REACHING THE ENOTE TIPPING POINT: WHY MORTGAGE LENDERS WILL EMBRACE EMORTGAGE NOTES IN 2021 - WHITE PAPER - EORIGINAL
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When you have to be right WHITE PAPER Reaching the eNote Tipping Point: Why Mortgage Lenders Will Embrace eMortgage Notes in 2021
2 Reaching the eNote Tipping Point: Why Mortgage Lenders Will Embrace eMortgage Notes in 2021
Ginnie Mae’s acceptance of eNotes is helping transform the mortgage lending landscape. The time to
adopt eNotes is now – so you can realize increased closing operations efficiency, accelerated capital
velocity, and deliver improved borrower experience.
The eMortgage Age has finally arrived
For years now, mortgage lenders have been And in July 2020, the Government National
inching toward end-to-end digital capabilities. Mortgage Association (GNMA), or Ginnie Mae,
First banks and independent mortgage launched its Digital Collateral Program to accept
originators began digitizing upfront processes eNotes as valid collateral, allowing issuers and
for greater customer convenience. Then the custodians of Ginnie Mae securities to accept
Covid-19 pandemic and its social-distancing and transfer eNotes. The effort was enabled by
requirements drove rapid adoption of eOriginal®, which Ginnie Mae selected to provide
e-enabled functionality like remote online eVault software and services.
notarization (RON).
By December 2020, Rocket Mortgage, owned by
Yet the mortgage note itself has remained a Quicken Loans, had become the first lender to
stumbling block in the path to fully digital use an eNote in closing a Ginnie Mae-backed
mortgages. While federal legislation authorized loan. The company says it anticipates widespread
the use of eNotes fully two decades ago, use of eNotes for Ginnie Mae loans by the end
many lenders hesitated to replace paper of 2021.2
notes with digital.
Ginnie Mae’s acceptance of eNotes
Now, the eNote essentials are falling into place. fundamentally rearranges the eMortgage
In fact, lenders and originators registered well landscape. If you’re like many smart lenders,
over 286,000 eNotes between January and you’re taking a hard look at how eNotes will fit
September 2020 alone – more than double the into your operations. But to succeed, you need
number in all of 2019.1 to fully understand how eNotes interact and
engage with your existing closing operations and
technology partnerships.
286K+ eNotes registered in the first nine months of 2020,
more than twice the number in all of 2019
eNote Acceptance Timeline
2000 2003 2005 2018 2019 2020
ESIGN Act Fannie Mae Freddie Mac Wells Fargo Ginnie Mae announces Rocket Mortgage
authorizes use purchases purchases begins a pilot to accept becomes the first
of eNotes to its first its first purchasing eNotes as satisfactory lender to use an
evidence debt eMortgage eMortgage eNotes collateral for its eNote in closing
secured by mortgage-backed a Ginnie Mae-
real property securities (MBSes) backed loan
1
“Demand for Electronic Solutions and Strong Origination Volumes Drive Record Registrations on the MERS eRegistry,” MERS, October 2020
2
“Rocket Performs First eNote Close on Ginnie Mae Mortgage,” Housing Wire, January 2021
Reaching the eNote Tipping Point: Why Mortgage Lenders Will Embrace eMortgage Notes in 2021 3
An eNote must be digitally created and digitally
signed. It must also be digitally stored in a
tamper-sealed manner in an eVault.
The March Toward Digitization
A mortgage promissory note is the legal contract a borrower signs at a mortgage closing.
It describes the terms of the agreement between the borrower and the lender. A mortgage note
differs from other types of promissory notes in that it’s filed with the local government and
specifies that the lender has a lien on the property such that the property is collateral against
the loan.
An eNote is merely a digitized mortgage note or other promissory note. It contains the same
information in a traditional paper note, but it’s created, signed, and managed digitally.
A mortgage note doesn’t become an eNote simply by being scanned by an optical device and
converted to an electronic file. Rather, an eNote must be digitally created and digitally signed.
