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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2017

The e-Lending Revolution

If you think you know digital mortgages, you’re probably wrong

The e-Lending Revolution

We’ve all seen the headlines: “Electronic mortgages are sweeping the mortgage industry.” They first appeare d round 2002 and then again around 2008 right before everyone started discussing nothing except defaults, foreclosures and mortgage regulations. What did they tell us about electronic closings and digital mortgages back then? Usually it was “We’re almost there.”

It feels like we’ve been discussing the electronic mortgage, or e-mortgage, forever — but only in theory. In reality, far too many mortgage professionals continue to perceive the digital transformation based on outdated information. The digital mortgage is here now. It’s time to understand where we really are in the process.

If you think you know what an e-mortgage is, you are probably wrong. But it’s not your fault. The industry has been confusing terms, concepts and realities for years when it comes to the digital transformation of the mortgage. Much of what the industry “knows” about digital mortgages is based on facts that are 10 years old. This is like getting your latest rate-card information from data published 10 years ago.

The fact is that rising origination costs are finally driving us to consider legitimate and sustainable ways to reduce costs and streamline the process. What better way to do that than to digitize the mortgage process? And yet, we still hear mortgage professionals say, “That’s years away. There are too many legal barriers, technology gaps and practical considerations to iron out before truly digital mortgages become a reality.” These experts are wrong. Here’s why.

History-based perception

Talk of e-mortgages is heating up again. It probably started with the wild marketing success of Quicken Loans’ “Rocket” mortgage. In addition, lenders are finally admitting that ramping up and down for market spikes, or flipping the switch back and forth between outsourcing and bringing processes in-house are not sustainable strategies for managing costs anymore.

In theory, pulling the virtual junkyard of disparate technologies, multiple vendors and winding processes together is an obvious way to save time and cost. But, as a practical matter, it doesn’t work that way. Not only are many mortgage company, lender and vendor systems incompatible, we often cannot even agree on the terminology.

E-mortgages, e-closings and e-notes are all different things. And, even the term e-mortgage is dated and calls up too many images of the ’90s when the electronic mortgage was just a theory or a vision. Here are a few key terms that get thrown around and help to muddy the waters of what is possible with today’s digital-mortgage technology.

  • End-to-end/cradle-to-grave mortgage: A lot of businesses claim to have an “end-to-end” digital-mortgage solution, but the actual products are only end-to-end for part of the process — the loan application process, for example. Right now, there are no true “end-to-end” solutions that begin at pre-qualification and end with recording the deed and the note, bringing together loan origination, underwriting, title insurance, valuation, curative, escrow, disclosure, closing and recording. So don’t be fooled. The end-to-end applications that exist right now are no more comprehensive than a bumper is in providing “end-to-end protection” for your car.
  • e-signing/e-closing: Here are those e-words again, which make people think of the dot-com boom. In a truly digital closing, borrowers receive their closing documents online. In a truly digital closing, smart docs are the norm and the signing may be done remotely, quickly and painlessly online. A truly digital closing doesn’t mean bringing docs to the settlement table on an iPad or showing borrowers the docs in a safe, online portal prior to close. It’s all digital, throughout. These exist right now — in states that allow them.
  • e-note/e-vault: This part is still in its infancy — at least when it comes to adoption. E-note refers to an electronic promissory note — the digital version of the notarized loan documents that must be filed with the county clerk. E-vaults are secure storage facilities for digital mortgage files — the equivalent of locked file cabinets in a secured storage room.

The e-note and e-vault are not digital closings, nor do the terms describe the entire process. In fact, if you haven’t already implemented a digital-closing platform, e-notes and e-vaults will be irrelevant to you. These elements, however, are necessary to make a truly digital, end-to-end solution into a widespread reality. The technology is in place and getting better by the day. The elements just need to be widely adopted. This will require a change of perception and a willingness to change on the part of the industry — especially investors.

Hybrid closings

In addition to the terms above, it also is important to know about hybrid closings. This newer term represents the best, current state of digital closings. Because not everyone will accept e-notes, several states still require in-person closings and/or “wet signing” of certain documents, where borrowers sign in ink with a quill on parchment — or, at least, with pen on paper — with a notary present.

In a hybrid closing, borrowers see closing documents and disclosures electronically in advance. Any documents that are not required to be wet-signed by law can be signed digitally online or in-person with the closing agent. Hybrid closings are shorter and easier, because only a few documents remain to be signed.

All of that information can then be incorporated into the online package for ease of recording and transfer. The best part about hybrid closings is that, unlike a truly digital closing, the vast majority of lenders already accept them, as do the vast majority of investors, including the government-sponsored enterprises (GSEs). Thus, those companies using hybrid closing platforms can still sell the notes. They’re not forced to forego business because they are embracing new technology.

Roadmap forward

If all of the parts are in place, what is the roadmap to attaining fully digital mortgages? First and foremost, there’s no reason every lender in the nation shouldn’t be using a hybrid closing platform right now. It gets the majority of the cost of transforming from traditional platforms to a digital platform out of the way without prohibiting a lender from still doing a mortgage the old-fashioned way. It doesn’t box out sales. But it will add efficiency and reduce costs immediately.

As lenders begin to climb aboard the hybrid bandwagon, they also need to bring their service providers with them. If your title company, vendor management company, appraisers or anyone else can’t or won’t use the same technology, find a better partner. Lenders don’t hesitate to change vendors if they can’t get the job done or begin to present risk, so how is this any different? Call it what you will, but mortgage lenders need to drive their vendor networks toward the digital transformation as well.

As the number of lenders using hybrid platforms grows, investors and the GSEs will take notice. In fact, some of them already are. In time, the largest players will evolve, which will drive e-note and e-vault innovation and adoption. Even the simple awareness that most of the market has begun the drive to a digital platform will eventually move investors in that direction.

Finally, in time, governments at all levels will bow to pressure from the industry and homebuyers — especially millennial voters — to enter the 21st century, even if they do it while kicking and screaming. Again, most already have. Today, only six states remain that don’t allow some form of e-notarization or e-recording.

The final holdouts on issues such as in-person closings, wet signings with notaries and so forth will eventually realize that the security provided by these ancient rituals can just as easily be provided via digital platforms — if not more easily and more effectively. It’s just a matter of time.

•  •  •

So, there you have it. The digital mortgage is already here in some form. It’s not just a talking point or a PowerPoint presentation anymore. It’s not entirely here yet, but complete adoption is only being blocked by inertia and indefensible skepticism in the market, along with a few legal and government holdouts, and a lack of understanding about how it all works.

The tech for digital mortgages is already in place — and only getting better. In fact, early adopters are already enjoying a competitive advantage simply by using technologies that will soon be standard across the industry. The hybrid-closing platform is the key-stone to the process. If you still think the e-mortgage is a waste of your time and focus, it is time to rethink that outdated position.


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