REQUIRED READING: Using E-Mortgage Origination To Create E-Transparency

Written by Paul Anselmo
on April 22, 2009 No Comments
Categories : Required Reading

it too late to bring back confidence in mortgage lending to the current crop of fund managers in the capital markets?[/b] If so, that's a shame. But the fact is that there are millions of loans to be made to people with the desire and capacity to repay them. It might be left to the next generation of investors to look more kindly at our business. ‘Kindly’ is probably the wrong word; ‘sensibly’ may be more like it. Just as it was insensible to create many of the loans that led to the crisis, it is entirely sensible to make loans to people who are motivated to own homes and have the proven ability to pay them back. Likewise, it is just as sensible to invest in securities backed by these types of loans. But as an investor, how do you know things are what they are purported to be by those putting together the securities? The investment community feels betrayed by virtually all of the establishment figures involved in the meltdown. What can reassure them that they are getting what they are told they are getting? Ultimately, it's all about the data. Loan guidelines need to be sensible, but that's a fix that has pretty much already happened. On paper, loans are safer now than they have been in years. In practice, there is a growing amount of fraud being perpetrated, especially in the income area, and it is getting appallingly easy to perform this sort of deception. But if you have verified data and there is absolute integrity between the documents that were executed and the data they contain, then you've got something. And that something may just be the key to bringing the capital markets back into the mortgage fold. That is where e-origination comes in. The e-mortgage provides a guarantee that the information in the loan matches the data that goes with it, and this is what brings confidence back to lending. For lack of a better term, think of the way things are now as ‘the old reality,’ and the way things will be, with widespread e-mortgage adoption, as ‘the new reality.’ In the old reality, loan data and the loan documents did not travel together. The data was taken from paper documents and put into a data file, generally in a format provided by rating agencies to feed their predictive models. A small sample of the data was checked against the paper documents by due diligence auditors in a process erroneously thought of as ‘re-underwriting.’ The job of the due diligence auditor was essentially to check data against information that existed in the paper file, not to be the arbiter of what did and did not make a sensible loan. The data needed to be checked, as most transactions were (and are) full of disagreements between the paper and the data that make up the loan. Things change over the process of manufacturing a loan, and updating the data has never been a high priority. Even if it had been, the process of updating is expensive and laborious, neither of which is consistent with the mortgage securitization process. Getting the loan closed was the main priority, and many executives never understood the downstream consequences of poor data checking. In the new reality of e-origination, all of that basically disappears, and to understand why, one needs to understand the basics of the e-mortgage. A true e-mortgage is one that is created using an electronic documentation process in which the data and the documents don't just travel together, but are the same thing. They are never separated, and the document you see is always electronic – really nothing more than a different view of the data. [i][b]SMART stuff[/b][/i] The best electronic forms of mortgages are known collectively as Category One SMART Docs, so-named by the Mortgage Industry Standards Maintenance Organization (MISMO). SMART is an acronym for five critical attributes: securable, manageable, archivable, retrievable and transferable. Admittedly, the ‘A,’ ‘R’ and ‘T’ in SMART can be achieved with paper, but not without trucks, couriers, boxes, porters, lawyers and lots of dead trees – not to mention the money to make them all happen. You are probably familiar with e-closings, and how they make signings quick and error-free. But e-origination is less familiar, even to experienced mortgage professionals. e-origination makes the whole front-end process far simpler. Borrowers give their information – which becomes the SMART Doc Form 1003 – and the collateral is researched, making the fair market value a data point that has its comparable sales data re-checked electronically, using the same databases the appraiser uses in the first place. They will even tell you things the appraiser didn't, such as finding closer, more appropriate comps that weren't chosen for the appraisal. Fudging becomes far more difficult, because the data is auto-reviewable in seconds – and not in a way affected by outside influences. Credit is accessed and becomes more data points, and identity, income and employment are verifiable using electronic means. All of this data – electronically gathered from the appropriate and trusted source – can be locked down with the same tamper-proof seal, with all the same discipline and security required by the laws for e-signatures. The data become the documentation for the loan and travel with it for life, with things like faxing, imaging, indexing (and mis-indexing) becoming things of the past. Processing and underwriting are largely automated, with rules and calculations triggering human intervention when needed to examine something that appears amiss, such as those suspicious appraisal comps or a tax return that doesn't square with borrower representations. Fraud and compliance checks are also performed, with their results flowing in as data and notifying humans of discrepancies. Closing packages are created electronically, are never ‘papered out’ and are electronically signed. Very importantly, key parts of the loan documents can require specific borrower examination at these areas and e-initialed acknowledgment. This protects lenders from borrower claims of inadequate disclosure and allows for a customized approach to confirm consumer awareness of specific loan terms. It is no secret that borrowers have made such claims, and many of these claims have led to significant penalties for lenders in recent months, including abrogation of the mortgages in some cases. The problem disappears with e-origination. [i][b]Data issues[/b][/i] It is all still data, though it looks like a collection of paper documents on the computer screen the borrower is using to e-sign – a process that takes minutes and allows previewing by borrowers who want to feel even more prepared. The closed e-mortgage is delivered to warehouse providers, investors and others as data, and an e-mortgage is recorded with the appropriate county agency. The paperless note is registered on the MERS eNote Registry to evidence ownership, as there is no paper to possess. As a side note, recordation is no longer the main reason for people to believe e-mortgages are not happening soon – almost half of the mortgages being made today are in places where e-recording is available now, and more are coming online every day. Because it is all data, once something is changed, it is changed throughout. The e-documents agree with one another; no single data element is out of place. Once the data is input correctly, they are precise and accurate 100% of the time – and the beauty is that the data's accuracy can be checked automatically in so many ways. Even the initial disclosure process is simplified. Secure links to borrowers' e-disclosures are sent electronically, require ID confirmation, and are e-signed in seconds and returned immediately. No paper, no courier, no sweating about the 72-hour deadline and no question about whether they were received – thanks to e-time and date stamping. Furthermore, compliance is simple: You never use an out-of-date paper form, and files are always complete; it won't close if a signature or item is missing. Missing signatures are the No. 1 post-closing exception for Federal Housing Administration loans and delays of Department of Housing and Urban Development endorsement. Everything in the loan process is made easier and more accurate in the new reality of e-mortgages, and once understood, this fact will be a persuasive lure to the new generation of capital markets investors. Fraud is tremendously thwarted, loan parameters and data are matched like never before, and the process has been accelerated and completes at a far lower cost. Post-closing audits are automated and e-deliveries become the rule. Traditional origination means all the same costs, inaccuracies and fallibilities that have led us to the present situation. Today's e-origination means e-transparency, with data precision and an array of protections throughout the process. This process is exactly what is needed to bring the next generation of capital markets investors back to our industry. [i]Paul Anselmo is CEO of SigniaDocs, a Houston-based provider of e-mortgage solutions. He can be reached at (877) 774-46

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