Fitch: E-Mortgage Adoption Slowed by Several Obstacles

Mortgage lenders have not made as much progress in adopting digital mortgage solutions as one might think, a recent report from Fitch Ratings shows.

“Today, many e-mortgages are originated using a hybrid approach of an e-note coupled with paper-based documents,” Fitch says in the report. “To date, Fitch has not seen e-notes in its rated transactions.”

Fitch defines an e-mortgage as “the electronic process of originating, closing, transferring and storing an e-note that is supported by other digital or paper-based loan documents.”

While government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac “have developed a full framework for accepting this technology,” the report states, “full e-mortgages have remained elusive in the non-agency space.”

“Despite the industry’s enthusiasm for automation, widespread e-mortgage adoption remains several years away, slowed by several obstacles,” the report states. “Originators and servicers will need to address concerns regarding enforceability, required technology, system security and showing borrower consent.”

Fitch further defines an e-mortgage as including “an electronic closing system, vault, and registry, as well as electronic notarization.”

Full e-mortgages also require “use of the Mortgage Electronic Registration System (MERS) e-registry to track loan transfers, lists of approved vendors for electronic closing systems and vaults, and specific representation and warranty requirements.”

As per the report, only about 60% U.S. counties have laws and infrastructure to support e-mortgages – including e-notarization.

Another major issue is e-note enforceability.

“Some legal precedents have been established for e-notes based on a limited number of court cases,” the firm says in the report. ”In these cases, the e-note holder used the MERS e-registry, provided electronic note affidavits and showed the integrity of the electronic vaults storing e-notes in order to establish standing in foreclosure.”

“For inclusion in RMBS, it is also critical that timelines in an e-mortgage foreclosure are comparable to paper mortgages so as not to pose any incremental losses in the event of default,” the firm adds.

Also slowing adoption of e-mortgages in the non-agency space has been the limited number of originators and servicers that have the technology to support them.

“Fitch has found that a primary deterrent to adopting e-mortgages is the cost to develop or acquire the technology required to originate, process and store [e-notes],” the report states.

Data security has also been an issue. It is critical that lenders “ensure e-notes have not been altered and support the holder’s ability to foreclose.”

“Fitch’s review process of proprietary and vendor-managed system security would be in line with the existing reviews of technology and vendors used in origination and servicing,” the firm states. “This would include system demonstrations and a review of controls in place to prevent tampering of e-notes.”

Borrower consent is yet another issue that has slowed adoption. 

“As mortgage originators begin to originate e-mortgages for private-label securitization, representation and warranty frameworks will need to reference electronic signature laws showing that the borrower had an express intent to sign such documents,” Fitch says. “This could be similar in form to representations and warranties required by the GSEs and would help the servicer enforce the e-note.”

Despite these obstacles, Fitch says the e-mortgage “promises faster closing times, decreased closing costs, instant document delivery and ease of note transfers.”

This “increased operational efficiency is expected to pressure greater acceptance across the industry.”