Digital mortgages are (once again) a hot topic for the mortgage industry. However, we mortgage professionals are rather fond of dropping terms like “e-closing,” “e-mortgage,” “e-sign” and even “e-vault” or “e-note” almost interchangeably. Some look at the solutions currently available as “cradle-to-grave” when they actually only touch on the loan application process.
Others think e-closing is truly impossible and will be for years because of state closing requirements. Still others think it’s an “e-closing” if someone used Microsoft Word to create the closing documents.
So what the hell is an e-mortgage, anyway?
The truth is that our industry widely accepts that the mortgage process needs to be digitized, but very few outside of the technology developers themselves understand where we are, what we can do right now and what the future holds for the digital transformation of the mortgage.
We’ve assembled the following primer on the digital mortgage as a starting point by correlating the various technologies to the segments of the mortgage transaction they actually impact. We then move on to discuss what’s available to the industry right now, and what we could see in the future.
Part I: Digital mortgage 101
Almost weekly, you’ll see that another mortgage lender, or title company or technology provider is announcing its first “e-closing.” Perhaps that provider or lender proclaims itself to have created an “end-to-end” solution. Maybe it’s interchangeably referred to as “e-mortgage,” “e-closing” and “e-note.” Judging by the headlines we see, one would think the mortgage transaction, after decades and decades of being anything but “paperless” or “streamlined,” has finally gone digital.
Well…yes, and no.
The good news is that, unlike similar headlines from five to 10 years ago, the digital mortgage is now more reality than theory. The technology is mostly in place for an “end-to-end” solution, and we are closer to adoption than ever before.
The not-quite-as-good news (there’s really no bad news in this…we are moving forward to the industry’s and the consumer’s benefit) is that there is still enough inertia, skepticism and practical resistance to the concept of a totally digital mortgage experience that we’re not quite end-to-end. Not yet.
Moreover, it’s not even clear that we’re doing it for the right reasons. Some are hoping for a grand plug in of sorts, a single platform that takes the note from application to secondary market. Others are being dragged/driven by necessity—it’s getting quite expensive to originate these days. But let’s start at the primary reason for doing this. Without understanding that, there’s no point to the transformation, as it’s likely to go off course sooner or later.
Why do we need to digitize in the first place?
The whole need for a digital process—or at least a more simple, unified process—has plagued the mortgage industry for decades. That’s because we are provider-centric. Each technology; each process and each system is designed to make it easier for the title agent, the loan officer, the escrow officer, the appraiser or whomever to complete his or her part of the deal.
We remain a disparate hodge-podge of service providers, vendors and originators busily working in our own silos on our own little elements of the larger transaction. Sometimes we use technology. Sometimes we don’t. Sometimes we communicate with each other. Often we don’t. But rarely, if ever, does the technology fit together seamlessly. At least, not from the most important, and yet, most often overlooked perspective: that of the consumer.
Think about it. A borrower enters a home-buying transaction (especially her first one) with little to no understanding of what it really takes to buy a home. Perhaps she does a little Google research, finds an “online application” for a mortgage. Maybe a Zillow ad directs her to a Realtor. Or a mortgage broker. Before long, the new homebuyer is being pelted by a hail of concepts with which no average person should be well-versed.
The loan app may be online, but the loan officer calls with questions. Or sends an encrypted e-mail. The Realtor likes to text. A loan officer’s assistant calls again asking for more information. Then, an honest-to-goodness letter arrives via postal service, congratulating the borrower on being approved. At some point in this scrum of a process, that same homebuyer might need to fax a sales agreement; wait endlessly and without explanation on an appraisal; haggle over what’s written in a home inspection report and be given a crash course in flood insurance—or perhaps several—from Realtor, mortgage broker or loan officer.
And, through it all, there’s the waiting. She’s powerless to make anyone call her. There’s nowhere to go to get the information she needs, except possibly voice mail hell.
And that’s all before the closing. How did we get an escrow agent involved in this, again?
Never mind the digital transformation for a second. Our industry is in desperate need of a way to present a single face for a single transaction to the person who drives it all: the consumer. Herein lies the most important thing to realize about the digital transformation. In spite of what others might have you think, this is not solely about using better technology. This is not about using less or even no paper. This is not even about making life easier for the dozens of different specialty firms that make up the process; reducing costs, errors and redundancies. These are all fringe benefits.
There are numerous reasons for our industry to be moving toward a digital mortgage process.
- It would centralize the transaction for all stakeholders (consumer, Realtor, lender, title, etc.). Instead of working in separate silos, the service providers would come together in the same digital “workspace,” realizing efficiencies and speed we can’t find in today’s disparate paper process.
- It would standardize the transaction. As is the case with manufacturing, it’s virtually impossible to accelerate production until you’ve standardized how you will build that product.
- It would modernize the consumer experience, pulling the mortgage industry within shouting distance of the way consumers already purchase cars, student loans and other major products and services.
- Getting started provides a path for evolution and adoption of the digital transformation. The best digitally-focused systems today will continue to innovate, helping the users of those platforms to evolve and stay on paced with consumer and business technology trends. Consider, for example, eVault or Blockchain, both of which could be major players in the digital transformation. While the industry is, at the moment, moving toward eVault-oriented solutions, it’s just as likely that Blockchain will evolve, leaving eVault in the past. The best platforms today will allow their users to evolve with the migration to Blockchain, and with more than just a bolt-on or spot solutions such as eSign or eNotary. The evolution for those businesses would ideally, then, be seamless, no matter what direction the technology goes.
