By Grant, Rick
This regional bank became a national powerhouse by harnessing technology.
Technology has long been a friend to mortgage bankers. In good times, when the market provides long lines of borrowers eager to refinance or buy new homes, technology offers the lender scale. When times are slow, technology helps lenders increase efficiencies and reduce costs as they weather the storm. * At Flagstar Bancorp Inc., Troy, Michigan, mortgage lending technology isn't just a friend- it's a trusted partner. While it serves to increase efficiencies and lower costs throughout this national wholesale lender's enterprise, that's not its primary purpose, according to Thomas J. Hammond, the company's founder and chairman. Technology at Flagstar isn't primarily about the company at all. It's about its customers.
Snapshot of a leader
It started out with Hammond Mortgage, Oak Hills Mortgage and First Security Mortgage, three small origination shops writing agency paper in the Midwest during the 1960s. But Hammond was an entrepreneur, and by 1987 he was successful enough to form a federal savings bank and rolled his mortgage assets into First Security Savings Bank, Bloomfield Hills, Michigan.
A community bank operating initially in Michigan, the enterprise expanded its branch banking operations into Indiana and Georgia, but pushed its mortgage unit-the core of its enterprise-much harder. By 1992, Thomas Hammond was providing loans on a wholesale basis to originators nationwide. That's when he encountered a problem.
It turned out there were a lot of financial services firms operating around the country during the 1990s that had 'security' in their names. In fact, in 1994, Hammond bought one when he acquired Security Savings Bank, Jackson, Mississippi, the firm's only acquisition to date.
Hammond realized that the company needed a new name-one that would distinguish it anywhere in the country. In 1996, the company name was changed to Ftagstar Bancorp from First Security to better reflect its diversified businesses and national reach.
Hammond took Flagstar public in 1997, and initially listed the company on the Nasdaq. By 2000, the firm relocated into a 380,000- square-foot facility in Troy, Michigan, where it is now headquartered. In 2001, Flagstar moved its listing to the New York Stock Exchange (NYSE). Today, it is included in the S&P (Standard & Poor's) Small Cap 600, Russell 2000 and NYSE Composite indexes.
According to Flagstar, in 2005 it originated $28 billion in mortgages, making it the seventh-largest loan seller to Fannie Mae. The company reports it originated $4.6 billion in the most recent quarter, ending Sept. 30, 2006.
The company currently services $24 billion in loans, including $14.8 billion in loans serviced for others, and is ranked a Tier One platinum servicer by Freddie Mac. It also holds a $1.3 billion commercial real estate servicing portfolio.
The majority of Flagstar's loan originations come in from a network of some 4,000 brokers (10,000 are approved), operating in all 50 states. These brokers delivered 57.1 percent of the bank's total production volume in 2005. In addition, Flagstar works with some 900 correspondent lenders across the country (1,500 are approved), which accounted for 28.7 percent of total originations in 2005.
Only 14.2 percent of its 2005 origination volume came from its banking centers, and the 90 additional home-loan centers it maintains in 22 states. But that is going to change. According to Hammond, his firm will be expanding its retail lending operations.
Flagstar's philosophy of technology
Talking to Flagstar executives about technology is like talking to them about customer service. In fact, it's exactly the same: They won't talk about one without the other.
'At the end of the day, it all comes down to customer service,' says W. Steven Brooks, Flagstar's executive vice president in charge of lending. He adds it's all about these questions: 'How are you providing service to your customers? And how do you measure that?'
At Flagstar, one of the most important metrics for measuring customer service is speed. Faster loan approvals and lower cycle times equate to more satisfied customers, and Flagstar knows it. To get that speed, the company declared war on paper more than a decade ago.
'This isn't something we started doing yesterday,' Brooks says. 'Tom [Hammond] talks about the paperless office today the same way he talked about it back in 1995.'
Technically speaking, Flagstar wasn't really paperless in 1995, but it was already on the road there. The bank was scanning documents in 1995, primarily for storage and retention. It wasn't until 1999 that it was capable of adding these scanned documents into an electronic workflow. Brooks says that was where the efficiencies really kicked in.
