BLOG VIEW: The residential real estate finance industry has struggled with the electronic mortgage, or ‘e’ for short, for years. Efforts to move from paper introduced microfilm, microfiche, imaging, optical character recognition (OCR) and scanning. All come with their own cost, infrastructure, deployment, storage, retrieval and indexing headaches. This was further complicated with the introduction of an ‘e’ or digital signature component. Everyone understood the benefits of ‘e,’ but this type of process change was going to require resource and time investments allocated at a cost to more immediate wants and needs. For the interim, ‘e’ would have to wait.
When the E-Sign Act was signed by President Clinton in 2000, the real estate industry didn't take much notice. There really wasn't any reason to modify existing processes and frankly mainstream technology wasn't available to institute ‘e’ save for the memorialization of a signature in an e-mail. The industry has danced with some ‘e’ success, e-disclosures (boiled down PDF documents sent through e-mail, i.e. paperless), evolving to attestation of those documents through a signing room where the recipient stumbles through an authentication process, to ‘sign’ the documents, which are then delivered back to a ‘e-vault’ for storage, which can be retrieved as PDF files.
There has been success in delivering e-notes electronically, with little enthusiasm. To date 321,559 e-notes have been registered and delivered electronically to the investor. The adoption of ‘e’ has been lethargic at best, but in reality pathetic. ‘e’ will shortly become the required standard and best practice, because drivers are in place to force the process change. They may look like the same old drivers the mortgage industry has been marching to over the years. But the reasons and structure are changed.
There are three drivers which will force the industry to move to a fully enabled ‘e’ transactions, from the purchase of a home to the delivery of the collateral to the secondary market. Yes, I said Home Purchase to Delivery. What does purchasing a home have to do with collateral delivery? Financing. It is the contention of the author that "e' starts at the beginning and the beginning is different for purchase and refinance transactions.
Fraud: Fraud breeds regulation. Each iteration of regulation begets more data to combat fraud. These two components ultimately force the industry to adapt rigor which guarantees transactions, ‘are what they are.’ The industry needs to provide sustainable, accurate and verifiable data elements, end to end, from the inception of the transaction; regardless where that is, purchase or refinance to delivery.
Audience: As we move from the Greatest Generation through the Baby Boomers. The X and Y Gens occupy the market place, they are tech centric and their culture is to obsolete ideas over and over.
Technology: Those partners who deliver the most user friendly, least obtrusive, e-solution will gain the most acceptance, faster.
Let's look at each of these in more detail.
Fraud
Data is the driver behind each real estate finance transaction. Looking at a purchase transaction. Nearly 70% of the data elements populated on the Universial Residential Loan Application (Form 1003) are collected either when the property is listed for sale or when the purchase and sales agreement is executed. In a purchase transaction the data between those data sources need to be combined and transferred to the lenders origination system electronically. Obviously a refinance tranasaction is working with a more abbreviated data set, but the utility and process are the same.
The real estate finance industry has compiled a comprehensive data dictionary with the development and revision of the MISMO data set. This standard is the vehicle to share and transfer common data elements through out the loan process. Unfortunately the standardization of data elements and attributes is not currently available from the multitude of listing services used by the real estate industry. In a perfect world the data elements in a purchase transaction would be directed from the Realtor to the lender, eliminating rekeying of the data into a website or the loan origination system. The present process of delivering a paper copy, minus the listing data to the lender, generates friction in the transaction and potentially opens a window for fraud. Everyone acknowledges best practice moving data electronically is faster, more efficent and elements errors.
Traditional data delivery does not look beyond their own vertical silo. The real estate finance and real estate industries understand the benefits of communication and collaboration to close a transaction. However, they are reading from two different books. Both of these industries continue down the same process happy path that has worked the last forty plus years. This is expensive, inefficent, inaccurate and easy to fraud. The fork in the road of traditional data aggregation and management is coming, and while the players may not surprise you, they likely won't be your traditional technology solution providers.
Touch points need to be reduced to improve data integrity, speed up delivery and drive down the cost of the process. In essence much of the groundwork is done, the data set needs to be more robust and delivered in a standard format (MISMO), providing accurate, verifiable and auditable data file.
This data set follows the life cycle of the loan rendering, (view) when needed, in the appropriate document. Once the data is compiled it can be parsed to render the appropriate data fields for the particular document in a browser. Indeed the basic premise of the SMART doc is data that appears in a browser as it would if you were completing a paper document. Changes to the data are date and time stamped, tracked and logged in a history file. As the transaction moves through the process certain fields become locked, and once the loan is eSigned and closed the transaction is then securely locked down and wrapped with a tamper evident seal to prevent further changes.
