Is There an e-mortgage in Your Future?

Is There an e-mortgage in Your Future? 1

Table of Contents I. Introduction: Why All the Buzz About e-mortgages?... page 3 II. E-Signatures: The Driving Force Behind e-mortgages... page 4 III. Challenges to The Formula For Success... page 5 IV. The Timeline for e-mortgages... page 6 V. In the Meantime... page 7 VI. The Rewards of e-signature Technology... page 8 VII. Questions to Ask... page 9 VIII. Conclusion... page 11 VIII!. Acknowledgements... page 12 2

I. Introduction: Why All the Buzz About e-mortgages? E-Mortgages have the potential to change the manner in which mortgages are originated, processed, closed, shipped, and retained. Automated underwriting engines, automated valuation models for appraising property, and the Internet have transformed the many paperbased, time-consuming, and often redundant processes that previously characterized the mortgage industry. Are e-mortgages the next logical step in this transformation? And if so, how close is the mortgage industry to taking the necessary steps that will make e-mortgages the rule rather than the exception? This white paper will answer these and other questions that mortgageindustry insiders, technology providers, and lawmakers have struggled to address for several years. Key Issues What are e-mortgages and what s the formula for e-mortgage success? The Formula For Success Market Acceptance + Legal Acceptance + Software Capabilities + Streamlined Process + Electronic Document Management Key Definitions e-mortgage: a paperless mortgage generated using electronic data and secure, digital documentation. Market Acceptance: All stakeholders (lenders, consumers, investors, and 3 rd parties) must be comfortable with the idea of e-mortgages. Legal Acceptance: A consistent legal framework exists to support e- Mortgages regardless of geography or jurisdiction. Software Capabilities: Reliable, userfriendly, and scalable technologies open to third party plug-and-play technologies. Process Streamline: Existing business processes have been streamlined to eliminate inefficient and/or redundant activities. Electronic Document Management: The electronic creation, signing, movement, accessibility, and retention of documents. The era of the paperless mortgage is at hand. But the journey will be a long one that requires determination and commitment to people, process, time, and money. Mortgage Banking, August 2001 3

II. E-Signatures: The Driving Force Behind e-mortgages In simplified terms, an E-Signature is an electronic version of a hand-written signature. An E-Signature confers the same rights and responsibilities as a hand-written signature and must meet the same minimum standards as a handwritten signature, namely that: the signature must be confidential; the signature must be authentic and the identity of the signer must be assured; the signature must demonstrate integrity by assuring that the signature has not been changed; the recipient must know the origin of the signature; and the signature cannot be disclaimed or renounced. Congress passed the Federal Electronic Signatures in Global and National Commerce Act ( E-Sign ) in June 2000, authorizing the substitution of electronic signatures for handwritten signatures. This law, along with its state-level counterpart, the Uniform Electronic Transactions Act (UETA), has paved the way for the development of secure e-signature technology. Under both laws, an electronic signature is defined as an electronic sound, symbol, or process attached to or logically associated with a data record and executed or adopted by a person with the intent to sign that record. Without e-signatures, the mortgage process can never be truly paperless. Documentation may be generated electronically, but most of that documentation is still converted to paper to await a handwritten signature. With an e-signature, a loan officer can transmit documents to the borrower electronically, and the borrower could affix his or her unique electronic signature and resubmit the documents to the loan officer without generating a paper file. As long as the e-signature conforms to the standards outlined above, there is no need to re-create the electronic file on paper. Although e-signature technology and the basic legal framework to support e-mortgages exist, several other obstacles must be overcome for e-mortgages to be fully implemented. 4