'It's not just scanning,' Brooks says. 'It's about capturing the documents and then doing something with them, routing them though your workflow to the people who need them.'
By 2000, the company was exporting images to investors. And by 2005, Flagstar had added a paperless file manager and the capability to auto-label incoming documents as part of a complete digital document-transfer platform.
According to Brooks, who started out with the company as a retail loan officer and worked his way up to a corner office, Flagstar doesn't tolerate paper and it won't listen to excuses related to it.
'Lost document?' he quips in response to one of the most common reasons for delays in the mortgage process. 'I haven't heard that one since 1995.'
While the Flagstar paperless back office may be 'legendary,' as one mortgage industry trade publication once put it, paperless lending initiatives are only one place technology is being employed in the bank.
Whether it's an innovative partner-rating system to allow Flagstar to rank its third-party loan originators or an online loan- status tool that has almost eliminated incoming broker information calls, the Flagstar philosophy is to apply technology to anything that will increase service levels to its customers-whether they be borrowers, brokers or correspondent lenders.
The Flagstar loan flow
Flagstar has systematically worked to make every part of the mortgage transaction electronic. Today, Flagstar's centralized mortgage loan-processing facility is paper-free. There are no paper files on the desks. There is no file room for them in the building. And there are no clerks to file them, lose them or find them again.
From the moment the loan enters the pipeline through to funding and post-closing, the file stays electronic.
Flagstar accomplishes this through full integrations with San Jose, California-based Calyx Software's, Dublin, California-based Ellie Mae Inc.'s and Kirkland, Washington-based Byte Software's loan origination systems (LOSes). Brooks says these three systems together serve the vast majority of the broker market. When a broker registers the loan with Flagstar, a single button uploads all the data from one of these three origination systems. If the broker uses a different loan origination system, a quick trip to Flagstar's interactive wholesale mortgage Web site provides a pull-down menu, allowing the broker to choose its LOS and upload the file to Flagstar in its native format. Bottom line: Flagstar employees almost never key in data.
Loan decisioning is handled by automated underwriting (AU) engines. Fraud and collateral valuation is handled by business logic that calls upon a customized version of Agoura Hills, California- based Interthinx's DISSCO^sup sm^ fraud tool and a cascade of 12 different automated valuation models (AVMs).
Flagstar processors are positioned in front of dual-screen computer displays, one showing the data provided electronically by the broker's LOS and the other showing an image of the original document providing those data. Making sure they match up is the primary function of the Flagstar mortgage loan underwriter. Instead of chasing paper around the office for a couple of weeks, Flagstar underwriters can approve a loan for funding in a couple of hours.
As a Flagstar underwriter confirms that the data in the system match the information on the scanned document, the loan is pushed further down the line toward closing. At the same time, a little checkmark appears on a special Web page the broker can use to check the ongoing status of the loan. The broker gets an e-mail automatically to confirm the checkmark is there.
For lenders on the path to paperless lending, Flagstar may sound like Nirvana. But according to Brooks, Flagstar isn't satisfied yet. Moving a loan through the system in two hours is good, but instantaneous is better.
He says brokers like to work electronically as the loan moves through the pipeline, but when the deal closes, almost all of Flagstar's 4,000 brokers hit the 'print' button and paper out. The same is true for the title companies and closing agents involved in the deals.
All the paper that the company has worked for 10 years to keep out of the process comes spitting back out of laser printers all over the country. It's a situation Flagstar is determined to change.
Taking the industry to the next level
Flagstar is ready \to take its business to the next level with an all-electronic loan-processing system it says can scale to handle $150 billion worth of mortgages-about three times the $56.4 billion the company originated at the peak of the most recent refi boom in 2003.
Of the 17 functions Flagstar has identified in the process of originating and funding a loan-from registering the loan through to post-closing-only two require Flagstar employees. The rest of the process is automated or dependent upon the broker.