Digitizing the mortgage transaction is also an optimal way to make life much easier for consumers undertaking the largest financial transaction most of them will ever enter. And that is why it’s not critical that we make the hyperspace leap from the paper/tablet-and-chisel/phone-and fax world to a space aged process where one can get a loan in 30 minutes in line at a McDonalds. What’s important to remember about the utility of what we still call e-Mortgages is that it’s not about the tech. It’s not about turning the process on its head for the simple sake of “progress.” Instead, it’s about taking the steps needed—one at a time—to make it easier for the average Joe to get a home loan. This is not an all-at-once proposition. It will need to happen in stages.
So let’s start with the basics. As an industry, we don’t even refer to the elements of a better transaction in a uniform manner. Let’s start with the vocabulary itself. More specifically, how do the various elements of the digital transformation correspond to the long-established elements of the mortgage transaction itself?
Digital mortgages defined
Once known as the “e-mortgage.” This is the somewhat generic term we’d like to see used globally to describe a complete mortgage transaction, from loan application through escrow, closing and recording and on to the sale into the secondary market, done completely through technology. In other words, the most important loan documents are created, executed, transferred and stored electronically. It’s applicable to the entire mortgage loan life cycle, and is also often referred to as an “end-to-end e-mortgage” or “paperless mortgage.”
Candidly, we’d love to see the term “e-mortgage” vanish into history. It reeks of ‘90s dot com technology, as well as a time when all things digital were, for the mortgage industry, theoretical and well onto the horizon. The technology for a complete digital mortgage transaction is here today. We just need to assemble it and adopt it. Let’s acknowledge that evolution in how we describe it.
Let’s also remember that a digital mortgage is not an all-or-nothing proposition. We can get there in stages.
Covers all elements of the disclosures (Loan Estimate and Closing Disclosure) using smart documents, which usually means the consumer can see accurate documents well before the scheduled closing from anywhere or anything that has an Internet connection. While the closing may be “in person” at a single site, all signatures are recorded digitally, and immediately incorporated into the smart doc without need for rekeying or data entry. This is here. Now. Today. Almost everywhere. All but nine states allow substitutes (remote notary, etc.) to the ancient ritual of “wet signing” a paper document (or parchment) with a pen in front of a notary public or attorney. This was one of the great impediments to the digital closing. Of all the elements of a digital mortgage, this is being adopted most widely and with gaining speed. The digital closing applies only to the actual settlement and closing process: the assembly of all documents necessary to execute the mortgage instrument and the formal execution of those documents.
Really a subset of the digital closing and once called “e-signing.” This is the element involving the ability of the consumer (or service providers) to review the LE and/or CD as well as other necessary closing documents online prior to the closing, and to “sign” all required documents using a digital signature (rather than pen, quill or chisel). The digital signing really only applies to the electronic signing or execution of documents required for the execution of the mortgage instrument.
Once called an “e-note,” this is really almost interchangeable with “digital mortgage” or “e-mortgage.” However, to be specific, this refers to the actual mortgage documentation and is most frequently used in conversations regarding the electronic storage of the digital note or mortgage in an “e-vault.” As Fannie Mae itself noted in an FAQ about “e-mortgages” in December, 2016 “This can still include a traditionally wet-signed security instrument.” The concept of the digital note is, as a practical matter, the electronic manifestation of an electronically-created mortgage instrument.
Also known as the e-vault, this is the electronic place of storage for digital notes/mortgages. The digital vault enables one to securely provide certification, storage and status reporting for electronically created and signed mortgages. The concept of the digital vault is most applicable to the servicing and secondary market stages of an executed mortgage.
Bridging the digital mortgage of today with the digital mortgage of tomorrow—the hybrid closing.
Quite new to the traditional conversation of the digital transformation of the mortgage is the hybrid closing. It merits its own definition here, as it is the keystone to the wide adoption of a digitized process. This is the catalyst from the archaic mortgage into an improved, more customer-centric process, even though it does not take us all the way to a completely digitized transaction. In other words, it’s the missing connection between theory and reality when it comes to digital mortgages.
Useful especially in states that have not yet updated their more arcane signing requirements, a hybrid closing platform enables the consumer to see the required closing documents online prior to the scheduled closing, as well as digitally sign any documents NOT required by state law to be “wet signed” in person.
From there, the consumer signs any documents requiring that wet signature at closing, which are immediately entered into the existing electronic closing documents for recording. It is critical to note that this has become the primary portal for lenders and providers seeking to become digitized without foregoing business with providers, investors or upstream lenders that do not (yet) accept e-notes. It is critical to note that the GSEs, investors and lenders—even those who do not accept full digital notes for resale in the secondary market, will accept mortgages closed on a hybrid platform.
So why is the hybrid closing so important to bridge the gap between the days of the paper-saturated mortgage process and the paperless mortgage? Quite simply, many lenders and service providers have resisted the initial steps to digitization—adopting a digital closing platform—for numerous practical reasons: their service providers don’t have digital platforms; the state in which the property exists requires wet-signed documents; lenders or servicers don’t wish to eliminate business from entities still using traditional means to generate mortgages because they’ve implemented digital platforms.
The hybrid platform allows its user to accept both traditional and digital mortgages, and empowers that entity to sell the mortgage to firms that accept OR reject notes which were generated digitally. Moreover, the transition from a traditional closing platform to a hybrid closing platform is the most intensive implementation process of all the elements needed for a complete digital mortgage platform, and it’s surprisingly not that intensive. In other words, once a lender, provider or investor has made the investment and implementation of a hybrid, the remaining implementations are even more painless and less disruptive.