|Debunking eMortgage Myths
|MORTGAGE BANKING / MARCH 2007 REPRINTED WITH PERMISSION FROM THE MORTGAGE BANKERS ASSOCIATION (MBA)
Cover Report: Technology
The effort to achieve the industrywide adoption of eMortgage has rolled on for nearly eight years now. As an early member of MISMO® and the eMortgage Alliance, an activist for electronic mortgages and a business owner who discusses this topic daily with leading financial institutions, I am asked frequently to comment on the current status and the many myths surrounding eMortgage development and adoption. ?Over the last two years, the mortgage industry has made significant strides in aligning itself for meaningful eMortgage adoption. Yet, we have not yet seen this technology =universally embraced and applied. The inescapable truth is that eMortgages will eventually be standard operating procedure. The questions of what, how and when have yet to be answered. There are also many myths that need to be exposed. The following are some of these myths, and insightful comments from industry leaders about the current status and future of eMortgages.
The full adoption of eMortgages is inevitable. Current myths about the obstacles to that adoption won't make the outcome otherwise.
BY ANDREW M. DUBINSKY
Myth No. 1: There is one universally accepted definition of eMortgage.
One of the major obstacles standing in the way of electronic mortgage adoption has been that the mere definition of an eMortgage varies from day to day and from company to company. Take, for example, the following three definitions of eMortgage: According to Mortgage Technology magazine: "In typical usage, any mortgage for which the loan application commences in cyberspace. More narrowly, all-electronic (paperless) mortgages, which have been completed successfully several times on a pilot basis in recent years. See E-SIGN [Electronic Signatures in Global and National Commerce Act], UETA [Uniform Electronic Transactions Act]."
According to MISMO: "A mortgage where the critical loan documentation-specifically the promissory note, assignments and security instrument-are created electronically, executed electronically, transferred electronically and ultimately stored electronically. [Also known as] the paperless mortgage." According to Fannie Mae's eMortgage Guide: "An eMortgage is a mortgage for which the promissory note and possibly other documents (such as the security instrument and loan application) are created and stored electronically rather than by using traditional paper documentation that has a pen-and-ink signature."
As you can see, there is no uniform definition (or spelling) of an eMortgage, because it is many things to many different entities. Some define it as a totally paperless process, while others see the technology as a tool to eliminate certain manual steps in the underwriting process to increase efficiency and cut costs. Harry Gardner, the Mortgage Bankers Association's (MBA's) senior director of industry technology and vice president of eMortgages for MISMO, agrees there is a wide variation in the understanding and definition of eMortgage.
According to Gardner, MISMO is in the process of developing an eMortgage informational packet for the 2007 MBA Technology in Mortgage Banking Conference this month, which will include key definitions, a high-level description of the process and the benefits it will provide. "This information will provide an eMortgage introduction and help frame our more in-depth MISMO publications, including the eMortgage Guide, the eMortgage Closing Guide, the eMortgage Vaulting Guide, and the eClosing Cost Benefit Analysis and ROI [Return on Investment] Template spreadsheet," Gardner adds.
Myth No. 2: Technology for a comprehensive eMortgage solution is not available.
In the early years of eMortgage development, it was all too common for vendors to claim to have created the technology for eMortgage. Some even claimed to have executed an eMortgage. We know now that such was not the case. However, while these vendors played on the false hope of some mortgage lenders, industry leaders such as the Mortgage Bankers Association; Vienna,Virginia-based MERS; Fannie Mae and Freddie Mac chose the high road and spent several years working to create the standards and industry infrastructure for vendors to leverage in designing their technology solutions.
Today, technology vendors have rolled out eMortgage platforms, and lenders have implemented production emortgage operations and are registering eNotes on the MERS eRegistry every day. In fact, a recent brochure created by Fannie Mae states: "For some lenders, eMortgage transactions are no longer part of the distant future-they are an everyday reality."
Myth No. 3: There are no immediate savings resulting from the use of eMortgage.