Hammond believes this is important, as he senses another refinance boom in the near future. But as chairman of a publicly traded company, he's careful about his forward-looking statements.
Brooks talks about the scalability built into the company's lending platform as well, but he also points out that with nearly 85 percent of the company's loan volume currently coming from the wholesale and correspondent channels, Flagstar needs to help its partners gain the efficiencies that come from living fully in the paperless world. And he adds that the loan originators that work with Flagstar today are ready to go to that next level.
He points out that brokers clearly appreciate the work Flagstar has already done. The company received the highest average rating in providing electronic services to brokers, according to a 2004 survey of mortgage brokers sponsored by Inside Mortgage Finance and conducted by Campbell Communications Inc., Washington, D.C.
Brooks tells the story of how Flagstar offered to let correspondent lenders scan in their own closing documents and upload them to the Flagstar system automatically instead of faxing them in and then paying courier fees to send in the originals.
'When we made that available, it was surprising how many correspondent lenders took advantage of it,' Brooks says. 'It was clear that these efficiencies are important to brokers. With 37 percent of our customers scanning in the documents now, we know they're ready for the next step.'
In September, Flagstar opened up its digital document-transfer platform to correspondent lenders, allowing them to transfer files electronically regardless of the paperless solution they were using to get the electronic information-including those offered by Alpharetta, Georgia-based Advectis Inc.; Vienna, Virginia-based VirPack; and Hackensack, New Jersey-based PaperClip Software Inc. Today, nearly half of Flagstar's correspondent lenders are sending their loan packages in electronically.
Brooks says these initiatives have been 'wildly popular. [Loan originators] want to be paperless,' he adds.
But to get to the next level, the industry needs technology that hasn't been developed yet. So, Flagstar is beta testing its new eClosing module. Pilot programs with some of the bank's top customers are expected during the first quarter of 2007.
The institution is working with both Fannie Mae and Freddie Mac, and hopes to provide a system that will produce fully electronic mortgages by working seamlessly with some of the nation's top mortgage loan-closing systems, including those provided by Fiserv Inc., Brookfield, Wisconsin; The First American Corporation, Santa Ana, California; and Stewart Information Services Corporation, Houston.
'Our goal is to make our new eClosing platform compatible with any system,' Brooks says. 'We'd like it to be neutral.'
Brooks says Flagstar is the obvious lender to go completely paperless, because it already has most of the rest of the process digitized. In addition, the company's imaging platform is proven and scalable. Producing SMART Docs(TM) won't be much more difficult than the printer command language (PCL) that Flagstar is using today. All the bank will require in the short term is an original note, but Brooks says that will change when Flagstar decides what it will do for an eNote repository solution.
'We're working with both agencies to finalize the last pieces that we have to build,' Brooks says.
But even then, Flagstar won't be satisfied. The company is putting the finishing touches on an automated system to compare the HUD-1 settlement statement to the Truth-in-Lending Act (TILA) statement in post-closing, a process that now takes too much time and can lead to compliance problems if improperly performed.
'We have this whole automated service to empower all the players in the deal, but in funding we have to stop the transaction and look at the final HUD-1 and TILA statement to make sure they're in compliance,' Brooks says. 'It's another review step that can lead to delays at the closing table. Borrowers don't like delays at the closing table.'
When the new system goes into pilot this month, Flagstar will be able to send the title company an e-mail that includes an embedded link. The title company can then follow the link back to certify that the information in Flagstar's system matches what was signed at the closing table.
Looking toward the future
Like those in any publicly traded company, Flagstar executives get wary whenever they are asked about the future. But they'll still answer the question. During a presentation company management gave in September during its investor and analyst day, a number of initiatives and goals for the future were described.
First, the company wants to take its underwriting function to the next level. Having employees compare electronic data and imaging documents on side-by-side flat panels is good, but interactive loan underwriting with video conferencing would be better.