III. Challenges to The Formula For Success Market Acceptance of e-mortgages Market acceptance of the technology and process changes required to implement e-mortgages is critical to the concept s success. All of the various stakeholders (consumers, originators, processors, servicers, purchasers, and investors) in the mortgage industry must believe that adopting e-mortgages will: help them achieve their business objectives; add value to their experience; and provide benefits that surpass traditional paper-based methods. Consumers may be willing to obtain e-mortgages, but if the other entities involved in the mortgage process will not accept them, the business value of e-mortgages to lenders is greatly reduced. Similarly, if lenders want to implement e-mortgages but a high percentage of consumers cannot or will not accept them, the lender faces significant financial hardship because it must operate two separate, yet redundant, systems for originating and processing loans. Legal Acceptance of e-mortgages Legal acceptance of e-mortgage documentation is another crucial element of e-mortgages. E-Sign and UETA are opt-in statutes. Both parties to the electronic transaction must agree to participate in the transaction. Currently, not all jurisdictions have agreed on standards for enforcement of contracts that use electronic documentation. For e-mortgages to be successful, the electronic mortgage documentation must be legal, acceptable, and enforceable across all jurisdictional boundaries. Technological Capability Existing hardware and software, along with infrastructure and architecture, must undergo rigorous scrutiny to determine if it is capable of meeting the unique needs of e-mortgage implementation. All of the parties involved in an e-mortgage transaction must meet certain minimum standards of technological capability for the initiative to succeed. Although most companies would likely meet these minimum standards, it is possible that many individuals would not. Thus, this problem could be a major roadblock in e-mortgage implementation. Process Streamline Organizations involved in the mortgage process must be willing to make an investment not only in technology, but also in process change. E-mortgages have the potential to eliminate many labor-intensive, redundant manual processes. However, organizations must be willing to re-align their business priorities to take full advantage of the streamlining capabilities that e-mortgages offer. As with any major organizational change, securing the support of those who will be directly impacted is important, and senior managers must demonstrate strong leadership to ensure the success of such a major shift in corporate culture. Electronic Document Management Along with a hardware and software review, organizations will need to review the standards and guidelines currently in place for managing paper transactions. Those standards and guidelines for document preparation, management, and retention must obviously undergo significant changes to facilitate paperless mortgages. 5

IV. The Timeline for e-mortgages The June 18, 2001 issue of Inside Mortgage Technology calls the imminent implementation of paperless mortgages a fuzzy image in a crystal ball that is, the mortgage industry can see e-mortgages in its future, but has not yet defined a specific time frame for implementation yet. The magazine article continued with, Mortgage lenders who want to be in the vanguard of the electronic mortgage movement face a great deal of uncertainty about when the train will actually leave the station. The track record of actual e-mortgage closings supports the article s assertion. As of this writing, there have been approximately 50 pilot e-mortgages closed. These transactions were highly orchestrated demonstrations of the process. However, there has been no sustained effort to increase the volume or frequency of e- Mortgage closings since the summer of 2000. For those lenders who want to be in the vanguard and who believe in the financial and customer-service benefits of e-mortgages, the slow progress of implementation is extremely frustrating. 6

V. In the Meantime Predictions range from six months to ten years before e-mortgages become standard in the marketplace. Pending the resolution of the complex legal, social, and technical issues required to adopt e- Mortgages fully, companies still have an opportunity to adopt portions of e-mortgage technology that will have immediate, positive, and lasting effects on their business. By gradually deploying new technologies and the processes that accompany them, companies can begin to substitute secure, efficient, and paperless processes for time-consuming paper- and labor-intensive paper processes. Within the mortgage process, some functional areas have already begun to use digital signature technologies as a means of expediting the process. These uses include appraisals, MI certificates, and title and hazard binders. Other corporate functions can certainly benefit from the technology required to implement e-mortgages. Potential nonmortgage uses of secure paperless technologies include human resources, internal document management, procurement, intracompany signature requirements, and online application processing. An Example of Incremental Implementation In February 2000, GMAC Commercial Mortgage (GMACCM) undertook a corporate-wide effort to implement e- signature technology for most internal and some external processes by December 2000. The objective was to focus on internal paper-intensive, timeconsuming, and costly processes tat would reap immediate benefits from e- signature technology. GMACCM researched and implemented a worldwide electronic signature approval process, document management, and workflow system. The result was that GMACCM avoided implementing the technology for processes with complex legal requirements (i.e. mortgages), while still gaining the benefits of e-signatures in other areas. GMAC was also able to build stakeholder support for and comfort with the technology before switching to entirely paperless systems. By implementing these technologies incrementally, companies can begin to realize significant cost savings in both dollars and time without fully committing to e-mortgages. An incremental approach allows companies to introduce a new technology, become familiar with its capabilities, gain practical operational experience with it, and understand its strengths and weaknesses. As additional technologies are added, they can be integrated into existing systems and processes without significant levels of system downtime or massive up-front investments in equipment and training. 7