Funding generates the data file necessary to deliver the collateral to the investor, at a minimum the e-note. Since nothing is printed to paper it can't be altered or lost. Based on the users credentials anyone who is authorized to view any part of the transaction renders the document in a secure browser.
Audience
X + Y = ‘e’
The above equation can be confusing; I struggled with math. I attribute part of the problem to the guy who sat next to me in math class during high school. Had he applied himself more I would have done better. However this isn't about math.
The audience is all ready engaged and will require the shortest learning curve, while being the quickest to adapt. The X and Y generation are the people that will to force the ‘e’ solution. They are tech savvy, multitask endlessly, pay their bills electronically, have documents stored in the cloud and don't do paper. The current generation is of age and wants stuff pushed to their Smartphone or tablet. They will execute their loan documents at 11:30 p.m. on Sunday. ‘e’ - Really.
Audience and Fraud are the two largest drivers that will compel the industry to move to ‘e’ quickly. The provider who implements smoothest ride to ‘e’ will win. Technology is the vehicle which enables lenders to remain competitive and differeniate from their peers. Lenders will naturally gravitate to the providers making it easiest to do business for them and their borrowers. Those providers who deliver the best solution; stable, secure and easy will be in a strong position when it comes to market share.
Technology
The mortgage and mortgage technology industry has never been willing to truly address the process and technology investment to fully move to ‘e.’ There have been gallant attempts by various players to provide a solution, but when the rubber meets the road; roadblocks allowed for a minimalist solution. Counties won't accept electronic documents, lack of an e-notary, non-acceptance by investors, HUD or the IRS, security; cost to implement, the list goes on. The roadblocks are down, all the reasons the industry has had about investing in ‘e’ are gone. E-Sign Act is law, 4506T has been accepted, lenders accept it, the GSE's accept it, 1,096 counties currently accept ‘e’ representing over 65% of total transactions, e-notary is live and supported. Technology exists today to support all, but it is not convenient, efficient or friendly.
The pieces are in place for an end to end ‘e’ delivery. New solutions that tightly integrate process provides low hanging fruit for those companies that recognize opportunity. It is not inconceiveable those solutions can be delivered from technologists not in or fringe players in the industry today. These companies are not hampered with, ‘what is, or what was,’ engrained process. They look through the glass with the design to introduce a totally new, comfortable, friendly experience. It is easy to imagine and not difficult to implement. Efficient data aggregators, outside of the traditional industry will recognize the opportunity and capitalize on it.
Nontraditional technology vendors have a clean slate on which to start. They are not saddled with legacy baggage. Regardless of the industry they invent, or recreate, they have the culture to obsolete existing ideas quickly. They have shown the willingness to spend big money to enhance earnings and market share. An ‘e’ document and digital signing offering, with high transaction volume and steady reoccurring revenue is attractive to any company that is willing to buy the ticket and take the ride.
The prospect of companies more effiecient in data aggregation, storage and mining, which already have tremendous stores of personal and property information moving into an "e' vertical integrated with a lender shouldn't be discounted. There isn't any need to develop an application to manage loan origination. Data feeds throughout the process could interface with many existing origination systems real time. The complexity that state, federal and investor regulations bring as it applies to document availability, validating calculations, notification and presentment, can be solved easily with the acquisition of a document services company.
All of the roadblocks to a succesful ‘e’ process have been removed, with the exception of a well defined end to end solution. The solution needs to be a seamless; not cobbled together with disparate technologies, (loan origination system, document service, notary, title and closing agent system). It needs to be complete, functional, conveinent, user friendly.
Introduction of technology which provides a well choreagraphed, secure, easy to use solution for both the lender and borrower is the last barrier to gaining acceptance, thereby distinquishing lenders above others and establishing that competitive edge. When these standards are met acceptance is broader and confidence in the process is stronger. The question is will the road be paved by the existing mortgage technology providers or will they become speed bumps, as other non traditional providers develop a better solution.
Alan Harris is founder of IRIS Corp. and a designated certified mortgage banker (CMB), with 25-plus years' experience in the real estate finance industry. He worked initially in loan origination, servicing operations and system administration, subsequently moving to change management, process re-engineering, system Integration and ‘e’ implementation. He can be reached at alan.harris@iriscorporation.net.