It must also be digitally stored in a tamper-sealed manner in an eVault. That way, the electronic file
can’t be modified without the change being recorded in a digital audit trail. Finally, the document
must be registered with the Mortgage Electronic Registration System (MERS).
The legal validity of eNotes has been long established. In 1999, the Uniform Electronic Transactions
Act (UETA) proposed uniform rules for state adoption of laws recognizing electronic records in an
equal basis with paper records.
What’s more, the Electronic Signatures in Global and National Commerce (ESIGN) Act of 2000
authorizes the use of eNotes to evidence debt secured by real property. The provision does not
defer to state law, meaning that eNotes secured by real property are legally valid and enforceable
in all 50 states and the District of Columbia. Since the ratification of ESIGN, case law has upheld
the legal enforceability of digital mortgage notes.3
3
“Enabled by Lenders, Embraced by Borrowers, Enforced by the Courts: What You Need to Know About eNotes,” DLA Piper, May 2018
4 Reaching the eNote Tipping Point: Why Mortgage Lenders Will Embrace eMortgage Notes in 2021
The March Toward Digitization
Government-sponsored organizations and government corporations are pillars of liquidity in the
mortgage industry, guaranteeing third-party loans and purchasing loans in the secondary market.
So it was significant when the Federal National Mortgage Association (FNMA), or Fannie Mae,
began accepting eNotes in 2003 and the Federal Home Loan Mortgage Corporation (FHLMC),
or Freddie Mac, followed suit in 2005.
Still, banks have focused their digitization efforts on the front end of the mortgage process.
Over the past five or six years, they’ve delivered online tools that allow borrowers to view credit
reports, compare and customize interest rates and mortgage terms, import asset, property and
income data, get loan approval, and view loan documentation. Yet actual closing has remained a
largely paper-based, manual process.
Document Custodians, eNotes and Ginnie Mae
Planning to issue eNotes for Ginnie Mae loans? You’ll want to check
whether your document custodian can service them, for two reasons.
First, not all custodians have invested in the infrastructure to store
eNotes. That situation should begin to change, though, following
Ginnie Mae’s use of digital collateral. As more lenders move to
eNotes, custodians will recognize the potential return on investment
(ROI) in the necessary technology.
Second, not all custodians are qualified to service eNotes, even if
they were previously approved by Ginnie Mae. That’s because every
custodian must be specifically approved as an eCustodian before it
can accept Ginnie Mae loans or pools that involve eNotes.
Reaching the eNote Tipping Point: Why Mortgage Lenders Will Embrace eMortgage Notes in 2021 5
Ginnie Mae’s acceptance of eNotes completes the
infrastructure that will drive widespread use of
digital mortgage notes.
Ginnie Mae and the eNote Revolution
The Covid-19 crisis created overnight demand for remote online notarization (RON) and other
remote processes. But the pandemic merely accelerated a digital transformation that was
already underway.
In 2018, the U.S. Treasury issued a report promoting a regulatory foundation to drive wide use
of eNotes and enable end-to-end digital mortgages. That same year, Wells Fargo Home Lending
entered into an agreement with eOriginal to enable the purchase of eNotes through Wells Fargo
funding. The introduction of eNote capabilities by the nation’s leading residential mortgage
aggregator represented a major step forward in the digitization of the mortgage industry.
Then in late 2019, MERS added a Secured Party field to its registry. The action drove acceptance
of eNotes by warehouse banks and other interim funders, which requested that their security
interests in eNotes be distinguishable on the MERS eRegistry from those of loan originators
or investors.
Now, Ginnie Mae’s acceptance of eNotes completes the infrastructure that will drive widespread
use of digital mortgage notes. The move is part of the organization’s Digital Collateral Program
– a set of policies, technologies, and operational capabilities that enable it to accept electronic
promissory notes and other digitized loan files as collateral for Ginnie Mae securities.
The Ginnie Mae program is expected to transform Federal Housing Administration (FHA) and
Veterans Administration (VA) lending, which make up one-quarter of Ginnie Mae’s originations.4
The FHA and VA already allowed eSignatures on their loan documents, but Ginnie Mae rules for
these securities prevented them from closing with eNotes.
