Technology has eased the mortgage lending process, but are complete electronic mortgages possible? A new study examines the challenges and chances of e-mortgage lending becoming an industrywide reality.
According to the recent report released by the Office of Federal Housing Enterprise Oversight (OFHEO) entitled The Single-Family Mortgage Industry in the Internet Era: Technology Developments and Market Structure, an entirely electronic mortgage --a mortgage where the critical loan documentation is created, executed, transferred, and ultimately stored electronically -- is possible, but is still years away.
OFHEO cited that, besides the Internet, the most significant technological innovations that have facilitated and boosted single-family mortgage lending, and paved the way toward e-mortgages, are the automated underwriting systems developed in the mid-1990's by Fannie Mae and Freddie Mac -- the two companies it regulates.
Other innovations that have spurred interest are the Uniform Electronic Transaction Act, approved by the National Conference of Commissioners in 1999, and the Electronic Signatures in Global and National Commerce Act (E-Sign) enacted in 2000, the report said.
However, "widespread adoption of e-mortgages will require an extensive long-term effort in business-process reengineering by the single-family mortgage industry and changes in consumer preferences," said OFHEO.
The study claims that the goal of many lenders is to restructure their business operations in the following ways: to be process-driven versus business department-driven, consumer-oriented instead of firm-oriented, automated and collaborative versus paper-based and competitive, and adaptable rather than sticking to traditional ways of doing business.
OFHEO said these goals are obtainable, but will require that lenders move from paper-based to electronic mortgages.
"The technologies required to facilitate that would include digital signatures; sophisticated encryption, authentication and security strategies and standards; and data exchange with trusted systems through the Internet or a private-network connection among lenders, data repositories, closing agents, county recording offices, and investors," added the oversight agency.
The industry will have to strive for these goals since mortgage lenders have been slow adopters of technology and have been reluctant to shift to e-business models of lending, according to the study. The high costs involved in switching from existing lending systems to new systems is one of many reasons for the reluctance. Lenders have also been constrained of the time necessary to install and test new processes, and train staff on the methods as they have been busy pulling resources to keep up with the high loan volume over the past four years.
While the cost of implementation is holding back the shift to electronic lending, the cost of expenses can be reduced, according to OFHEO. The agency said an e-mortgage infrastructure could reduce "total origination time and errors by sharing data between processing, underwriting, document preparation, and third parties without the need to enter data by hand multiple times into different systems." In servicing, it could lower costs by reducing the shipping, storage, and manual tracking of paper documents.
As far as changing consumers preferences, the study suggests consumers may feel uncomfortable with a paperless process and that lenders would initially have to invest in educating consumers on the tangible savings of e-mortgages to gain their acceptance. On the other hand, research shows consumers are becoming impatient with businesses that lack the ability to execute transactions quickly and do not provide convenience and access to innovative products.
E-mortgages could further ensure that for at least another five to 10 years, the costs of transmitting, processing and storing information can continue dropping by 25 to 35 percent per year, as has been the trend for the last 30 years.
A single software/hardware platform to support fully electronic mortgage lending would "significantly" change the structure of the single-family industry, according to the study. Analysts remain positive electronic lending can be achieved and rely on the Mortgage Industry Standards Maintenance Organization -- or MISMO -- as a key organization that will develop universal standards, requirements and recommendations to overcome the challenges.
The organization has already developed guidelines to use a SMART (Securable, Manageable, Achievable, Retrievable, and Transferable) document, which may be either an electronic representation of an existing paper document or a new electronic document created to transfer information between parties in a mortgage transaction and includes the capability to digitally sign the document. Fannie Mae and Freddie Mac are already preparing to accept SMART documents in electronic deliveries, the report said.
Paperless Mortgage Still Years Away