Second, the firm is dedicated to completing the work on its own eClosing platform that will allow the bank to more effectively handle loan closings around the country, making full use of electronic documents and eSignatures.
Finally, Flagstar is dedicated to helping the other loan originators it depends upon for loan volume to fully embrace electronic lending. In that respect, the company plans to be an evangelist for the paperless mortgage-waving its flag, so to speak, in the hope that other originators will rally to it and take the industry to the next level.
Brooks is positive about the outcome, because he says Flagstar customers already see the value and want the same efficiencies for themselves. But then, Brooks seems to be perennially positive when it comes to technology and its benefits, which is probably why he has advanced so far within Flagstar.
'I live it and breathe it,' he says. 'I'm one of those people on the business unit side who has always been a big believer in change.'
The Flagstar philosophy is to apply technology to anything that will increase service levels to its customers-whether they be borrowers, brokers or correspondent lenders.
'Our goal is to make our new eClosing platform compatible with any system,' Brooks says. 'We'd like it to be neutral.'
Rick Grant is a freelance writer based in Jim Thorpe, Pennsylvania. He specializes in writing about technology for the financial services industry. He can be reached at ricgrant@ptd.net.
Friday, August 17, 2007
Wednesday, August 15, 2007
Fannie Mae says, "eMortgages are sooo yesterday!"
Industry Getting Arms Around eMortgage Cost SavingsMurray, MichaelNEW YORK—A loan through Fannie Mae’s desktop underwriting using electronic loan delivery (eLoan Delivery) into the secondary market could provide cost savings of up $350 per loan if the loan closed the same day, according to Christos Bettios, the company’s senior portfolio manager.
“[Electronic] mortgages for Fannie Mae are no longer a new thing or a pilot,” Bettios said here at the Mortgage Bankers Association’s National Secondary Market Conference & Expo. “For us, this is not a new thing.” Bettios said faster funding through eLoan Delivery has been placed at $35 to $200 cost savings with same-day origination, closing and sale of the loan. Savings on operational costs could range from $80 to $150 per loan through automation. Bettios also estimated six to nine months for implementation. With industry-wide data standards, an interface from lenders to investors could be a one-time fee. The costs to change processes in report closings are “good kind of costs” because they provide long-term savings in quality assurance. Not simple to buy piece of software, plug it in and make it rumble, Bettios said. Harry Gardner, senior director of industry technology at MBA, said it is not always easy for lenders to quantify cost savings, but said he knows of at least one warehouse lender that keeps production through FedEx delivery in paper notes. In cases of bad weather, such as a snowstorm, the warehouse lender needs to spend the day speaking to correspondents on whether to take greater risks in waiting on the notes. An electronic note (eNote), Gardner noted, would arrive electronically, without dependence on paper delivery. Additionally, an eNote process gives immediate cost savings in delivery to Fannie Mae and Freddie Mac. “There is great savings potential,” Gardner said. “In some cases it is difficult to quantify. In some cases, there are obvious savings.” Implementation costs—expensive a few years ago—are changing because service providers charge on a transaction basis, said Brian Blair, senior vice president of sales at Wayne, Pa.-based GHR Systems, a subsidiary of Metavante Inc. After closing, the Mortgage Electronic Registry System (MERS) receives the electronic document—the eNote—by providing standard delivery of the eNote from one member to another. An existing MERS interface eliminates custom B2B interfaces. MERS, however, is not a vault storing the eDocument, according to Gardner. “Everyone is integrating with everyone else through proprietary interfaces,” Gardner said. “MERS has central ‘spoke and hub architecture’ for eDocs to move back and forth among partners.” The eNote is then registered on MERS eRegistry, a national eNote registry that is the central location to identify the current controller and location of the authoritative copy of an eNote. An eNote registered on MERS eRegistry keeps track of the owner of the eNote. The post-closing eRecording phase can happen in near real-time because documents are moving electronically, Gardner said. Quality assurance can certify eNotes faster, eliminating rekeying with fewer mistakes. Rather than “stare and compare,” data would be populated on the back-end with greater transparency into the depth of the loan and data quality. With an eNote acquired and traded in minutes, investors are also able to buy a loan faster at best execution and lower risk, Gardner said. “The data is immediately in our hand,” Bettios added. Fannie Mae has acquired eNotes from 1,000 or more lenders by sharing its best practices and guidelines with lenders. In a recent survey by