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How transforming mortgage custody could drive liquidity

The ability of custodians to address common challenges could reduce risk for investors

HousingWire recently spoke with Aditya Udas, managing director at Iron Mountain, about the potential for digital transformation of mortgage custodial duties and how Iron Mountain is innovating collateral management.

HousingWire: How does custody transformation impact the mortgage industry?

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Aditya Udas: From Iron Mountain’s perspective, mortgage custody directly impacts liquidity in the housing market.

Custodians are responsible for storing mortgage collateral documents on behalf of the investor for the life of the loan – 30 years, plus ~4 years after the mortgage is paid in full. There are approximately 55 million files currently held by document custodians, which is expected to grow to 61 million by 2025. Basically, all loans that are sold to the secondary market are stored by custodians.

But before the long-term storage, custodians are responsible for the critical task of certifying the mortgage. Lenders send their documents to the custodians, who perform an initial certification to confirm completeness and accuracy – and to validate that the documents match the data that Freddie Mac, Fannie Mae and Ginnie Mae hold on the mortgage. The GSEs require this certification be completed before they securitize and sell the mortgage to investors.

If there is any delay in certification, then the mortgage is delayed in reaching the secondary market. And if certification is not done properly, there is a risk to the investor from the faulty data. These are critical challenges that not enough technology providers and fintechs are focusing on today.

HW: What are the trends impacting the custodians?

AU: Firstly, the issue of scalability. For all of us in mortgage, it’s been a wild 12 months on the origination and refi rollercoaster. Although it brought in record profits, the high volume brought a lot of operational pain for all players in the industry as we tried to scale. Custodians faced the same issue – file certification is a manual process required to be completed within eight business hours of receipt. In times of high volume, custodians face tremendous pressure to meet this SLA.

Secondly, digital mortgages – in the next 10 years we project that the majority of mortgages will be digital. eNotes registered on the MERS eRegistry increased approximately 350% between 2019 and 2020 (127,178 files vs. 462,671 files). The continued adoption of eNotes often forces custodians to maintain parallel universes – one set of operations for physical certification and mortgage custody, and one for auto-cert and eVault storage.

HW: Where is Iron Mountain innovating to address mortgage custody scalability and the rise of eNotes?

AU: For scalability, Iron Mountain has developed our AI/ML tool for unstructured data called InSight. InSight uses intelligent document processing to certify physical or digital collateral: classifying, extracting relevant data, validating the data and reporting that certification to the GSEs. InSight removes the need for manual certification, drastically reducing operational expenses, improving accuracy and enabling rapid scaling.

For eNotes, we are investing in general infrastructure such as auto-certification (or integration to the GSEs auto-cert tools) as well as building an eVault for storage. But more tactically, the thornier problem is addressing that “parallel universe” I described earlier. To address this, Iron Mountain is exploring a concept called “The Bridge.” We asked ourselves ­– can physical collateral be certified using the same process and infrastructure as an eNote?

The answer is yes. The Bridge is a process for delivering a seamless physical collateral management solution from the origination table through paid in full that mirrors the custodial experience of a native electronic closing. It includes:

  1. Digitizing the physical collateral package, creating a quasi-eNote
  2. Running the quasi-eNote through InSight, to process and extract the unstructured data
  3. Certifying the data through the eNote certification process or auto-cert tools
  4. Storing the quasi-eNote in an eVault and providing an option to store the original physical collateral in a vault if needed
  5. Creating a leverageable data record for each physical-born collateral that includes closing document data validated against origination data and later appended with data on trailing documents, assignments, transfers, investor information, servicer information, MERS data, partial releases, foreclosure documents, and paid-in-full events. 
  6. Building an industry eBridge Platform used to track collateral certification and lifecycle updates of physical collateral that has been digitized and converted to structured data.  The eBridge Platform will provide rules based access to multiple concurrent users, with governed and monitored update privileges. This provides a transparent view into the loan level chain of title through both data and supporting images.

HW: What would these innovations mean for the industry?

AU: This would impact everyone in the life cycle: investors, the GSEs, custodians, lenders and ultimately the borrowers. Focusing on the custodians themselves, the legacy manual processes serve as a root cause for lost or damaged documents that, in the worst-case scenario, can make the loan unsaleable. Using InSight, the custodian expands client value by electronically classifying documents and extracting structured data sets that are compared across documents and loan level servicing data using AIML based technology. This enhances efficiencies and accuracy, ensures SLAs are met, and expands metadata per file that custodians can analyze for future growth, enhanced reporting and risk management. By using “The Bridge,” custodians can operationally support the hybrid environment of rising eNotes and physical notes – keeping costs down as we steadily move to 100% digital.

Again, the ability of custodians to address these challenges will ultimately drive liquidity in the market and reduce risk for investors.

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