which is moving toward a digitized process using blockchain and other technologies to make it much easier.”
The warehouse lending perspective
Clem said: “I’ll start with a baseline on warehouse lending, which supplies all the money used at closing. In 2016, of all of the loan transactions, $1.3 trillion of that was funded by a warehouse facility. Out of that, there are 85 warehouse lenders in the US right now. So looking at that and wanting the full digital transaction, warehouse lenders have been hesitant because they’ve been concerned about the security of the collateral.
“Warehouse holds the note and wires the money to the closing agent. The loan is funded, the borrower walks away, and the warehouse lender receives the original collateral. The rest of the closing package goes back to the originator, which sells it to the original investor, and the warehouse delivers the original collateral to the end investor, which wires the money to the warehouse. Any additional funds are returned to the originator as premium. It’s a very important component in real estate.
“The most significant barrier has been training around digital transactions during closing. They’re still a big part of the industry that doesn’t understand all those components. There was a 2016 survey that found that over 70% of the lenders said they’d begun some kind of implementation. They’re allowing some e-signatures on some documents, and the desire is that there are some hybrid closings where they’re signing everything but the note and the recordables. That’s phase one.
“As we look at phase two, we’re looking at adding the smart document e-note into that and then extending that out to include e-recording of the mortgage and other documents but adding e-notarization to it too.
“As we look at those phases, some of the key technology considerations are, if you’re not a MERS member – warehouse lenders aren’t, but they need to be for e-notes. So that’s something new for them to deal with. That allows them to use e-registry and e-delivery.
“As we look at the electronic documents and adding smart doc e-note version 1, some of the doc vendors out there are supporting 3.0 and beyond, having the electronic closing room, whether they’re recordable or not. Having an e-vault solution. County recorders have been resistant because there’s the click sign where it looks like typed words and they have issue with that. So there’s an initiative at the county level, and there are about 1,800 counties that accept e-recording right now, but we need all 3,600 to do it.
“E-notarization: there’s legislation going on. There’s an initiative with MISMO, and I’m one of the co-chairs of that group. They’re implementing data standards around that. There’s power of attorney and other documents that don’t need to be recorded that could easily have the signature notarized.
“There have been 16 press releases around e-mortgage, so it’s something to keep track of.”
Back to the beginning
Clem recalled: “The first e-note was closed and funded in 2000. Fannie Mae developed their e-note in 2003, and in 2002 automated underwriting was the dominant technology, and most originators were using it. Cloud technology was still on the drawing board.
“When we look at going forward, the legal foundation for this was created 20 years ago, and that is the legal structure that we’re using for this. We have a lot of originators who are permitting hybrid closing, but they’re not using smart doc e-note because they’re an investor that’s not Fannie or Freddie that doesn’t always permit them to sell e-notes. A lot of conversations are being had by our company to allow aggregators to buy e-notes and why that’s important. We’re going to add e-notarizations and e-recording for all kinds of documents.
“There’s a difference between e-closing and digital mortgage. We’re looking at taking the future state, the big picture we want to get to is to look at the transactions on the New York Stock Exchange, we’re looking at a mortgage transaction being something like that, where millions of trades are transacted in nano-seconds.”
How to change the industry
Clem continued: “What do we need to do to change the business in 2018? We have MERS registrations, and that is growing by about 200 a month, so we’re not setting the world on fire. We had 2,038 e-notes registered so far this year. We have 65 companies active on the MERS e-registry. We had 20 lenders who have registered at least one e-note. We have 10 warehouse lenders funding e-notes and we have 13 vendors on the Frannie and Freddie technology provider solutions list. That’s a small sliver of the folks who can provide that, so we need others to see this opportunity.
“Lenders are accepting online applications. There are very slick user interfaces out there. Quicken and others have capitalized on it, but when we get to the back end of the process, we’re still papering that out, and it’s labor-intensive and costly. In a previous job, we had a million docs in a holding area and the floor was collapsing because of the weight. They went out and signed up with Iron Mountain and started scanning documents, which was the catalyst for them to move to electronic images.
“Looking at it purely selfishly from the secondary side, the collapse of our industry in 2007 and the mortgage-backed securities that had been sold to the industry to insurance companies and retirement accounts, the visibility wasn’t there. People had no idea what the quality of those loans were, and when they started to collapse, the investors in those assets lacked visibility to see what was going on. We’ve had trouble getting the private label market to get back into these assets because they were burned before.