Fannie Mae, 72 percent of its lenders expect to implement some form of electronic signatures (eSignatures) and nearly 45 percent of respondents expect their companies to implement eMortgages. Fannie Mae forecasts a “critical mass’ of lenders moving to eMortgages in the next three years, Bettios said. Gardner said hybrid loans are likely for some time with eNotes and paper closing documents. Custodians must manage paper or eDocuments for the same loan, and hybrid pools would include eNotes and paper notes. “The revolutionary move is toward an electronic note on the outset. Typically, with the signing pad, it is the legal document that is being delivered,” Gardner said. To gain the full eMortgage landscape and liquidity, more investors are integrating into loan origination systems and are becoming electronically enabled, according to Gardner. Electronic file transmission and shipping can be integrated into a loan origination system. Blair said Metavante has several clients that want a “lights-out processing” requirement, which includes minimum staff for processing a loan. Bettios said Fannie Mae’s eCommitONE for lenders to commit to a price does not incur pair-off fees if a loan falls out of the pipeline and it provides a window for loan officers to lock in a rate by 10 p.m. If closed and received, the commitment price is given to the lender With eDocuments, data and the view of information combine through SMART Docs, allowing the borrower to see and sign the documents, but it also provides data payload capability. It provides almost immediate quality assurance capabilities for investors and data in XML data payload links to signed eDocs. Automated underwriting at point-of-sale is a cost savings of $1,025, and costs of direct servicing are 50 percent less than the 1980s, with 2 percent to 5 percent errors. Blair said GHR Systems works with more than one appraisal vendor, and GHR could implement other proprietary data interfaces, although it would save costs to the entire industry for one standard interface. A study by MISMO said XML data standards alone could save $240 per loan transaction. Blair said GHR supports MISMO XML standards and the automated appraisal process. Bettios said the new servicer of electronic notes, if not already enabled electronically, will eventually need to become e-enabled. Fiserv, Encomia, Settleware, Digital Docs and Document Processing System are live on the eMERS Registry system. The combination of an eClosing—using eSignatures and eDocuments—provides borrowers with secure access well in advance of the closing for borrowers to find any mistakes prior to closing, rather than taking the time at closing to initial errors. The electronic notarization (eNotarization) is the same as notarizing in the paper world, but the notary seal is in electronic format. “For eSignatures, the intent to sign must be clear,” Gardner said. “The signer must agree in advance to use electronic documents and electronic signatures.” A Public Key Infrastructure (PKI) seal—a digital thumbprint on the eDocument—provides security. The eMERS Registry stores a “hash value,” protected with the PKI thumbprint and MERS confirms the eDocument was received and is identical to the document received by the borrower at the closing table. The eNotes include fixed-rate and ARM products. “When Fannie Mae talks about eMortgages, we mainly care about the eNote,” Bettios said. As sellers send loans to investors on a post-analysis basis, they provide variance-based expectations as data would populate an investor’s software to schedule and track cost expense guidelines. In an automated environment, investors could create any forms and retain that data, and investors would manipulate unrekeyed data to determine risks and costs. MISMO industry data standards would again prevent added costs to create new interfaces for each investor. “Electronic reporting is the next advent to get to with this type of technology,” Blair said. “We are still struggling with clients who do not want to uphold the [data] standards but they are certainly there.” Even with MISMO XML data industry standards, which would reduce costs to create separate interfaces for all investors, some investors do not necessarily want to comply with the standards. “I do see a need of custom forms and some institutions are feeling they need to be unique or different,” Blair said. Quality assurance departments could verify borrowers with automated compliance alerts to ensure loans meet certain thresholds on the front end, and they can provide exception alerts to management in shorter time frames, according to Blair. County recorders continue to adopt electronic recording (eRecording) capabilities and they are increasing through the Property Records Industry Association (PRIA). While there are 3,600 counties and municipal entities, the “80/20 rule” applies, as nearly 300 counties account for 80 to 90 percent of mortgages across the country. A statewide eRecording portal has been created to integrate eRecorders at the end of the origination process. New Jersey, for example, has taken to the statewide portal and it is offered for free to any other state government willing to use it.
