Residential: Is the complete digital mortgage still years away?


Despite momentum across the mortgage industry landscape, a new report from Fitch Ratings says widespread digital mortgage adoption “remains several years away.”

Over the past decade, lenders and industry vendors have reimagined the mortgage process and customer experience, making steady progress toward the digital mortgage. The government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, have led the way, investing in technology and fostering innovation. Ginnie Mae and the Federal Housing Administration (FHA) have proposed major initiatives to retool their technology infrastructure, and Ginnie Mae last month released a proposal to automate and digitize the issuer process.

“We’ve seen significant FinTech investment and innovation in the mortgage industry in recent years, especially on the part of the GSEs,” said Brian O’Reilly, Managing Director and Head of SitusAMC’s Federal & Strategic Solutions Group. “As we’ve learned from previous periods of meaningful FinTech innovation in this industry – such as when the GSEs introduced Desktop Underwriter (DU) and Loan Prospector (now part of Loan Advisor) – when Fannie Mae and Freddie Mac lead, private sector entities and private sector capital follow, hoping to leverage the GSEs’ massive distribution channels. This is absolutely the case today as stakeholders throughout the mortgage life cycle seek to further advance the goal of achieving a completely digital mortgage process.”

So what is the holdup?

The industry’s enthusiasm for automation notwithstanding, Fitch said lenders and servicers face obstacles related to enforceability, system security, borrower consent and technological capability. While some aspects of the process have seen more progress in automation, such as origination and closing, electronic transfer and storage of notes (eNotes) have lagged behind. In the non-conventional market in particular, digital capabilities have “remained elusive,” Fitch said.

“Fitch rightly recognizes that Fannie and Freddie are at the forefront of the digital mortgage, standardizing the digital mortgage process for conventional originations,” said O’Reilly. “However, the nonconventional market has represented a much smaller percentage of the total market in the last decade and is also generally more fragmented, which might explain why technology adoption has been slower within that segment.”

The GSEs “continue to be the most active participants in the eMortgage space and have developed a full framework for accepting this technology,” the report states. “Adoption in the non-agency space is slowed by the limited number of originators and servicers that have the technology to support eMortgages.” In the non-agency market, Fitch points to technology costs as the biggest obstacle to adoption.

Fitch notes that only 30 states have the legal infrastructure to support a digital mortgage process, including electronic notarization, today. As more states enact the necessary legislation and more court cases establish a legal precedent for the recognition of eNotes, Fitch said it expects the industry to become more “comfortable with [digital mortgage] enforceability.”

When assessing the security of eNotes, Fitch said it will review lender, servicer and vendor-managed system security. As digital mortgage capabilities become more prevalent in the non-agency space, Fitch said private-label securitizers will need to follow the lead of the GSEs and reference eSignature laws in their reps and warrants.

“While obstacles exist for eMortgages, the technology promises faster closing times, decreased closing costs, instant document delivery and ease of note transfers,” the report says.

Finally, O’Reilly said, “While 100% development and adoption of the digital mortgage still has a few hurdles to cross, as more and more industry participants deploy automation, costs to originate will fall, efficiency will increase, and the customer experience – especially among the cohort of borrowers accustomed to a digital experience in connection with their other financial matters – will increase. As that occurs, it will be increasingly harder, if not impossible, for late adopters to compete without investing in the technological capability themselves.”

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Trends We’re Watching: Senior Housing, Technology & Aging in Place

The number of Americans age 65 and older is expected to hit 73 million by 2030, fueling the development of thousands of independent- and assisted-living units. But will technology be the industry’s black swan? Medical-related sensors, voice-recognition tools and innovative features and fixtures that allow seniors to age in place have garnered $1 billion in investment this year, according to the Wall Street Journal (subscription). That’s double the investment of just three years ago – and could put a dent in the occupancy of senior housing centers, one of the real estate industry’s fastest-growing sectors. In fact, Kroll Bond Rating Agency reported that the occupancy rate for assisted-living units has declined 5 percentage points since 2006, to 85.4% in the third quarter of 2019, according to Commercial Mortgage Alert (subscription). Industry players argue that tech can’t address seniors’ desire for social engagement, which has been linked to better health and well-being in the elderly.

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