There are immediate cost savings as a result of moving toward an electronic mortgage process. The issue is how to determine this cost savings. The MISMO eMortgage Workgroup has identified four areas where cost relief can be found early in the process. These include:
It is important to note that the implementation of eMortgage technologies requires organizational change on two levels. First, the appropriate technology systems must be in place. And second, even before that point, lenders must organize their existing business flow to accommodate these systems. It is the organization of business flow-in preparation for technology deployment-that provides the most value in an electronic mortgage environment. Best of all, return on investment can be achieved through lower costs, higher loan quality, lower risks and higher customer satisfaction before the first eMortgage solution is ever implemented. Bill Moody, chief executive officer of Lenders First Choice (LFC), Simi Valley, California, a national provider of settlement services and title insurance, puts it best: "Eliminating paper and reduction of overnight mail costs are not the only reasons for implementing eMortgages," he says. "In fact, they aren't even in the top five reasons."
- Fewer resources needed for paper processing, and additional savings through the elimination of paper delivery charges.
- Higher loan quality created by the ability to check compliance and data integrity issues at any point in the process.
- Lower risks due to the higher loan quality and a shortened process cycle.
- Higher customer satisfaction due to fewer mistakes at closing, improved communication and less time between application and closing.
Myth No. 4: It is OK to delay serious consideration of eMortgage.
The fact that the implementation of eMortgage technologies can provide immediate ROI is important due to the current state of the industry. The myth that lenders can wait to seriously think about preparing for eMortgage, an attitude often promoted by vendors threatened by eMortgage, can be especially harmful in light of the current pressing need in the industry to cut costs.
"With the downturn in business throughout the industry this year, now is the classic time to regroup and reassess IT [information technology] infrastructure and business strategy to gain an advantage over competition in the future," adds MISMO's Gardner.
Since the ball dropped in Times Square to mark the start of 2007, we have read numerous accounts of lenders-primarily in the non-prime arena-closing their doors. What these institutions learned, albeit the hard way, was that cost-cutting technology initiatives take time to implement-often several years. This is due mostly to lengthy decision-making procedures and complicated vendor-selection practices. By the time those lenders forced to close their doors earlier this year realized the need to cut cost to offset losses on the secondary market, it was too late.
Industrywide adoption of electronic mortgages will not happen on a specific day at a specific time. I believe organizations that have yet to begin adopting will find that they, too, have waited too long. In a presentation to attendees at MBA's 2006 Annual Convention in Chicago, Eric Stoddard, executive vice president of Des Moines, Iowa-based Wells Fargo Funding Inc., concluded:
"With recent technology advancements and industry standardization, a fully integrated eLending
environment is not only feasible, it is required to maintain a competitive advantage in the
lending services arena."
Myth No. 5: eMortgages must be 100 percent electronic to be effective.
eMortgage is not an all-or-nothing process. Much of its ROI comes through process improvements that can be achieved during early stages. "Some lenders, brokers and consumers aren't ready to bite off the entire life cycle, but can benefit from the components," says Cary Burch, chief executive officer of Lender Support Systems Inc. (LSSI), Poway, California, a global provider of lending and loan servicing technology solutions.
"Elimination of manual processes such as mailing and printing is beneficial-especially eDisclosure." MBA's Gardner adds, "There's a misconception that you have to adopt an entire eMortgage process to receive a benefit. However, companies are realizing that there are benefits to implementing certain aspects, starting with the eNote and delivering it electronically, and progressing toward additional electronic documents."
Myth No. 6: Title companies will not support eMortgages.
For years, lenders and title companies have played "chicken," each waiting for the other to be the first to take on the cost of investing in the tools necessary for eMortgage. However, over the last several years, some lenders have paraded their eMortgage initiatives in front of the media, while the title companies have quietly made significant progress of their own.