“[Electronic] mortgages for Fannie Mae are no longer a new thing or a pilot,” Bettios said here at the Mortgage Bankers Association’s National Secondary Market Conference & Expo. “For us, this is not a new thing.” Bettios said faster funding through eLoan Delivery has been placed at $35 to $200 cost savings with same-day origination, closing and sale of the loan. Savings on operational costs could range from $80 to $150 per loan through automation. Bettios also estimated six to nine months for implementation. With industry-wide data standards, an interface from lenders to investors could be a one-time fee. The costs to change processes in report closings are “good kind of costs” because they provide long-term savings in quality assurance. Not simple to buy piece of software, plug it in and make it rumble, Bettios said. Harry Gardner, senior director of industry technology at MBA, said it is not always easy for lenders to quantify cost savings, but said he knows of at least one warehouse lender that keeps production through FedEx delivery in paper notes. In cases of bad weather, such as a snowstorm, the warehouse lender needs to spend the day speaking to correspondents on whether to take greater risks in waiting on the notes. An electronic note (eNote), Gardner noted, would arrive electronically, without dependence on paper delivery. Additionally, an eNote process gives immediate cost savings in delivery to Fannie Mae and Freddie Mac. “There is great savings potential,” Gardner said. “In some cases it is difficult to quantify. In some cases, there are obvious savings.” Implementation costs—expensive a few years ago—are changing because service providers charge on a transaction basis, said Brian Blair, senior vice president of sales at Wayne, Pa.-based GHR Systems, a subsidiary of Metavante Inc. After closing, the Mortgage Electronic Registry System (MERS) receives the electronic document—the eNote—by providing standard delivery of the eNote from one member to another. An existing MERS interface eliminates custom B2B interfaces. MERS, however, is not a vault storing the eDocument, according to Gardner. “Everyone is integrating with everyone else through proprietary interfaces,” Gardner said. “MERS has central ‘spoke and hub architecture’ for eDocs to move back and forth among partners.” The eNote is then registered on MERS eRegistry, a national eNote registry that is the central location to identify the current controller and location of the authoritative copy of an eNote. An eNote registered on MERS eRegistry keeps track of the owner of the eNote. The post-closing eRecording phase can happen in near real-time because documents are moving electronically, Gardner said. Quality assurance can certify eNotes faster, eliminating rekeying with fewer mistakes. Rather than “stare and compare,” data would be populated on the back-end with greater transparency into the depth of the loan and data quality. With an eNote acquired and traded in minutes, investors are also able to buy a loan faster at best execution and lower risk, Gardner said. “The data is immediately in our hand,” Bettios added. Fannie Mae has acquired eNotes from 1,000 or more lenders by sharing its best practices and guidelines with lenders. In a recent survey by Fannie Mae, 72 percent of its lenders expect to implement some form of electronic signatures (eSignatures) and nearly 45 percent of respondents expect their companies to implement eMortgages. Fannie Mae forecasts a “critical mass’ of lenders moving to eMortgages in the next three years, Bettios said. Gardner said hybrid loans are likely for some time with eNotes and paper closing documents. Custodians must manage paper or eDocuments for the same loan, and hybrid pools would include eNotes and paper notes. “The revolutionary move is toward an electronic note on the outset. Typically, with the signing pad, it is the legal document that is being delivered,” Gardner said. To gain the full eMortgage landscape and liquidity, more investors are integrating into loan origination systems and are becoming electronically enabled, according to Gardner. Electronic file transmission and shipping can be integrated into a loan origination system. Blair said Metavante has several clients that want a “lights-out processing” requirement, which includes minimum staff for processing a loan. Bettios said Fannie Mae’s eCommitONE for lenders to commit to a price does not incur pair-off fees if a loan falls out