The e-mortgage: A true business advantage in todayâ€™s mortgage environmentTom Madisone-mortgage, credit crunch, paperless, Mortgage Industry Standards Maintenance Organization, Extensible Markup Language Without a doubt, the credit crunch and recent events in the mortgage industry have put many of us to the test. For today's mortgage lenders, navigating through this crisis means looking for new and improved ways to deliver greater value. This is where strategic technologies like the e-mortgage can play a valuable role. We have all heard the e-mortgage buzz, and for the past few years, e-mortgage has been a popular topic among business and lending circles. While lenders have understood the benefits that e-mortgages can bring to the lending process, it was not until recently that lenders became serious about the technology. Todays e-mortgage processes are designed to streamline operations, enhance data management and, ultimately, improve interactions with the secondary/investment market. What e-mortgage really means While lenders of all sizes and types are talking about the value of the e-mortgage, the term has come to have several market meanings. Some lenders interpret e-mortgage as a paper-based environment in which loan documents are first signed manually and later scanned and stored electronically. Others view the e-mortgage as a completely paperless transaction, in which critical loan documents (including the necessary disclosures, documents used at a closing, riders, contracts, agreements and, specifically, the promissory note) have been natively electronically generated and signed. While both scenarios are moving us in the direction of a more "electronic" mortgage lending process, going completely paperless has some distinct advantages over a "mixed" manual/electronic process. Truly paperless e-mortgages facilitate the greatest operational efficiencies. Sending documents electronically from point-to-point can significantly reduce loan cycle times, resulting in noticeably lower origination costs. Additional savings can be realized from the elimination of traditional postage costs and back-office inefficiencies associated with manually processing loans. Paperless e-mortgages also can mean higher quality loan documents and data, since electronic processing reduces the chance of data loss. This is particularly beneficial given the high percentage of non-compliant loans currently held within real estate investment funds. Had this technology been implemented earlier, the number of non-compliant loans might have been better managed with readily accessible data. Paperless processing: Lending a competitive advantage In the simplest terms, paperless e-mortgages are only as strong as the technologies behind them. Lenders can lower data integration costs by utilizing the Mortgage Industry Standards Maintenance Organization's (MISMO) Internet-based Extensible Markup Language (XML) for real estate finance specifications and electronic mortgage guidelines. With this standard, lenders can exchange the Securable, Manageable, Archivable, Retrievable and Transferable (SMART) document, an electronic document that binds together the data, page view and signatures into a single electronic file. SMART documents eliminate the need for a separate or proprietary interface to a title agent, appraisal company or the closing and document preparation company. With easy access to discreet data elements, lenders reduce risk from a quality control and regulatory check scenario by automating these environments. In addition to supporting the right technologies, e-mortgages must also improve the quality of loan delivery to the secondary market, which is increasingly moving toward purchasing electronic promissory notes. With electronic notes, the risk of human error is significantly reduced, as mistakes are caught during the loan delivery process. As more and more of these notes continue to be accepted, the delivery to the secondary market will be much faster and, more importantly, potential for buy-back will be diminished due to higher quality and better loan data. Most importantly, the right electronic mortgage brings greater value to the marketplace than its corresponding paper asset, which is exposed to more problematic inaccuracies. For this reason, a $200,000 electronic-based promissory note should actually be worth more than a $200,000 paper-based promissory note in the secondary market. The need for settlement services providers Once lenders have decided to go electronic, they must determine how to capture associated efficiencies without incurring costly technology development fees and exposing themselves to captive and operational risk. This is where settlement services providers come in. Settlement services providers offer convenient access to products, services and processes necessary to close a mortgage loan transaction through relationships with vendor management partners. The relationship that exists between the lender and the settlement services provider brings industry expertise and adds efficiency and value to the closing process. This specific expertise enables lenders to facilitate an e-mortgage without being exposed from a captive or operational risk perspective. Vendor management companies serve as the "vanguard" of e-mortgage technology, so that lenders do not have to develop and manage back-office systems that dont serve their primary purpose. Settlement services providers also offer a centralized resource for the entire lending process. Typically, lenders working with a vendor management company will order settlement services through their existing loan origination system. Instead of the order being distributed to seven or eight different vendors, it will go directly to the settlement services companys network of providers, which will then fulfill its requirements. This streamlined process helps lenders facilitate an e-mortgage by improving data quality, enabling technology adoption, addressing evolving technical standards and eliminating legal concerns. For example, by utilizing lender-specific controls made available by most vendor management enterprises, the provider can follow a lender's custom workflow so that funds are not released at closing until all appropriate procedures have occurred, reducing rework andworsepotential repurchase. Choosing your settlement services provider When it comes to settlement services, not just any provider will do. For a settlement services provider to operate a successful vendor management operation, it must be staffed with seasoned professionals that have extensive experience in the settlement services industry. The right settlement services provider will offer services that can be customized based on a lenders criteria for vendor selection. For example, if a centralized processing lender out of New York needs to close a loan in Kansas, a top-grade settlement services provider will select and apply the best local vendor in a matter of minutes. Settlement services providers also help lenders avoid legal issues associated with e-mortgages, since lenders outsource the fulfillment of e-mortgages to them. Because the vendors involved are pre-screened and trained, lenders are ensured that the appropriate disclosures, disclaimers, and Electronic Signatures in Global and National Commerce Act and Electronic Uniform Transactions Act compliance measures will be followed. A settlement services provider also supports eNotarization, allowing the notary seal to be applied electronically. Once the loan documents are finalized, the settlement services provider will track the authoritative copy of the electronic promissory note and submission to the MERS note registry. Closing in on results You may ask: "Why e-mortgages?" We're all familiar with the current market picture: Mortgage delinquency has reached record levels. Foreclosure rates continue to climb, resulting in excess housing inventory and lower home prices. Lenders continue to face rapidly declining loan volumes and decreasing margins, with per loan profits dropping to a low of 15 to 30 basis points, according to some industry analysts. In times like this, finding ways to drive efficiencies is more important than ever. While changing the market situation will take time, there are things lenders can do today to make an impact in the future. Technology adoption can play a large role, which is where e-mortgage comes in. Weve explored several benefits of e-mortgage in this article, but perhaps the greatest benefit of all is the long-term impact that the adoption of e-mortgages can have on our industry. An e-mortgage represents a viable execution strategy for lenders that need to manage operations more effectively. More than that, e-mortgage represents a vehicle by which investor skepticism surrounding mortgage pools can be alleviated. Helping lenders originate more efficiently will be an essential ingredient in our industry's recovery. Tom Madison is senior vice president of mortgage services for Equifax. He may be reached by e-mail at [email protected].