Professor of Law
Darrick Meneken
As published in Scotsman Guide's Residential Edition, February 2011.
There's plenty of talk about the advantages of electronic mortgages. Here's the rub: It's often easier to say "e-mortgage" than to originate and close one. Using e-mail rather than a fax machine doesn't scratch the surface of e-mortgage intricacies. Ronald Mann, a legal financial expert and Columbia Law School professor who researches e-mortgage infrastructure and facilitation, explains more.
What's holding up a full-bore transition to e-mortgages? Before you can shift from the traditional paper-based mortgage-note industry to a wholly electronic one, you have to have the legal infrastructure to ensure that the electronic documentation works. you also need the practical infrastructure necessary to consummate the transactions electronically in a way that they can reliably keep track of title to the underlying instrument over time in a way that works for mortgage brokers, originators, homeowners and the courts.
It seems like we're talking about two different things here — notes and mortgages. Is it easier to "go electronic" with one or the other? Yes. The notes are much easier. There's no reason notes couldn't be wholly electronic pretty quickly. The biggest problem is, traditionally, if you wanted a home-mortgage note to be a negotiable instrument, it had to be on a piece of paper. That has changed. you can have wholly electronic notes, and MERS [Mortgage Electronic Registration Systems] has been doing that for some time.
The problem is much harder for mortgages. The basic idea of an electronic mortgage is difficult to reconcile with the paper-based filing system the counties have. If we have 3,000 counties and mortgages have to be recorded with the counties, then it's hard to have all mortgages be electronic.
Where does that leave us? The most you can easily do is have a system where you can make transfers of the notes electronically and immobilize the paper documents in the hands of somebody like MERS. That got a lot of market traction during the last decade, when the overwhelming majority of mortgages that were going to be securitized went into that system.
Do e-notes cause an increase in legal cases in which borrowers claim no one can produce the mortgage note necessary to foreclose? Generally, those cases are exacerbated by the complexity of ownership. The same note might be pooled into one group of securities, but then there are several tiers of collateralized-debt obligations behind the pool and those investors all hold derivative interest in the same note. That increases the concerns people have about the difficulty of ensuring you can point at who actually owns the equitable interest in the note. You must be able to document that you're the person who owns the interest in a promissory note.
How extensive is the problem of not being able to say who owns certain notes? We don't know. We may never know. You could tell a story that a lot of the record-keeping difficulties are simply the inadequate shift to electronic documents.
Darrick Meneken is an associate editor at Scotsman Guide.
Reach him at (800) 297-6061 or darrickm@scotsmanguide.com.
