Advancing eMortgage: Why Are We Still Using Paper?

Going ‘paperless’ could save $1 billion annually

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If you’ve ever wondered why mortgage settlements involve so much paperwork, you’re not alone.

Fannie Mae and other mortgage industry stakeholders have been working together for over a decade to make that paper-based process electronic. But while there have been successes along the journey, such as the development of systems and processes to enable electronic promissory notes, the mortgage closing process remains paper-intensive and has lagged behind other industries, such as the securities market, in doing transactions digitally.

Fannie Mae has launched five Innovation Challenge teams to propose solutions to some of the industry’s leading problems. One of those teams was “Advancing eMortgage,” which was charged with the task of improving the mortgage process, including getting more elements of it done online. The team is identifying challenges with implementing automated digital flows across the entire loan spectrum, not just the front end of the business. This workstream, as defined by the team, focuses on the end-to-end process view, beginning with the customer.

Fannie Mae has launched five Innovation Challenge teams made up of industry participants to propose solutions to some of the industry’s leading problems. The “eMortgage” team was charged with the task of improving the mortgage process, including moving more elements of the process online.

The team’s findings include three key ideas:

  • Borrower Financial Passports – online employment and financial profiles that borrowers can share with lenders.
  • Loan File Service – electronic storage vaults for documents and data from loan files.
  • National Mortgage Registry and Clearinghouse – enhancements to a decade-old system that keeps digital records on electronic promissory notes for real property.

In addition to improving the customer experience, the team estimates that an electronic mortgage process could shave 30 days off of the average 52 days it takes to close a loan and save the industry an average of about $1,100 per mortgage, or roughly $1 billion a year.

Why Paper Persists

For years, interest in making paper mortgages electronic has been intense in the industry. In 2000, Congress passed legislation that, in combination with certain state laws, allowed lenders to make enforceable electronic mortgages.

But hurdles remained. “The initiative often falls to competing priorities around compliance and production,” says Nancy Alley, vice president of strategic planning at Simplifile, a company that helps ease the process of recording mortgages electronically.

Part of the problem has been a focus on digitally rendering the promissory note.

The promissory note comes in at the end of the mortgage process, and the focus on digitizing it has been primarily for investors who buy and sell packages of loans on the secondary market, she said. The focus on promissory notes may have “prevented us from recognizing lift elsewhere in the process, Alley says.

“We may have finally reached the critical juncture from a business perspective,” she adds.

A major reason: The federal Consumer Financial Protection Bureau has issued new mortgage disclosure forms, and there will be renewed focus on disseminating those forms electronically, along with related data. In addition, the nonprofit Mortgage Industry Standards Maintenance Organization (MISMO), which develops technology standards for the mortgage industry, is progressing on the architectural framework for its residential standards.

 

The Consumer Financial Protection Bureau (CFPB) has released guidelines for an upcoming eClosing pilot project to assess how electronic closings can benefit consumers as they navigate the mortgage closing process. Find out more here.

“This will allow stakeholders much earlier in the origination chain to derive value from going electronic,” Alley says. “That should help adoption. Plus, an electronic process should drive a better consumer experience.”

The Borrower Financial Passport

Going digital requires changing how the process starts.

The central idea behind electronic “passports” is to allow borrowers to give lenders access to all their financial information in one digital fell swoop with accuracy, speed, and the ability to share that data with whomever the customer allows.

At the moment, for instance, many consumers must provide paper copies of their pay stubs or W-2 forms. When a loan stalls and the paper copies age, the borrower is then required to provide updated paper documents.  

There are private, working models of these passports today, such as an offering from Mint.com, which purports to put consumers’ data in one spot for everything from savings and checking accounts to investments and auto loans and mortgages.

A challenge, Alley says, is getting the industry to recognize such products as replacements for how they currently verify information.

“There may be less risk in digital certification than in staring at a piece of paper,” says Kristin Hoffman, program manager at Fannie Mae. “We need to prove that.” She additionally notes that by electronically connecting to the sources of the information, more effective fraud analytics can be run.

Loan File Services

Just as the passports combine all of the borrower’s financial data into one digital spot, the idea behind Loan File Services is to electronically bring together all of the data from the origination and closing of the loan into one repository.

Such a repository would save significant time, money, and effort.

“The data in the central data repository must be trusted by all users, including originators, investors, and regulators, and through the securitization process,” according to Lisa Weaver, senior vice president at ISGN, a technology and services vendor to the mortgage industry. She points out that currently “there is a fragmented system where data is not readily available for any one user.”

Such a repository would save significant time, money, and effort, she says. One reason: mortgages currently go through numerous quality control reviews. Rather than starting each review from scratch, the results would be conveyed electronically.

Mortgage Registry and Clearinghouse

Moving to a fully digitized process will require a national registry for establishing, tracking, and transferring ownership rights in both the note and mortgage for residential mortgage loans. This registry should reflect all security interests in all registered loans and eliminate the issues related to missing notes and unrecorded assignments. Likewise, it would provide simpler and more transparent identification and transfer of security interests.

For the small percentage of mortgages that currently start out electronically, a company called Mortgage Electronic Registration Systems Inc. runs what is known as the MERS eRegistry, a technology vault of sorts that keeps electronic records on the owners and locations of registered promissory notes for real properties.

“The eRegistry is underutilized,” says Chris Christensen, an attorney at PeirsonPatterson LLP, who specializes in consumer finance and residential real estate. “If you accelerate the exchange of electronic mortgages, it reduces costs for originators.”

How Soon is Now?

The work of the team is only one step toward getting the mortgage industry to go digital. About 25,000 mortgages had electronic promissory notes in 2013, roughly 1 percent of all U.S. mortgages originated last year, according to Michael Cafferky, product development manager at Fannie Mae.

“Until the closing segment is able to take the package of documents and feed it into the electronic closing platform, there are probably more standards that need to be created,” Cafferky says. “Before we can get to broader adoption, there will be a lot of heavy lifting to take the (digital) platform and then push it out to the closing population to get a level of penetration.”

All of that said, it’s still possible that electronic mortgages could become prevalent in as little as two or three years, panelists said.

But Charlie Burke, vice president of strategic initiatives at the Federal Home Loan Bank of Chicago, acknowledges that digitization of the end-to-end process may face an uphill climb in the short term.

“It depends on the motivation, the regulatory environment, and how hard it’s being pushed,” he says.

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