In our own 2007 survey of title companies, an overwhelming 98 percent of 500 respondents said that they would "support an eMortgage initiative by setting up the capability to support electronic closings." LFC's Moody backs up this view. He says, "Not only will title companies support eMortgages, they will embrace them." He adds, "The technology is already available, and most title companiescould adapt relatively quickly to any technology issues. The standardization of loan documents would help most parties in the loan process and deliver a better experience to the consumer."
Moody adds that title companies realize "eMortgage standardization also will make the transfer of data to and from the originator more effective, saving time, reducing human error in data input, and producing a much better set of documents for the consumer."
Ashley Patten, fee attorney and escrow officer with Houston- based Fidelity National Title, agrees, adding that there are multiple advantages for title companies adopting eMortgage
processes. "We have the opportunity to significantly reduce costs incurred from the use of courier services, overnight shipping and paper," she says.
"The title industry has been receiving electronic documents for years, and we're ready to
move forward. I believe that 95 percent of title companies already have the in-house tools
that support a paperless mortgage environment. After all, all that's needed is a computer
with Internet connection and a tablet PC [personalcomputer]."
Myth No. 7: There's nothing a broker can do to facilitate the adoption of eMortgages.
"Brokers are the dynamic in the tipping point," says David Lykken, president of Mortgage
Banking Services Direct (MBSD), Horse Shoe, Texas, a management consulting firm
that specializes in residential mortgage lending and technology for the lending industry.
"Take a scale with a fixed point in the middle, for example. The current paradigm has the
scale tipped against an eMortgage. Little by little, brokers are putting pebbles on the opposite side, and at some point the scale will tip. While they won't contribute to the development, they will adapt to the changes. Brokers facilitate everything in the lending process, and account [for a significant share] of loan origination. We won't see the elimination of the mortgage broker, but we will see the elimination of some aspects of their involvement and the emergence of a more efficient method. Historically, brokers have successfully led industry-wide adaptation to changes in the mortgage banking environment, and they will use that same intelligence to distinguish a new, prosperous role in the eMortgage process."
"On a widespread level, the general perception among mortgage brokers is that the eMortgage process, once evolved, could put them all out of business," says Dale Vermillion, a Grayslake, Illinois-based consultant who assists lenders in improving their broker relations. "Those brokers who fear their jobs are in jeopardy should rest assured that their role will only change, not be eliminated," he says.
Vermillion adds, "The consumers need to know what they qualify for, and that's where the broker can help. The actual benefits for the broker are that the borrower taking part in an eMortgage is already committed, and the broker can focus more time on building the correct relationships and understanding their clients goals. This is an exciting change for the mortgage broker that will make their job more fun and more valuable to the borrower."
Myth No. 8: It will take a tremendous amount of infrastructure for an investor to buy an eMortgage.
Fannie Mae bought the first electronic mortgage in 2000. At the time, the event was more designed to generate excitement (there was much excitement) and industry attention to the
eMortgage process. It is fair to say that the manner in which Fannie Mae executed the purchase of that loan could not be easily replicated, especially on a mass scale. So it is also fair to
say it did not signify the arrival of the eMortgage as an everyday working reality of the mortgage business.
Today, everything is different. MERS, which was still in its early years in 2000, has established the eRegistry, a system that identifies who is in control of an electronic note. It is an easily accessible means for investors to find information on loans.
"The MERS eRegistry alleviates a large amount of the infrastructure requirements for the investor, and plays a critical role as an industry system," says Dan McLaughlin, executive
vice president of MERS. "We've also deployed MERS eDelivery, which reuses the eRegistry infrastructure and is built on MISMO standards. It provides a safe, secure and cost effective
means for investors to accept delivery of eNotes from their trading partners and seller-servicers. MERS developed these tools for the benefit of the investor, to ease the infrastructural transition to an eMortgage."
Additionally, the industry now has at least three electronic document custodians with working electronic vaults. These vaults serve as electronic loan-document warehouses and are capable of
storing multiple document formats for easy delivery to and from originators and investors.
