The future of mortgage closings

Where do we go from here?

Future of closing - april magazine

A painstaking, uncoordinated movement to fully adopt remote online notarizations nationwide and complete end-to-end digital escrow mortgage closings is gaining even more traction as the real estate industry launches into a new decade in 2021.

But depending on where you work in housing, it can feel like a bumbling snafu, a noble attempt that’s stuck in slow motion, or maybe even a lifelong crusade where patience and persistence will eventually win the day. Where does the industry go from here?

Combined with real estate’s technological adaptation that’s kept transactions healthily moving during the coronavirus pandemic, recent events are signaling that complete electronic mortgage closings on a much larger scale could be the next big shift in property transactions.

The pandemic is injecting even greater urgency in endorsements of eClosings at the county and state levels from several private sector leaders in residential real estate — and perhaps a few public policymakers who might not be holding out too much longer.

“It’s not insurmountable to get permanent RON laws passed over the next few years by states that haven’t done so,” said Bill Anderson, vice president of government affairs for the National Notary Association in Chatsworth, Calif. “But there’s got to be a will to make it all happen.”

Your secretary of state is key

To understand where RON is going, you need to understand where it’s been. Historically, a notary is not needed to simply oversee a promissory note contract

signed over from a borrower to a lender. In reality, notaries administer promissory note signatures that support legal property liens for mortgage collateral purposes where the Electronic Security Instrument (deed of trust) is what actually gets recorded in local counties. Officially transacted property collateral by a “third party” notary provides assurance to securitized bond markets and government-backing agencies when lenders sell mortgages to investors.

Given this history, going fully RON means weaning off wet-ink closings, hybrid closings, pandemic-era socially distanced “mobile” closings and even remote ink-signed notarizations (RIN) for industry players who are up to the challenge. That is as long as they can envision the efficiencies gained, cost reductions, enhanced security and get local buy-in from county recorder offices.

What’s also helped? COVID-19 immediately moved mountains of homebuyer paperwork into the digital sphere within a handful of states that hadn’t transitioned to RON prior to the pandemic. And for longtime RON cheerleaders, acceptance within financial investment markets and government intermediaries already developed over the past 10 years. Freddie Mac, Fannie Mae, Ginnie Mae and others have come a long way to give investors peace of mind.

But the hard truth about the future of eClosings is etched in a years-long complex patchwork of permanent-versus-temporary state legislation and “authorization,” governor emergency orders on professional eNotary oversight, county recorder willingness, local real estate transaction law, technology upgrades, properly certified specialists, liability and fraud concerns and lender workflows.

After piece mealing a partially-paper-partially-electronic grid by public and private interests to mark the trail we have today, you shouldn’t expect widespread wholly functioning implementation of eClosings to kick off tomorrow just because of the lingering pandemic.

“Historically, you still have to get the blessing of the secretary of state — who’s usually the notary regulator — in any state to pass an official permanent RON law for eNotaries to legally practice,” Anderson said. “If the secretary of state isn’t on board, it’s hard getting legislation out of committee to support any type of permanent remote-notary or electronic-closing escrow services.”

And that’s with broad nationwide support already amassed from real estate agents, land title specialists, escrow officers, lenders and trade associations for years on end.

Legality vs. capability vs. cooperation

A state’s structural foundation for allowing RON or RIN is completely separate from its stance toward allowing remote notaries to actually practice those notarizations — the latter being a much-coveted second step in the ongoing storyline. The first step is the legal basis for electronic signatures and notarizations, which have been around for 20 years. With the exception of New York and Illinois (which have electronic signature statutes), all other
states and the District of Columbia have deferred to — and ultimately derive their RON and RIN authority from — the Uniform Electronic Transactions Act passed by the Uniform Law Commission in 1999.

This act filled in the gaps where state legislatures and secretaries of state did not initially tread. For federal jurisdictions, Congress passed the Electronic Signatures in Global and National Commerce Act (E-SIGN) in 2000. In conjunction, 30 states gradually passed official permanent laws over the years allowing eNotaries to directly administer remote non-ink notarizations or remote ink notarizations — that desirable second step. Some of these states have gone further and developed post-law compliance regulations while others have taken a minimalist post law approach.