of the pipeline and it provides a window for loan officers to lock in a rate by 10 p.m. If closed and received, the commitment price is given to the lender With eDocuments, data and the view of information combine through SMART Docs, allowing the borrower to see and sign the documents, but it also provides data payload capability. It provides almost immediate quality assurance capabilities for investors and data in XML data payload links to signed eDocs. Automated underwriting at point-of-sale is a cost savings of $1,025, and costs of direct servicing are 50 percent less than the 1980s, with 2 percent to 5 percent errors. Blair said GHR Systems works with more than one appraisal vendor, and GHR could implement other proprietary data interfaces, although it would save costs to the entire industry for one standard interface. A study by MISMO said XML data standards alone could save $240 per loan transaction. Blair said GHR supports MISMO XML standards and the automated appraisal process. Bettios said the new servicer of electronic notes, if not already enabled electronically, will eventually need to become e-enabled. Fiserv, Encomia, Settleware, Digital Docs and Document Processing System are live on the eMERS Registry system. The combination of an eClosing—using eSignatures and eDocuments—provides borrowers with secure access well in advance of the closing for borrowers to find any mistakes prior to closing, rather than taking the time at closing to initial errors. The electronic notarization (eNotarization) is the same as notarizing in the paper world, but the notary seal is in electronic format. “For eSignatures, the intent to sign must be clear,” Gardner said. “The signer must agree in advance to use electronic documents and electronic signatures.” A Public Key Infrastructure (PKI) seal—a digital thumbprint on the eDocument—provides security. The eMERS Registry stores a “hash value,” protected with the PKI thumbprint and MERS confirms the eDocument was received and is identical to the document received by the borrower at the closing table. The eNotes include fixed-rate and ARM products. “When Fannie Mae talks about eMortgages, we mainly care about the eNote,” Bettios said. As sellers send loans to investors on a post-analysis basis, they provide variance-based expectations as data would populate an investor’s software to schedule and track cost expense guidelines. In an automated environment, investors could create any forms and retain that data, and investors would manipulate unrekeyed data to determine risks and costs. MISMO industry data standards would again prevent added costs to create new interfaces for each investor. “Electronic reporting is the next advent to get to with this type of technology,” Blair said. “We are still struggling with clients who do not want to uphold the [data] standards but they are certainly there.” Even with MISMO XML data industry standards, which would reduce costs to create separate interfaces for all investors, some investors do not necessarily want to comply with the standards. “I do see a need of custom forms and some institutions are feeling they need to be unique or different,” Blair said. Quality assurance departments could verify borrowers with automated compliance alerts to ensure loans meet certain thresholds on the front end, and they can provide exception alerts to management in shorter time frames, according to Blair. County recorders continue to adopt electronic recording (eRecording) capabilities and they are increasing through the Property Records Industry Association (PRIA). While there are 3,600 counties and municipal entities, the “80/20 rule” applies, as nearly 300 counties account for 80 to 90 percent of mortgages across the country. A statewide eRecording portal has been created to integrate eRecorders at the end of the origination process. New Jersey, for example, has taken to the statewide portal and it is offered for free to any other state government willing to use it.
The Plot Thinkens
Without a doubt Amtrust Bank (formerly Ohio Savings Bank) has been the "dark horse" in the eMortgage race. Offering their eSign product to brokers was a major event in the development of the Paperless Mortgage (eMortgage: See my definition on wiki.)
The other "Big Boys" of the wholesale lending universe have been watching, plotting their marketing strategies, investing tens of millions of dollars behind the scenes to be the undisputed winner of this race.
