The push towards an industry-wide fully digital mortgage seemed like a big step forward last month Ginnie Mae, the government agency that issues mortgage bonds backed by Federal Housing Administration or Veterans Affairs Department Loans said it had moved forward with a pilot to accept eNotes (electronic promissory notes).
But a new report from Fitch Ratings suggests that widespread adoption of a fully digital mortgage (or eMortgage) may be many years away.
In recent years, numerous lenders have digitized the front-end of the mortgage process, the directed mortgage application Accelerate Loans‘Rocket mortgage and the like.
However, there are still a few key barriers that must be addressed in moving the entire mortgage from a paper-intensive to a digital process.
One of the main problems that prevented the full digitization of the mortgage process was the use and acceptance of electronic promissory notes, also known as eNotes. An eNote is an electronic version of a note that is the legal record of the obligation to repay the mortgage.
Traditionally, the IOU was a paper document, but a move towards digitization across the mortgage business led to an increase in digital IOUs.
But it’s not as easy as a digital promissory note. The eNote must also be stored in such a way that it has the same legal enforceability as a paper document.
Despite these hurdles, the data was published earlier this year by MERSCORP shows that the number of eNotes added to MERS eRegistry skyrocketed in the first quarter of this year; This means that fully digital mortgages are becoming more and more acceptable in the market.
And with massive companies like Wells Fargo and major agencies like Ginnie Mae jumping on the eMortgage bandwagon seem to be heading in the same direction.
Not that fast, according to Fitch.
“Despite the industry’s enthusiasm for automation, the widespread adoption of eMortgage is still several years away and is being held back by several roadblocks,” a Fitch Ratings report said. “While the mortgage industry has focused on automated technology for borrowers, full eMortgages have remained elusive in the non-agency realm. Originators and service engineers need to address concerns about enforceability, required technology, system security, and evidence of borrower consent. “
Fitch notes that the government sponsored companies (Fannie Mae and Freddie Mac) are among the most active in eMortgage and have developed a “complete framework” for the acceptance of eMortgages.
According to Fitch, this includes using the MERS eRegistry to track credit transfers; Lists of approved providers for electronic locking systems and safes; and specific display and warranty requirements.
However, as Fitch notes, the process only works in counties and states that have the laws and infrastructure to support eMortgages, including electronic authentication.
Not all counties and states currently support eMortgage technology. According to Fitch, about 30 states and 60% of the US states can currently support eMortgages.
Fitch believes eMortgages will continue to grow in popularity, but said there are many other issues that must be addressed before eMortgage becomes the industry standard.
“Some legal precedents have been set for eNotes based on a limited number of legal cases,” notes Fitch. “In these cases, the eNote owner used the MERS eRegistry, submitted affidavits for electronic notes and demonstrated the integrity of the electronic vaults in which eNotes are stored in order to guarantee the foreclosure.”
Also, according to Fitch, if the underlying mortgages are to be included in mortgage-backed residential properties, “it is important that eMortgage foreclosure deadlines are comparable to paper mortgages so as not to incur additional losses in the event of default.”
The adoption of eMortgage technology has been slow in the non-agency space as well, as Fitch realizes that there are few originators and servicers with the technology to support eMortgages.
Regarding the reasons for the slow adoption, Fitch states that the cost of developing or acquiring the technology required to create, process, and store eMortgages was a “primary deterrent.”
Another potential legal and technical issue is a scenario where a digital mortgage document is changed after the loan is closed. The advantage of a paper document is that it is a legally enforceable document that will lose its enforceability if it is changed.
A digital document could theoretically be changed without the borrower or a court ever knowing or having evidence of the contents of the original document.
This is where blockchain technology could come into play, as documents on a blockchain cannot be changed without informing others on the same network of the changes.
“The security of the technology required is critical to ensuring that the eNotes have not been tampered with and to support the owner’s ability to foreclose,” says Fitch. “Fitch’s review process for proprietary and vendor-managed system security would be consistent with existing reviews of the technology and vendors used in its creation and maintenance. This would include system demonstrations and a review of the controls in place to prevent tampering with eNotes. “
While there are still many problems in the way of widespread use of eMortgages, Fitch suggests that there are real benefits on all sides of the mortgage transaction should the industry find a way to overcome all of these hurdles.
“While there are barriers to eMortgages, the technology promises faster close times, lower closing costs, instant document delivery, and easy transfer of notes,” explains Fitch.
“While only a small percentage of GSE production currently uses this technology, the driver for greater operational efficiency is expected to increase adoption across the industry,” concludes Fitch. “The electronic process implemented by eMortgages could easily be used by banks and other institutions wishing to use distributed ledger technology in the creation and securitization of mortgages.”