Why eMortgage is So Complicated: The Note
For the uninitiated, the transition to electronic mortgages seems like it should be easy. Aren’t you just signing documents online? Unfortunately, no - it’s much more complicated than most people appreciate.
In a mortgage transaction, the promissory note is the most important document for investors. Once executed, the physical piece of paper represents the borrower’s obligation to repay the loan. Whoever possess that piece of paper is entitled to enforce the debt obligation.
However, mortgages often get sold. As this occurs, the physical piece of paper (promissory note) - representing the debt obligation - is transferred to the purchasing investor. So now, the new party in possession of the note gains the rights to enforce your debt obligation.
When a borrower discontinues paying on a mortgage, investors may find themselves in a bankruptcy court proceeding. A borrower, if refuting a lender’s claim during a foreclosure hearing, can force the lender to produce the physical piece of paper. If the lender cannot, a court can invalidate the debt obligation, letting the borrower off the hook. This drama is illustrated in the movie 99 Homes and we saw it time and time again during the financial crisis with many lost notes that were never identified.
In short, that signed piece of paper is the most important piece of collateral in the housing finance market and mortgage lending process.
When the concept of an electronic mortgage came to be, people were faced with the challenge of maintaining this construct in a digital world where files could easily be copied. To be contemplated were things such as: when selling a mortgage from one party to another in digital format, what happens if both parties maintain a copy? And, when a lender ultimately must appear in court to enforce a debt obligation, how do they prove that their copy is the authoritative or enforceable version?
To solve this problem, an industry consortium created a system to transfer, maintain, and control these electronic notes or “eMortgages.” This technological ecosystem is comprised of several parts.
- A registry - called the Mortgage Electronic Registration System.
- A XML file format - called a MISMO SMARTDoc eNote.
- A data warehouse - called an eVault.
During an electronic mortgage signing, the note must be executed as a MISMO XML SMARTDoc eNote. That MISMO eNote must be transferred, stored and maintained in an eVault and the eNote signatures are applied in real-time and wrapped with a tamper-evident seal. Additionally, an audit trail is created to ensure the accuracy and integrity of all data maintained in the document. This audit trail is often called into evidence in the event of foreclosure and there is case law confirming the validity of the eNote (see here). Once executed, the eNote is registered with MERS, the controller and location are assigned, and ultimately transferred into the secondary market or end investor. As the eNote moves, the MERS registry is updated with all transfers of control and location being captured. The combination of these services creates a formal audit trail which can be used to prove the authoritative copy and track transfers between parties at all times.
This system is required if you want to execute an electronic mortgage to be sold into the secondary market, which the vast majority of eNotes are. As both GSEs have been purchasing eNotes for over 14 years, this process was adopted by both Fannie Mae and Freddie Mac to ensure their validity and saleability of eNotes. Before Notarize, the GSEs had never approved nor purchased an eNote executed in an online closing. They now have.
Adding to the challenge of this process is the age of these systems. MISMO, MERS and eVault technology were all conceived over 14 years ago. Given the lack of adoption of eMortgages to date, these systems have not kept up with any modern day technological advances. For example, the industry currently requires MISMO SMARTDoc version 1.02, which is now 14 years old. Even though there is currently a transition underway to MISMO SMARTDoc version 3.0, that version is already almost 3 years old. Integrating these systems into products and services that meet the customer demands of today is quite challenging.
Because of these requirements, a lender that sells into the secondary market can’t “just go electronic” or “e”.” They must implement all of these systems and technologies first. Then, approvals and formal audits are required to demonstrate compliance before a lender can receive approval to sell electronically executed loans into the secondary market. To date, lenders haven’t wanted to take on this cost and complexity especially as it’s associated with such antiquated and cumbersome processes.
Notarize is the first company to solve these challenges and integrate a solution into an online signing platform. Most importantly, our closing platform is finally compelling enough [click to close anywhere online vs drive to borrowers with an iPad] for lenders to tackle these issues and make the leap to a fully electronic mortgage process.
For lenders, our platform generates eNotes, integrates with eVaults, and delivers them into the secondary market. There is no upfront cost. Notarize helps with the entire onboarding and approval process - we can get a lender up and running in as little as two weeks. We’ve taken a daunting experience and made the transition as trivial as possible - all aimed at creating better adoption and a more seamless entrypoint for lenders who wish to become fully “electronic.”
For borrowers, the experience is like nothing else they have ever done. We’ve built our system to treat the eNote exactly like every other document. Borrowers simply click to close and execute an eNote along with the rest of their closing package entirely online - our system handles it all behind the scenes. The entire process is effortless to them, yet they are raving about how “fun and neat” the closing experience is. When is the last time a borrower said your closing experience was “fun or neat?”
There are many constraints and considerations as to why electronic mortgages have not taken off to date - and Notarize is addressing each of these issues in a transformative way. We are making the last step in the mortgage process a better experience for all!
Jennifer Parker is Notarize's GM of Mortgage Solutions and was previously Fannie Mae's head of eMortgage.