Change can be a frightening concept for many in the mortgage and real estate industry, and with good reason. Ours is a business that draws enormous regulatory scrutiny. Our mistakes can have consequences that impact the entire American economy.
The business risks we do take are dissected, challenged and questioned. Transitioning away from something that “works,” or at the least, doesn’t provoke negative consequences, can take a lot of courage. We are risk-averse by design and history has not always rewarded the pioneers seeking to advance our business.
And yet, I call today upon our industry to work even harder to make the digital mortgage a reality.
To be sure, there are risks to changing the way we originate, record and transfer mortgage loans. We’re not talking about the cosmetic. The digital mortgage could alter the very foundation of the mortgage loan. But the benefits—to consumers, regulators, investors and lenders alike—far, far outweigh those risks.
The undeniable trend
Candidly, we’re behind many (if not most) other industries when it comes to reaping the rewards of the technological revolution that has swept our world in the 21st century. We can originate student or auto loans in minutes on an iPad. We can find our dream homes and make an offer on our smart phones. Our cars are starting to drive themselves, and tablet screens are replacing shopping malls for virtually every consumer good available.
Yet, when the time comes to close a home purchase, we gather together and take a quill and ink to a stack of parchment tall enough to make the state’s legal code look like a pamphlet. All indications are that this is not the way anyone really wants it to be. And yet it remains the way it is.
Slowly but surely, however, that’s changing. Several prevailing trends are finally pushing our industry (and its regulators) away from the age-old way of doing things. And the most powerful catalyst is the consumer. As Americans grow used to eSigning anything from grocery purchases to auto loans, they wonder more and more why a mortgage loan requires a notary, an attorney and a trip to an office simply to sign documents. Our explanations for this are being met with increasing skepticism. Beyond consumer expectation, the consumer is becoming a focal point in the argument for the digital mortgage.
Is it really more transparent to rely on written documents, redundant processes and manual archiving? Does the consumer and her regulatory protectors have better access to the process when there are numerous, age-old touchpoints in the process to revisit? And is the mortgage itself being produced as efficiently; as accurately and as well as it would be if done electronically? The fact is that not only would a truly digital mortgage make life easier for consumers; it would also improve transparency; efficiency and accessibility. This is a benefit to all stakeholders, from lender to investor; consumer to regulator. Moreover, it’s where the current of modern society is taking us whether we resist or not.
Why then, are we still taking 40 to 50 days to close a mortgage, and doing so with pen and paper? As I’ve mentioned already, ours is a risk-averse industry, and justifiably so. When the concept of the “eMortgage” first gained steam in the early 2000s, the easy rejoinder was that too many state laws and requirements made it nearly impossible to automate or make electronic the process. However, in today’s world, the states are finally bowing to the wishes of their constituents (the consumers). We’re already seeing a wave of state legislation allowing for all levels of “eNotarization” and more. So, although there are still some legislative and regulatory barriers to the digital transaction, it’s safe to say those are falling quickly.
One of the strongest and most practical arguments I’ve heard as to why more lenders and investors haven’t whole-heartedly embraced the digital mortgage is that the pain of transition is too much to bear. Digital mortgage technology will admittedly involve a significant investment at a time of tremendous market volatility. But more importantly, the presumption is that adopting the digital mortgage will immediately prohibit a lender or investor from doing further business with those who haven’t yet adopted the same technology.
The fear is that digital shops will be leaving money on the table as traditional notes are unable to be processed. Similarly, many lenders note that few investors are accepting “e-notes.” Why originate a mortgage that cannot be sold? The concern is valid, but there is a solution that’s already being used across the industry.
The solution—baby steps
Not everyone is familiar with the concept of the “hybrid mortgage.” But they soon will. This is a process by which technology enables the lender, closing company and consumer to process a good portion of the settlement service process electronically—as an e-mortgage. This includes the doc prep process. Any documents which are not required by investor or law to be “wet signed” (with pen, before a notary or attorney) can be reviewed and signed electronically well in advance of the closing by the consumer.
The documents, which must be “wet signed,” are then executed as they would during a traditional closing. However, the live closing process is much, much shorter. The consumer likely has had much more time to review the documents. And, in the background of the process, the settlement company and mortgage lender are now working electronically. Instead of shuffling hundreds of documents, processors are gliding from screen to screen.
From the investor perspective, the hybrid mortgage brings the best of all worlds. Any perceived risk is eliminated with the formally signed documents (whether that “risk” is a reality is a topic for another time). Yet the process itself is more efficient, better documented and more transparent.
For the lender, the hybrid mortgage is a win-win as well. After the initial technological investment, the lender is likely to see the cost of origination decline with a more efficient, automated process. I’m also advised that this initial technological investment is likely the biggest a lender will have to make throughout the digital transformation. As more investors, more service providers and more lenders come online, future upgrades after that initial installment are expected to be much more seamless in transition.
The transition from paper to digital is, itself, fairly seamless. The same lender also leaves no money on the table, as hybrid mortgages are accepted almost universally as if they were purely manual transactions. Even though the number of states/counties working to eliminate legislative barriers to the e-signature is growing quickly, there are still a number of key markets where one cannot e-record. The hybrid is an easy solution to this. Thus, lenders can begin to make progress in the digital transformation without leaving money on the table or leaving investors or other clients behind.
Another important consideration in the transition from paper mortgages to a paperless process is the bankruptcy/foreclosure element. There’s not a lot of (if any) case law right now to support (or, I suppose, refute) the role of the e-signature. The hybrid provides a way for the lender to hedge its bets in the interim.
Finally, with the hybrid mortgage, the closing package is returned almost immediately from the closing table to the mortgage lender. The wet-signed note is usually returned within 24 hours. This certainly provides the lender with more time to review the documents and expedite the funding process
To be sure, there’s quite a way to go before we have a truly end-to-end mortgage (loan application to e-vault). There’s a lot to do before most investors are e-note and e-vault capable. But now, there’s a pathway there that brings minimal pain. I applaud the work of Freddie Mac and Fannie Mae to empower and encourage our industry to move toward the digital transformation. And now, I call upon lenders, investors, government entities and service providers alike to do their part to facilitate and accelerate the transformation to an all-digital process. It’s in the consumer’s best interest, and in our best interests as well.