VI. The Rewards of e-signature Technology Will e-mortgages make loan origination and fulfillment more profitable since this is the process that bears the brunt of the paper avalanche? Possibly. It is easy to become enthralled by the speed and ease with which mortgages can be originated, processed, and closed with e-signature technology. E-Mortgages represent an ideal application for e-signature technology. By implementing e-mortgages, lenders can realize significant cost and time savings through shortened marketing and closing cycles and improved document management. 8

VII. Questions to Ask Implementing e-mortgages requires more than simply installing a new piece of software or hardware. Without paying careful attention to the necessary business process re-alignments, the introduction of new technologies like e-signatures could ultimately increase, rather than decrease, a company s costs. Thus, a company preparing to implement one or more of the components of an e-mortgage system should base its decision on the answers to the following questions: 1) Financial Considerations What are the direct and indirect costs of the project (be sure to account for training, staff and system downtime, change management, and customer service)? Is my organization positioned to absorb those costs without realizing immediate returns? What kind of up-front financial investment is required (including the costs of new hardware/software, recruiting of additional IT personnel)? Does the anticipated ROI of the project fall within current company guidelines? How can we document and analyze qualitative and quantitative savings? Does implementing the technology make a transaction-fee model more appealing? If a consumer opts out, can I still garner some of the benefits of e-mortgages? 2) Technical Considerations Am I choosing technology that easily integrates with my current systems ( plug and play )? What is the life expectancy of the component that I am purchasing i.e. will it be obsolete by the time I deploy other components, or can it meet changing needs as I deploy additional components? Can my current IT infrastructure support increased demand on its resources without sacrificing network and systems reliability/availability? Should we consider outsourcing IT functions as a means to ensure reliability, availability, and scalability? 3) Operational Considerations What will be the operational impact of supporting two modes of mortgage processing (manual and electronic) during the transition? Will my business partners (brokers, servicers, investors) support e-mortgage or its components? What manual backup strategies must my organization develop to maintain operations in the event of a system failure? 4) Legal/Compliance Considerations Am I following the opt-in provisions of the applicable state or Federal law that governs the use of e-mortgages? Are my organization s procedures for implementing e-mortgages adaptable to the various published standards (i.e. MISMO, Freddie Mac, Fannie Mae)? 9

VII. Questions to Ask (continued) Early adopters of technologies like e-mortgages know that they may not be able to answer all of these questions until after they begin to deploy the technologies. However, early adoption is a strategic positioning move that reaps benefits unavailable to late entrants, including: Incremental deployment (late entrants must often play catch-up with competitors, decreasing the likelihood that the organization will conduct a thorough review of processes and technology prior to deployment; a less-than-adequate decision making process often leads to decreased end-user satisfaction). Ability to test and re-test in a less-crowded marketplace (early adopters have more time to establish comfort levels and re-engineer their processes without fearing a loss in revenue due to market demands for e-mortgages). 10

VIII. Conclusion Are e-mortgages really just around the corner? No one can say for sure. But by reviewing your organization s current capabilities, processes and market positioning, you can be ready to make the change at a time that s right for your business financially, technologically, and operationally. CC Pace has over 20 years experience providing technology solutions for critical business challenges in the mortgage industry. Our adaptive planning and design process, and the importance we place on close working relationships with clients, ensures that the end result of a client engagement is a solution that meets defined business needs. We can help your organization articulate its pain points and provide rapid, measurable results. 11

VIIII. Acknowledgements This white paper is based on material originally presented in a two-part article written by Barbara Michels and Rick Morelli that appeared in the August and September 2001 issues of Mortgage Banking magazine, published by The Mortgage Bankers Association of America. CC Pace 4100 Monument Corner Drive Suite 400 Fairfax, VA 22030 (703) 631-6600 For more information, visit our website at. 12