It seems the finish line is drawing near. We've got Amtrust leading the race, Citi, Flagstar and Wells Fargo are looking strong (Still have no confirmed reports that BofA is even in the race.) By all accounts and from my discussions with the industry players expect a winner to be declared in the 1st Quarter of 2008.
Amercian Home Mortgage (ABC to you wholesale folks) is defiantly out of the race. But, someone may step in to pick up the pieces. I'm told they were working quite diligently on an eMortgage solution and depending on what they put together that could be a very attractive asset. From what I understand the technology solutions that InterFirst put together was one of the primary motivating factors behind Citi Banks acquisition of them.
To summarize. We've got Amtrust leading the race, AHM is out and we've got Citi, Flagstar and Wells Fargo pacing Amtrust, all looking to take the lead in this home stretch.
It is my hope that when I attend the MISMO conference in Houston next month I will have a chance to talk with all the participants (on the record) and update the leader board for all you folks interested in this Great American eMortgage Race.
If you have not done so already...place your bets now.
The other "Big Boys" of the wholesale lending universe have been watching, plotting their marketing strategies, investing tens of millions of dollars behind the scenes to be the undisputed winner of this race.
It seems the finish line is drawing near. We've got Amtrust leading the race, Citi, Flagstar and Wells Fargo are looking strong (Still have no confirmed reports that BofA is even in the race.) By all accounts and from my discussions with the industry players expect a winner to be declared in the 1st Quarter of 2008.
Amercian Home Mortgage (ABC to you wholesale folks) is defiantly out of the race. But, someone may step in to pick up the pieces. I'm told they were working quite diligently on an eMortgage solution and depending on what they put together that could be a very attractive asset. From what I understand the technology solutions that InterFirst put together was one of the primary motivating factors behind Citi Banks acquisition of them.
To summarize. We've got Amtrust leading the race, AHM is out and we've got Citi, Flagstar and Wells Fargo pacing Amtrust, all looking to take the lead in this home stretch.
It is my hope that when I attend the MISMO conference in Houston next month I will have a chance to talk with all the participants (on the record) and update the leader board for all you folks interested in this Great American eMortgage Race.
If you have not done so already...place your bets now.
Thursday, August 2, 2007
Debunking eMortgage Myths
Source: Mortgage BankingPublication date: March 1, 2007
By Dubinsky, Andrew M
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.
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 penand-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:
* 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.
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."
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 Gary 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 h\ave 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 companies could 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 Houstonbased 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 [personal computer]."
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 industrywide 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 MERS 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 the industry system of record for ownership of eNotes," 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 LaSaIIe [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 the MERS eRegistry. Not only are the legal infrastructure 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 (ay 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-tosign 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 Alien, 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 paper-signing 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.
The full adoption of eMortgages is inevitable. Current myths about the obstacles to that adoption won't make the outcome otherwise.
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.
Industrywide adoption of electronic mortgages will not happen on a specific day at a specific time.
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.
eMortgages are yielding meaningful results right now to the few early adopters in our 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 andy@encomia.com.
Copyright Mortgage Bankers Association of America Mar 2007
(c) 2007 Mortgage Banking. Provided by ProQuest Information and Learning. All rights Reserved.
By Dubinsky, Andrew M
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.
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 penand-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:
* 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.
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."
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 Gary 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 h\ave 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 companies could 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 Houstonbased 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 [personal computer]."
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 industrywide 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 MERS 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 the industry system of record for ownership of eNotes," 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 LaSaIIe [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 the MERS eRegistry. Not only are the legal infrastructure 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 (ay 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-tosign 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 Alien, 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 paper-signing 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.
The full adoption of eMortgages is inevitable. Current myths about the obstacles to that adoption won't make the outcome otherwise.
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.
Industrywide adoption of electronic mortgages will not happen on a specific day at a specific time.
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.
eMortgages are yielding meaningful results right now to the few early adopters in our 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 andy@encomia.com.
Copyright Mortgage Bankers Association of America Mar 2007
(c) 2007 Mortgage Banking. Provided by ProQuest Information and Learning. All rights Reserved.
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