4
“Rocket Performs First eNote Close on Ginnie Mae Mortgage,” Housing Wire, January 2021
6 Reaching the eNote Tipping Point: Why Mortgage Lenders Will Embrace eMortgage Notes in 2021
Ginnie Mae and the eNote Revolution
But the organization’s embrace of eNotes should drive record-breaking issuance of digital
mortgage notes. It’s worth noting that issuance of mortgage backed securities (MBSes) by Ginnie
Mae hit an all-time high of $77.62 billion in August 2020.5 Looking forward, the increase of eNote
issuance for Ginnie Mae-backed loans should make 2021 the tipping point for eNote adoption
across the mortgage banking industry.
The RON Piece of the eMortgage Puzzle
Like eNotes, remote online notarization (RON), sometimes called
eNotarization, is a key component of an end-to-end eMortgage
process.
RON uses digital technology to complete the notarial process
when parties aren’t in the same physical location as the notary.
It maintains the regulatory compliance of the traditional in-person
closing process. The promissory note underlying the document goes
into the vault. Non-promissory documents are filed back to the
lender and stored.
RON acceptance is growing nationally as more states adopt enabling
laws. The Mortgage Bankers Association (MBA) and American Land
Title Association (ALTA), which worked together on a legislative
framework for any state to adopt a RON process, are pushing the
federal government to support RON in all 50 states.
RON is an essential eMortgage capability. However, RON adoption
typically require lenders to manage a dedicated integration
to multiple providers while title organizations must manage
subscriptions and training on multiple platforms to support the
varied preferences of lenders and technical requirements of the
origination’s state jurisdiction.
As a result, lenders should adopt eClosing technology that enables
seamless access to one or many RON providers, allowing maximum
choice to complete remote and contactless closings.
5
“Ginnie Mae August MBS Issuance Soars Above $77 Billion, Financing Housing for More than 280,000 Homeowners and Renters,” Ginnie Mae,
September 2020
Reaching the eNote Tipping Point: Why Mortgage Lenders Will Embrace eMortgage Notes in 2021 7
A fully digitized mortgage process gives
customers a faster, easier, and more convenient
borrowing experience – and a better perception of
your brand.
Why You Need eNotes Now
eNotes are as effective and enforceable as paper notes. They also deliver tangible advantages
to your business:
Faster processes –Lenders have been leveraging digitization to drive down
the time for mortgage closing for the past several years. In 2018, the average
time to close a home mortgage was 43 days. In 2019, Chase Home Lending
said it would pay $1,000 to any borrower whose mortgage it couldn’t close in
21 days. That same year, LoanDepot, the second-largest provider of nonbank
direct-to-consumer loans, rolled out a “smart loan” it said could close in just
eight days.6
But an end-to-end digitized process enabled by eNotes can accelerate both
mortgage closing and securitization. Fully digitized signature execution and
closing-package processing can speed mortgage settlement – and improve
overall revenue potential. And effective technology can equip lenders to
create, manage, deliver, and transfer assets into the secondary market with
greater efficiency.
Lower costs – The average cost of mortgage closing was $7,452 in Q3 2020.7
Turning loans faster can help lenders shave those costs. It can also help you
remain liquid. As an example, you can use funds for shorter periods of time.
Just as important, you can turn credit lines more frequently, reducing the size
of credit lines and saving on warehouse lending. If you originate hundreds of
thousands or even tens of thousands of units per year, even a small average
cost reduction from a digitized close can add up to significant savings.
A digitized mortgage process can significantly reduce costs for acquiring and
organizing documents, and ensuring post-closing quality control. Effective
eClosing ensures that the required documents are in place and signed in the
required locations, avoiding problems of missing documents and inaccurate
signatures. Originators can then move loans into the secondary market more
efficiently, freeing up dollars on the balance sheet for additional lending.