McLaughlin adds, "Some investors think that they have to build their own eVault to participate in the eMortgage process-but in reality, they can designate a third-party custodian.
The custodial community has been preparing for the transition to a paperless mortgage for years. GMAC [Bank, Horsham, Pennsylvania],Wells Fargo and LaSalle [Bank, Chicago] are all
using these solutions today. If an investor wished to build their own electronic vault or provide their own facility, they could do this cost-effectively through a technology vendor who is already integrated with MERS eRegistry. Not only are the legal infrastructures and data standards in existence today, the complete technological infrastructure is currently being used. eNotes are being originated and sold into the secondary market every day."
Finally, Fannie Mae and Freddie Mac have already established their guidelines for delivery of eMortgages. Based on my experience, I believe Wall Street is likely to follow. All that
is left is for Wall Street firms to prepare for the integration of eMortgages into the mainstream, which some are doing. As with lenders, the issue lies more with reorganizing existing
business flow than with adding infrastructure.
"We are now reaching out to the Wall Street investors and ratings agencies, to work with them on eMortgage adoption as part of the efforts of the eMortgage Adoption Task Force, a newly
formed industry group that has been organized by MBA's Residential Technology [ResTech] Steering Committee," adds Gardner.
Myth No. 9: eMortgages are more susceptible to identity theft than paper mortgages.
In fact, the opposite seems to be true. "It's not a factor of the type of loan. Identity theft plays no favorites," says Jay Meadows, chief executive officer of Rapid Reporting Verification Co., Fort Worth, Texas, a national provider of income and identity verification for mortgage lenders. "A person committing identity theft will use any means necessary to defraud a lender, whether it's a paper mortgage or an eMortgage."
Meadows adds, "eMortgages are actually less susceptible to fraud because the lender experiences no automatic reaction that Jane Doe is in fact Jane Doe just because she's there in front of him. With eMortgage, the lender actually exercises more precaution, because they don't
know the person filing the loan is who they say they are. This is why eSignatures are so valuable.
There's an authenticator on both sides that eliminates the ability to forge a click-to-sign as
well. The important issue remains that ineffective security tools allow identity theft, and the
proper tools can make any loan secure."
"There haven't been a sufficient number of eMortgages originated to conclude that they
are more or less susceptible to identify theft or fraud," says Craig Focardi, research area director
of consumer lending at TowerGroup, a research and advisory firm headquartered in
Needham, Massachusetts. "The biggest sources of potential identity theft today are stolen paper loan files, lost loan-data tapes, employee laptops and insider scams involving loan originators, appraisers and Realtors®. However, by reducing paper in the loan closing and post-closing processes, eMortgages reduce the potential for identity theft and fraud. Moreover,
since the promissory note evidences the borrower's obligation to pay, and the mortgage or deed represents the lender's security interest in the property as collateral, highly secure safeguards are being built into the signing, transmission, storage and retrieval of these electronic original documents."
"When loan data is stored, certain safeguards must be in place to ensure the security of the information," says Ann Epstein, strategy and process redesign manager for Freddie
Mac. "The fact that eMortgages use an electronic note makes it no safer and no riskier than a paper file, because those necessary safeguards exist in electronic format today."
Myth No. 10: Borrowers will never sign an electronic mortgage.
Some borrowers will not sign an electronic mortgage. However, according to Leilani Allen, with Mundelein, Illinois-based Summer Point Consulting, the issue appears to be more of a generational problem. "The baby boomers grew up with ink and paper as the norm in transactions, but they have come around to accepting-if not demanding-that part of the
mortgage transaction be electronic," she says. "They expect a lender to have a Web site; they are willing to at least complete a short application electronically; they demand e-mail communications. But still, there is hesitancy on some issues. Generation Next, the 20- to 30-year-olds who will soon be buying houses, have grown up with an electronic transaction being the norm. They will question why any part of the transaction is paper-based. Their requirements and demands will ultimately make eMortgage a reality."
