When one thinks of mortgage, innovation does not typically come to mind. Fortunately, we’ve seen a strong trend of mortgage leaders embracing advancements in technology and taking the leap to digital closings, the eNote and electronic vaulting. If you’re in the industry, you know it is impossible to avoid the buzz around transitioning from paper and headlines singing the praises of digitizing processes.
Last week, the U.S. Treasury Department released a 223-page report, A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation, which promotes innovation and the need for regulatory framework within financial services. Mortgage did not fall by the wayside. We were encouraged to see a section dedicated not only to lending and servicing, but also the acceptance of eNotes and the need for changes to accommodate an end-to-end digital mortgage.
From the Borrower to the Secondary Market
As we’ve noted previously, “Digital processes have evolved and are rapidly being adopted by mortgage stakeholders—including the front-end borrower experience (phase one) and now the digitalization of the closing process and the creation of an eNote (phase two).”
Borrowers are critical to maintaining a steady stream of business. Bridging the gap in digitization at the closing table is an important step in not only the borrower experience, but also for operational and capital efficiency. Major mortgage ecosystem stakeholders are moving to the second phase of digital mortgage, which complements phase one application processes and borrower experience enhancements.
We believe that technology should be leveraged throughout the entire process, providing transparency and auditability for both the documents and corresponding data. Digital processes eliminate inefficiencies, increase the speed of capital through faster delivery into the secondary market and enable the secure management of electronically-signed assets throughout post-execution life.
Although the terminology is different, the Treasury Report highlighted these sentiments, stating:
While there is growing use of digital platforms for borrowers to shop and apply for a mortgage online, further digitization of the origination process beyond this first step, including through the use of electronic notes, closings, and recordings, remains limited. Where the use of electronic files has occurred, it has often been by incorporating scanned images of paper documents as opposed to developing fully digital files.279 However, the application of financial technology in the mortgage market is accelerating, challenging existing norms as the industry transitions toward automated, digital practices and processes that appeal to customer demands in today’s digital age.
The GSEs, eNote Acceptance and Recommendations
Fannie Mae is a perfect example of an organization that has embraced new processes and available technology. In 2017, Fannie Mae transitioned to a state-of-the-art electronic vault to replace its aging legacy system. The GSE is actively purchasing eNotes and currently holds the largest number of digital promissory notes in the country. Freddie Mac is purchasing as well.
Unfortunately, Ginnie Mae and the Federal Home Loan Banks (FHLBs) have to make-up lost ground on the digitization front. On a positive note, Ginnie Mae highlighted its commitment to developing digital capabilities, including eventual acceptance of electronic promissory notes in its 2020 report. The Federal Home Loan Banks (FHLBs) are another story as they are not purchasing eNotes. This is an additional barrier for the industry as the FHLBs’ primary focus is providing secured advances to member institutions that support mortgage lending activity. While the FHLBs have expressed interest in moving toward the acceptance of eNotes, they have identified the current limited depth of a secondary market for eNotes as an inhibitor.
In response to Ginnie Mae and the FHLBs, the Treasury recommends the following (p. 103):
- Ginnie Mae pursues acceptance of eNotes and supports the measures outlined in its Ginnie Mae 2020 roadmap to more broadly develop its digital capabilities.
- The FHLBs explore ways to address their concerns regarding eNotes with the goal of accepting eNotes on collateral pledged to secure advances.
National Mortgage News hit the nail on the head stating, “The bottom line for the participants in the primary and secondary markets for government mortgage loans is that, as technology changes, government agencies like Ginnie Mae must do the same. This is crucial for ensuring that our customers can do business more efficiently as well as for preserving the health of the mortgage market.”
The Future is Bright for Innovation
On the regulatory front, the Treasury’s outlook is bright stating (p.11):
Policymakers should address regulatory challenges that discourage broad primary market participation and inhibit the adoption of technological developments with the potential to improve the customer experience, shorten origination timelines, facilitate efficient loss mitigation, and generally deliver a more reliable, lower cost mortgage product.
We applaud and support the U.S. Treasury Department and its vision of innovation for industry adoption, acceptance and regulation of digital mortgage best practices. If you would like to learn more about the digital disruption of mortgage, click here to review our white paper.