6
“Feeling the Need, the Need for a Speedy Close,” Wall Street Journal, March 2019
7
“IMB Production Profits Increase in Third Quarter of 2020,” MBA, December 2020
8 Reaching the eNote Tipping Point: Why Mortgage Lenders Will Embrace eMortgage Notes in 2021
Why You Need eNotes Now
Improved customer experiences – A fully digitized mortgage process gives
customers a faster, easier, and more convenient borrowing experience –
and a better perception of your brand. Digitized experiences are also becoming
table stakes as more Millennials and even younger home buyers enter the
mortgage marketplace. These “digital natives” are accustomed to an always-on,
instant-response, Amazon-like transaction experience, and they’ll gravitate to
lenders that meet their high expectations.
eNotes are an integral part of an end-to-end digital mortgage experience that
allows borrowers to complete a mortgage closing from the comfort of their own
home. In the short term, while Covid-19 and social distancing still are concerns,
customers – as well as settlement agents – can avoid in-person closing-day
contact. In the longer term, all transaction participants can benefit from an
accelerated, simplified, and more accurate and reliable mortgage process.
Greater transparency and security – eNotes enable you to securely store
and manage documents in a digital vault. That gives you the ability to both
service the mortgage and move the asset to the secondary market with
greater transparency. In addition, an effective eClosing process gives lenders,
borrowers, and settlement agents alike a more cybersecure process. You gain
ID verification, encrypted communication, and a full audit trail – with stronger
safeguards than traditional, in-person notarial transactions.
Competitive advantage – Ultimately, the ability to close mortgages more
quickly, cost-effectively and securely, with a higher level of customer service
and satisfaction, will become a competitive differentiator. In fact, nonbank
originators have already used digital mortgages to make significant inroads
against traditional banks.
In the short term, early movers can use digital mortgages to outmaneuver
slower rivals. As 2021 becomes the eNote tipping point, the laggards will find
themselves at a distinct disadvantage to more-nimble competitors – and at
risk of losing both customers and market share.
The time to adopt eNotes is now. Ginnie Mae’s acceptance of digital mortgage will rapidly
transform the mortgage lending landscape. Organizations that are slow to act risk falling behind
competitively as they fail to meet customer demand for an end-to-end digital mortgage process.
Lenders who embrace eNotes today have an opportunity to realize return on investment – in time,
cost, and customer experience – on every digitized loan.Reaching the eNote Tipping Point: Why Mortgage Lenders Will Embrace eMortgage Notes in 2021 9
End-to-End Digital Mortgage
Start
Lender Portal
1
Access a single platform to intelligently manage the complete loan portfolio.
Preview and Pre-Close
2
Securely deliver eligible closing documents or borrower review and eSignature.
Borrower
3
Route execute closing documents to the settlement-agent workbench.
eClosing Room
4
Execute in-person, hybrid, or fully remote eClosing using the referred RON partner.
eAsset Management
5
Instantly vault executed closing-package documents and register with MERS eRegistry.
Finish10 Reaching the eNote Tipping Point: Why Mortgage Lenders Will Embrace eMortgage Notes in 2021
Strategies for eNote Success
Beyond their advantages for mortgage closing, eNotes are crucial to
the downstream life of the loan. Digital mortgage notes can address
numerous sources of risk in the secondary market:
Compliance risk – Digitally track every action against
the loan file.
Operational risk – Significantly reduce manual steps
for quality control.
Financial risk – Increase capital efficiency.
Reputational risk – Eliminate lost note affidavits.
It’s essential that eNotes be properly created, signed, and managed.
However, to be enforced legally like a paper promissory note,
each eNote must be created as an authoritative copy, adhere to the
MISMO SMARTDoc format, and be registered in the MERS eRegistry.
To navigate those requirements, it’s vital for lenders to work with
a knowledgeable and experienced technology partner that offers a
comprehensive eClosing platform.Please visit www.eoriginal.com
250 W. Pratt Street,
Suite 1400 for more information.
Baltimore, MD 21201
Contact Us at
1-866-935-1776
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