The Road to an Electronic Mortgage
Advancements in technology continue to pave the way for an easier, more cost-effective and streamlined mortgage process. Consumer’s views toward the mortgage process are shifting, and it is time for the industry to understand new preferences. Carlisle & Gallagher Consulting Group conducted a survey of 618 U.S. consumers in September 2012 and found that 46 percent felt that time-to-close was the most important factor in the mortgage application process. 42 percent said that simplicity was the most important aspect. It’s becoming more evident that consumers want a fast, simple process that is reliable. With this knowledge, our industry must consider ways to advance our technology in order to provide a more positive and efficient experience.
The technology exists to change the mortgage process as we know it today. With capabilities such as electronic signatures and records, consumers are able to send pertinent documents without leaving their home or office–a convenience they now come to expect in everyday activities. With the capability of recent technology coupled with consumer desire to complete mortgage process electronically, the question that remains is why has there not been a widespread adoption of electronic practices, such as electronic signatures? The answer in part is due to a slow industry-wide acceptance.
Many lenders currently originate both Federal Housing Administration (FHA) loans and conventional loans. While the lender may be able to use electronic signature capabilities with conventional investors, the FHA loans require a completely separate process since the FHA does not currently accept closing documents or records which have been signed electronically. This inconvenience of performing two procedures to manage several identical documents has limited the number of lenders who are willing to provide these capabilities throughout the mortgage process, therefore, hindering its mainstream adoption.
There is industry discussion regarding the chance that the FHA may soon start accepting documents that are signed electronically along with electronic records. This industry evolution will change the entire mortgage process and lead the way to industry-wide acceptance of electronic signatures, and further down the road a solely electronic mortgage process. This lone development will have a significant impact on the industry due to the prevalence of FHA loans in our current market. According to the Mortgage Bankers Association (MBA), in the second half of 2012 FHA-backed loans accounted for as much as 30 percent of the total loan applications submitted to lenders. These loans have made it possible for many first time homebuyers, or ones with thin credit scores, to own their own home by providing them with financial opportunities conventional lenders cannot. According to the National Council of State Housing Agencies (NCSHA), 78 percent of the home-purchase mortgages supported by FHA in 2012 were for first-time homebuyers, who are often members of a younger generation. According to the National Association of Home Builders (NAHB), the median age of a first-time homebuyer is 31. These younger consumers favor technology and the convenience it provides to many aspects of life. This change will help propel the industry forward where electronic mortgages will no longer be a thing for tomorrow, but instead the standard mortgage practice of today.
A new era
As regulation holds the mortgage industry more accountable than ever before, lenders have had to find new ways to cope with compliance scrutiny. The anticipated FHA acceptance of electronic signatures and records could not be coming at a better time as a paper-driven process is no longer meeting the degree of accuracy and timeliness required by regulators. An electronic process will allow for guidelines to be met more efficiently, providing added protection for consumers. In addition, technology enables lenders to validate that documents from their end were delivered on time with a date and time stamp. This will prove invaluable in light of the Consumer Financial Protection Bureau’s (CFPB) new rule stating that all closing documents must be delivered at least 72 hours prior to closing. Moving to a fully electronic process will make meeting this deadline easier by decreasing the amount of time it takes to complete and deliver documents.
The ability to share loan files as electronic records in a secure, trusted, tamper evident way mitigates the risk of receiving negligent or fraudulent documentation and provides peace of mind to borrowers. Physical documents are required to pass through several touch points before completion, leaving room for error. With electronic document presentment, the process is streamlined and the risk of a document being lost or altered is significantly reduced. Also, with no surprises popping up at closing, such as delays and last minute cost adjustments, the process runs smoother and all parties can enjoy a more pleasant experience.
As the industry continues to recover from the mortgage crisis, we certainly want to move forward rather than repeat history. However, even with certain regulations having yet to take effect, mortgage origination and compliance costs have nearly doubled in the last year. In fact, the MBA has said that the average cost of originating a mortgage jumped from $3,500 in 2008 to $5,000 in the third quarter of 2012. Our industry and economy simply cannot afford another crisis like we recently experienced.
The mortgage crisis served as a wakeup call to an industry that it is in need of change. The good news is that the industry has never before been as equipped to implement an entirely electronic mortgage process as it is now. The advent of the IRS accepting electronically signed 4506-T forms has been instrumental to those promoting adoption of an electronic process. The Electronic Signature and Records Association (ESRA) led this effort with the IRS which has paved the way for other entities to realize the need for this change and the consumer desire for it.
Kelly Purcell, executive vice president, Global Sales and Marketing for eSignSystems, commented, “We absolutely cannot afford to have history repeat itself as we are constantly working to rebuild consumer trust. With the rising cost for consumers, if we don’t change how we view the mortgage process we are burdening the American dream of homeownership. Because the legal and technological frameworks exist, the industry no longer has any excuse to not implement electronic processes to introduce a more efficient and productive mortgage process.”
It is also important to consider the next generation of homebuyers. Who is today’s consumer? According to Purcell, “approximately 80 percent of applicants today expect to complete their application from start to finish online without the interruption of a document that requires them to physically sign and return it. As younger generations begin the mortgage process, it is important to consider how the infiltration of new technology has impacted the way consumers shop for everything, including homes.”
Consumer demand goes far beyond simply receiving mortgage documents electronically. Instead, they expect to be able to sign and return forms as easily as they shop for everyday items via their phones, tablets and computers. Modern services will attract consumers who are now seeking the convenience of completing tasks from anywhere and at any time without ever having to step foot inside a financial institution for assistance or wait for a follow-up package to be delivered. While the mortgage process is rarely referred to as fun and easy, keeping up with consumer’s demand for an electronic process can provide a significantly better experience.
The road ahead
Many may wonder what the future will look like with all of the impending changes in mortgage technology. Having more advanced technology, rather than going through multiple channels or relying on borrower provided information, such as employment, income sources, and identity, financial institutions will have an increased ability to receive consumer authorized verifications obtained directly from the source saving both time and money. Because financial institutions will know that borrower information is more accurate than in the past, they will be able to easily adjust thresholds, bringing up more funds that can be invested sooner. This will improve the process for everyone involved, from consumers to investors.
Looking forward, there will inevitably be roadblocks along the way that must be overcome to reach a fully electronic mortgage process. For example, the Social Security Administration’s (SSA) recently issued a policy revision that it will no longer accept electronic signatures on Form SSA-89, which authorizes the SSA to release social security number verification for purposes such as mortgage applications, background checks and credit checks. This decree is one setback for our industry to overcome in the path toward a completely electronic mortgage process.
However, just because obstacles exist does not mean that the end goal is out of reach. Ultimately, to effectively change the mortgage technology of today, the industry must refocus the way we view the mortgage process. We can only hope that, there will no longer be separate processes for an electronic mortgage and a traditional mortgage. Instead, the only mortgage process option will be one that is entirely electronic.
Jeff Knott is the secretary of the Electronic Signature and Records Association (ESRA) and AVP product management for Equifax Verification Services. He may be reached by e-mail at firstname.lastname@example.org.
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