Meanwhile, eNotaries in another 18 states have been given the green light by an assortment of temporary laws, authorizations and emergency orders over the years to perform their trade electronically. Approximately half of these states’ “temporary” approvals were either developed nearly overnight or fast-tracked from prior discussion when last year’s COVID-19 social distancing policies were put in place.

The remaining two states having no permanent or temporary laws that expressly approve of notaries to practice RON, or RIN for that matter, are California and South Carolina, and they are outliers for completely different reasons. During the springtime 2020 crisis point of the pandemic, then-California Secretary of State Alex Padilla (now a U.S. senator) fiercely opposed discussions in the U.S. Congress about passing a federal emergency law temporarily allowing RON in states where eNotaries had never been given approval by their legislature or secretary of state.

While Congress ended up not going this route, many states and governors passed their own emergency legislation, authorization, or temporary orders anyway. California did not. “Many were not surprised that California’s secretary of state was opposed to those discussions in Washington, D.C.,” said Gavin Ales, chief compliance officer for DocMagic, an eClosing provider based in Torrance, Calif. “They were surprised over the strength and emphasis in which he pushed back. He wasn’t just against it; he was very averse to the idea.”

California decided that only socially distanced “mobile” closings were appropriate. Also, and perhaps unanticipated, RON closings were only allowed if eNotaries providing the service were out-of-state — but even this brief show of support for out of-state notaries was eventually withdrawn. Padilla stated in a letter to Congress that he had concerns over consumer fraud given the online audio-visual nature of an eNotary’s interaction with document signers.

“Please don’t force us into something we’re not ready for, is basically what California stated,” said Mark Ladd, past president of the Raleigh, N.C.- headquartered Property Records Industry Association and a current member of PRIA’s advisory council.

“Mr. Padilla also thought it would cost the state $20 million to regulate remote notaries. With California
home to Silicon Valley, everyone thought the pendulum would be in favor of remote-notary technology. But the state is apparently convinced it doesn’t know how to properly regulate RON notaries and protect the consumer at the moment.”

Over the years, this fear of consumer fraud has also hit a vein in two other large states with big real estate markets and large metropolises: New York and Illinois. State bureaucracy and regulatory culture may play into the picture as well. “No matter what type of business you’re talking about, states like California and New York will always see the need for a robust regulatory scheme, and that involves costs,” Ladd said. “A lot of this comes down to a particular state’s views on regulation in general. That slows things down.”

The other state without a permanent or temporary RON law for eNotaries, South Carolina, has a strict yet unofficial practice of making sure attorneys are involved in real estate closings — not professional notaries. The state’s legal association, South Carolina Bar, is still calculating how it would let non-attorneys supervise eClosings so borrowers are protected from fraud and liability when they sign documents.

Devil in the (RON) details

“There will probably always be some usefulness for ink documents,” Ales said. “But still, you would think we’d get to full-RON at some point because that seems to be the trajectory of our eBased society. I’m not sure there’s some huge void to be filled, but RON definitely adds efficiencies. Lenders are always looking at what it costs to produce a loan origination since you’ve got all types of economies of scale at stake. And with the pandemic still here, it’s made complete sense.”

A robust number of certified, registered local electronic notaries is another issue as different states have a varying supply of these specialists. Many states’ eNotary workforce pools are not equally proportional to the volume of annual home transactions, let alone the amount of future transactions that have the possibility of being eClosings. On average, approximately 1% of any state’s traditional notaries are also eNotaries.

The Louisiana Notary Association came out against Gov. John Bel Edwards’ emergency executive RON order when COVID19 hit the state last year. The order was not renewed after it expired but it didn’t matter; the state eventually still passed a permanent RON law. As of late January, the association said in a statement it is continuing to work with the secretary of state’s office and other stakeholders to “promulgate” post-law RON regulations, including how the process will work, what the software will look like and possible next-steps for eNotary training.

“Even in normal times before the pandemic, becoming an eNotary was a separate process above and beyond the normal certification and training,” Ales said. “It’s all critical — the notaries, the states, the eVault storage and MERS database (Mortgage Electronic Registration System), and having the blessing of Fannie, Freddie and Ginnie Mae — everything combined. You have to have the whole thing working together for the process to move forward.”