Additionally, the integration of electronic signatures into everyday life is preparing more consumers for eMortgage, according to LSSI's Burch. "Consumers are signing loans electronically in banks, filing their taxes online and signing HIPAA [Health Insurance Portability and Accountability Act of 1996] disclosures electronically in emergency rooms. Other industries have accelerated [adoption] much faster than the mortgage industry. People today are surrounded by an electronic environment that has created a consumer demand for a paperless, more streamlined process," says Burch.
Adds MBA's Gardner, "This question has arisen many times over the years, and to date we
have not heard of any consumer resistance to an eClosing. In fact, quite the opposite-today's
borrowers, even the older generation, are accustomed to signature pads in retail stores, and
they are happy to streamline the lengthy papersigning process.
Furthermore, the question of whether or not consumers will embrace the idea of electronically
signing a loan only reinforces the value of the trained mortgage originator in the
process. Says Vermillion, "The consumer wants to always have a human being to support and endorse their decision, because there are so many product choices. No matter how much you create a paperless environment where everything can be done online, there will still be a need for a mortgage originator to guide and direct the client throughout the process."
Some of the real problems
Will investors be ready? There is a legitimate question as to whether secondary market mortgage investors will be ready once the primary market has adapted the means to originate paperless mortgages in any degree of volume. A lack of investors buying eMortgages obviously would
limit the number of available products that can be originated electronically. In a June 2006 issue of National Mortgage News, Jordan Brown of Ponte Vedra Beach, Florida-based Market-
Wise Advisors LLC was quoted as saying, "In the end, more investors have to accept eNotes and the creation of eMortgages. That's the driving component."
Brown went on to discuss how eMortgage will eventually permeate through Wall Street in the same manner as automated underwriting has. "Case law will be created surrounding issues
around the eMortgage as we drive through it. We went through the same argument with automated underwriting and waiting to see if the investor would accept the result. It took several years, but the end result is very simple in that virtually all conforming loans go through [Fannie Mae's] Desktop Underwriter® or [Freddie Mac's] Loan Prospector®. The result with eSignatures and the eMortgage will be equally inevitable," he said.
Too few warehouse banks: While organizations such as GMAC, LaSalle and Wells Fargo have taken leadership roles in the document custody space by becoming the first-known electronic
vault technology adopters, the need for more document custodians is critical. In the same way lenders and title companies once faced off, investors and custodians must not wait for
the other to take the lead before taking eMortgage seriously.
Some companies are still slow to adopt eMortgages: I still see some companies slow
to implement eMortgages. In my view, this is because they require expenditures in new
technology, and they unlock customers- meaning that, with an open standard like the
SMART doc® specification, customers are not locked into a single technology provider, but
can take their business and their data to the technology provider that serves them best.
"There are several developments and dynamics involved," says MBSD's Lykken. "People
naturally don't embrace change, especially when they don't understand the benefits of the
shift. Several . . . industry leaders who are advocates of eMortgage need to come together
with a unified statement so that others can rest assured that an investment into paperless
mortgage technology is smart and worthwhile. I believe this would alleviate the active
fight against eMortgage adoption."
Getting past the naysayers
As part of the industrywide educational process that is still under way, lenders and investors will learn more about the benefits and the limitations of electronic mortgages. Until this process is complete, it is important that both parties-especially those expected to take a leadership role-focus on the industry goal of a less expensive, more efficient lending process.
eMortgages are yielding meaningful results right now to the few early adopters in our industry, and the rapid acceptance of a fully paperless solution is going to happen sooner
than many people seem to think, in my view.
Further, the industry must work together to see past the myths and counterproductive agendas of some that currently surround eMortgages. The sooner this happens, the sooner we can begin to realize more of the benefits that the technology and standards can deliver to the mortgage industry.
Andrew M. Dubinsky is president and chief executive officer of Encomia LP, Houston, a provider of end-to-end eMortgage technology. He can be reached at firstname.lastname@example.org.
MORTGAGE BANKING / MARCH 2007