“Our desire is to bring them back into the market and through that is full visibility into the mortgage transaction. That’s the only way that will happen. So with a lot of retooling in the LOS and servicing systems, now you’re bringing warehouse back in, and with large data grabs, all of that gives better visibility for the end investor because they can tie everything together and feel more comfortable with the assets they’re buying. Now they can examine them and kick out what they don’t want when buying a pool of these loans. It’s a win-win.
“The great thing about MERS is that it was bought by ICE, which also has the New York Stock Exchange. Some new enhancements will come out with MERS and ICE in 2018. MERS will be able to expand what they’re offering. We have e-vault technology. We can use e-delivery to examine the authoritative copy with the other MERS members. From the warehouse side, we’re working to expand the delivery of the smart authoritative copy from the warehouse to the end investor but also including the wiring instructions so we can close that loop. Then they know where the collateral came from and who needs to be paid for the transaction.
“The other piece is that if you’re not a MERS member, they have developed their site and made it easier to become one and go through testing. There are good tools out there aiding our industry toward adoption.”
Looking forward in the US
Forecasting the future, Clem said: “We know that we have to slow walk originators and title and servicers into this space. Part of that is showing them the benefit. We’ve done a great job on the front end with origination, but on the back end, it takes more time for the loan closer, title, those involved in the post-close process, so we need a clear roadmap for how they get started. At the executive level, we explain what’s great about it and the ROI. But the conversations we have with settlement involve how many mouse clicks and so forth.
“Right now, I might have 12 closings that I get done a day. By introducing this new technology, if I drop back to 10 or 11, I can’t do it, but if I can go to 14, I’m all in.
“We’re getting good feedback from the industry. It’s about education and awareness. We became industry advocates two years ago. We’ve been talking to everyone we can get an audience with. We’ve been talking to various associations to explain what it means to their industry and how we can help. It has led to future conversations and we’re grateful for that. We want to figure out where and how to move this forward.”
Looking forward in Australia
Roberts explained: “We’re just at the beginning of the public cloud. We’ve only just been allowed to roll it out to customers. We’re going to take it from state to state and make sure all the banks and brokers can offer this to customers. We’ll refine the process as we go. We’ll talk to the states that aren’t on board with e-signature and see what we can use, such as video, to address the challenges.
“We’re going to evangelize it too. I feel like I’ve been through a war, but we’re the only bank in Australia doing it paperless end to end. There’s a lot of problem-solving that we’re doing.”
Q&A
Q: “Victoria is testing e-sign. Is that their digital version of e-notary?”
Roberts: “In some states. Queensland, for example, requires a justice of the peace, which is close to a notary, to be the witness. Other states require an adult not related to the person. They can witness it electronically, as long as they’re in the same room. It can be the lender too.”
Q: “Presenting and rendering mortgage documents on a small mobile screen is a challenge. Do you have to deal with that too?”
Roberts: “We have that challenge too, where the mortgage documents’ look and feel is dictated by regulators. We’ve moved to a national mortgage that has some elements standardized, but not the requirements behind it. And looking at that on a mobile device is tricky. The type is often small. It doesn’t pass the ‘easily legible’ legal test. There are teams that are redesigning home loan documents so they can be responsive on a mobile device and pass that test.
“I’m not in the huge enterprise project. I take what we have and digitize it and adapt it. We’re being told we have to block mobile devices until we can redesign them so they’re easily legible. I was annoyed but I realized that giving a customer over 200 pages to read, absorb, and sign on a mobile device is a challenge.”
Q: “You’re evaluating data to evaluate mortgages. I presume that’s a by-product of the electronic process. You evaluate them – do you pass that on to investors?”
Clem replied: “I’m on the warehouse side, so I’m just providing the money that’s on the table. The end investors didn’t have visibility into the transactions when it was paper-based, so digitizing it lets us get more data from the LOS that wasn’t being delivered to end investor before.
“They’ll be able to get all that data and tie it back to the electronic documents so that the interest rate in the LOS is the same as the document. No need to ‘stare and compare’ anymore. So you just have to investigate the anomalies. It cuts a two-hour process to minutes. The end investor who has more visibility can figure out pricing for populations of loans more easily. That’s what we’re h