County recorder offices across the nation present their own unique circumstances. Those that accept deeds of trust (Electronic Security Instruments) with eSignatures usually convert those files to TIFF (.tiff) images to record on their systems, technically known as the “tag image file format” developed in the 1980s and 1990s. But recorders that don’t accept eInstruments are not refusing because their systems will not allow it.

“They can actually accept them,” Ladd said. “They say they can’t — or in reality they don’t want to — from a policy perspective. Even with state legislation, each county has the authority to decide whether they accept eSignatures or eDocuments. States with RON have many counties that will do them, but sometimes a county recorder office in a particular state refuses since their state hasn’t provided official compliance guidance. Also, some county recorders are just afraid it’s a gateway to fraud.”

What is successful RON execution?

From a county, to its state, to an entire industry navigating fitful starts over the past 20 years, advocating for RON has come down to keeping one’s composure. “We see a lot of lenders attempting digital closings, and they spend a lot of money and time to just end up doing a few hybrid closings and maybe a few full eClosings,” said Peter Martinez-Fonts, senior manager of customer success for San Francisco, Calif.-based Snapdocs, during a February eClosing webinar hosted by HousingWire.

“They can be a major hassle to do and will lose steam if they never get off the ground within an organization. That’s not really success.” Still, many within the mortgage industry and escrow-title space in recent years have fully backed RON efforts as they patiently persevere and continue doing a mixture of wet-ink, hybrid, or RIN and RON escrow closings. But it hasn’t been painless.

“Lenders have completed years of due diligence, but operational concerns and a lack of consistency in the laws nationwide are still a challenge — and no one wants to be the first in line to litigate these complex issues,” Anderson said. “I’ve been working with a lot of the same people over the last few decades. It’d be nice to see full state-to-state permanent adoption of RON take place before we retire.”

Joe Tyrrell said “change management” can be hard for lenders to stomach. Until recently, some lenders have been operating in multiple states with only a small proportion of those states allowing for complete eclosing. “Are you going to go through massive disruption just to bifurcate your borrower experience depending on the state?,” said Tyrrell, president of ICE Mortgage Technology, a Pleasanton, Calif.-headquartered division of cloud-based loan origination provider Intercontinental Exchange. “Lenders usually never worried about whether a mortgage is eligible for e-close or RON; that was always a consumer opt-in. But today these decisions become a balancing act.”

More than 462,000 eNote registrations were completed on the MERS eRegistry in 2020 according to MERS (the Mortgage Electronic Registration System), which is more than quadruple the combined total recorded from 2014 – 2019. Also, these registrations have reached 50,000 – 60,000 per month from September 2020 to January 2021 and aren’t showing any signs of declining. This recent spike paints an anecdotal visual of RON closings going forward.

By late 2022, Tyrrell expects more than half of mortgages processed annually through the company’s platform to use full eClose with some form of RON, which equates to more than 25% of all U.S. mortgages funded annually. It’s a number that will probably grow larger every year — a forecast ICE Mortgage Technology is making since it touches 50% of all mortgages in the nation.

Simultaneously, it’s unlikely all 50 states will have permanent RON laws anytime soon coming out of this pandemic era, especially with the 2020 elections adjusting policies and legislative focus in some states due
to changes in leadership. That’s besides the fact that approximately 90% of all Americans live in a county allowing eRecordings and almost 60% in a county allowing for full RON.

In 2019, several secretaries of state came together to discuss what aligning their postlaw regulatory and compliance standards would look like for permanent eClosings and RON. The biggest impediment is getting many of the remaining states to agree on what those standards are. “These aren’t automobile transactions. They are residential transactions with several hundreds of thousands of dollars in liability,” Tyrrell said. “Everyone is trying to figure out how to implement eNotarization without the litigation exposure. There are advantages for everyone involved in the
ecosystem. It’s a matter of counties and states feeling continued pressure to move forward and see that it can be done with the right safeguards.”

This article was pulled from the HousingWire Magazine April issue. To read the the rest of the issue, go here.

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