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Online home loans were supposed to be the future. They still may be.
By Patrick Barta
Staff Reporter of THE WALL STREET JOURNAL
It was nearly three years ago when Fannie Mae and several other mortgage companies combined to produce what many consider to be the first fully electronic home mortgage. The borrower, a home buyer in Brevard County Florida, reviewed and signed all the closing documents online, and the necessary materials were sent electronically to a county courthouse to be recorded and filed. The process, which normally would have taken more than a week, took three hours. It seemed like technology was about to transform the tortuous process of closing a home loan.
Three years later, the process has only been repeated about 100 times, and for most people, a truly electronic mortgage -- in which borrowers never touch a piece of paper and everything gets signed online -- is nowhere in sight.
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Take a look at of some of the hurdles that have prevented widespread adoption of electronic mortgages.
True, just about every important lender has a presence on the Web, and numerous innovations have reduced the time it takes to get a loan approved. But the rest of the process remains about as arduous as ever. Even borrowers who apply online wind up talking to a person at a faraway call center who then ships out a set of forms. And the closing process has hardly changed at all, with borrowers wading through stacks of documents before finally finishing the loan.
Recently, however, a few advances have revived hope that a paperless future, while still a ways away for most borrowers, is coming into view. After years of internal debate, the mortgage industry has settled on a uniform set of standards to govern the way lenders, title companies and other parties write and process the electronic documents needed to make paperless loans. At the same time, Fannie Mae and Freddie Mac, whose activities as government-sponsored mortgage-finance companies often determine what kinds of loans are available to consumers, have agreed to start buying some mortgages that are processed electronically. That greatly reduces the risk to lenders that choose to make the loans. Several lenders are moving to roll out electronic mortgages -- albeit on a limited basis. One, Flagstar Bank, a unit of Flagstar Bancorp Inc. in Troy, Mich., performed a dozen electronic mortgages as part of a pilot project in late 2001 and early 2002. Now, it plans to begin offering the loans to borrowers who enter retail branches in its home base of Oakland County and the nearby Detroit area by the end of this year, and hopes to offer the loans more broadly after that. Another lender, the Navy Federal Credit Union in the suburbs of Washington, performed 17 electronic loan closings in 2001 and plans to begin offering the loans to a lot more borrowers in some counties -- including heavily populated Fairfax County Va. -- beginning this summer.
Other lenders, meanwhile, are adding technologies that, while not quite fulfilling the full electronic-mortgage goal, still bring borrowers closer to a paperless home loan. Quicken Loans Inc., an online lender based in Livonia, Mich., is allowing customers to use electronic signatures on loan applications. And last month, the company launched a home-equity product in which the borrower doesn't have to touch a piece of paper until the closing, which can take place at the borrower's home.
All of that has led many in the marketplace to conclude that more innovations are coming. "We're on that hockey stick," says Michael Williams, president of e-business at Fannie Mae, describing a growth curve that starts out flat and suddenly shoots upward like a hockey stick. While this year it's likely that only a few hundred electronic mortgages will be sold, over the next few years there will be thousands and tens of thousands, Mr. Williams says. "This is the next big bang for the buck in terms of efficiency and streamlining of the [mortgage] process," he says.
Innovations are also starting to appear outside of the U.S., though less rapidly. In Europe, several countries have considered legislation to allow electronic signatures. Financial Insights, a Framingham, Mass., research firm that has studied electronic mortgages, notes that in Australia, one firm has developed technology that receives and approves applications online and then sends closing documents to borrowers via e-mail; the borrowers can then sign and fax them back. Canada has also made some progress in developing electronic signatures and electronic recording of mortgages, Financial Insights says.
While fully electronic mortgages are uncommon, the number of borrowers using the Internet for at least part of the home-loan process has risen steadily. Volume of mortgages in the U.S. for which the borrower applied online:
Many other countries, including some in Asia, are moving less rapidly. Often, other countries have less competitive mortgage sectors, and many don't have thriving secondary markets or companies like Fannie Mae and Freddie Mac to help spur innovation. Plenty of hurdles remain in the U.S., too. For one thing, less than 20 of the nation's 3,600 county recorders and other recording jurisdictions are configured to receive and record mortgage documents electronically. But 25 or so are in the process of converting, and since the bulk of the nation's mortgages are handled by 250 or so major urban counties, the task is not as daunting as it seems. There are also a number of legal uncertainties associated with loans handled electronically, as well as issues related to storing the loans electronically. Achieving a fully automated mortgage system is "a lot more complicated than you can possibly imagine," says Gabe Minton, a vice president of industry technology at the Mortgage Bankers Association of America, the industry's leading trade group, based in Washington
."We just need to keep running up the hill and solving these issues together." Another issue is convincing lenders, who already have more business than they can handle due to the mortgage-refinancing boom, that it's worth investing to set up electronic mortgage systems. Still, electronic mortgages present enough benefits to lenders that many analysts believe they're inevitable. In addition to savings on couriers and overnight shipping, there's less risk of data errors when loans are processed electronically, since the data can be imported from file to file without re-entering the information on each document. "We just don't see the benefit to paper," says Steve Brooks, an executive vice president for Flagstar's mortgage division. When the current mortgage-refinancing boom ends, lenders could feel pressure to innovate. As rates climb again, lenders will have to do more to encourage borrowing, and analysts believe some will turn to electronic mortgages -- emphasizing their convenience for borrowers.
The recent creation of universal standards for electronic mortgages will make that possible by helping resolve a fundamental source of friction in the lending industry. Unlike other retail businesses, in which a consumer only has to deal with one company when ordering a product, a mortgage borrower and his or her bank must deal with a host of stakeholders, including title companies, appraisers, pest inspectors, credit bureaus and others. While these participants use computers, there's no guarantee they're using the same software, or the same formats for their documents, meaning that someone had to step in to make sure everyone was speaking the same language. Also, the industry had to agree on certain additional guidelines to ensure that the documents were enforceable by law. The first complete set of those standards was put in place in January by an industry-sponsored group known as Mismo, or the Mortgage Industry Standards Maintenance Organization. Those standards provided the guidelines and file formats to allow lenders to make legal paperless mortgages that can include electronic signatures and be recorded by county courthouses online.
To see how one lender is trying to transform itself, consider the 2.3 million-member Vienna, Va.-based Navy Federal Credit Union, which has adopted a goal of allowing men and women serving overseas -- or on the seas -- to sign off on a loan anytime they're away from home. "We don't want someone to have their refinance delayed, so they don't get to take advantage of a lower rate, just because they're located on a ship," says Johnna Cooper, an associate vice president in the credit union's mortgage department. Working with Fannie Mae, the credit union developed a pilot project in which borrowers applied for a mortgage online or by telephone. Next, flood certification, a credit report, tax information and the appraisal were ordered and received electronically. Then, at closing, borrowers were invited to sign final documents online, using a mouse-enabled electronic signature. The note was then transferred to Fannie Mae electronically. While the pilot proved that loans could be closed online, it didn't meet the credit union's goal of enabling sailors to close loans while at sea or abroad. Some documents had to be printed out and signed by the borrower to be filed with the relevant county recorder. Worse, the electronic signatures had to be made in a lawyer's office and in the presence of a notary.
Ms. Cooper says upgrades now will allow borrowers to close anywhere they have a computer -- including on a ship -- so long as a notary is present, and the credit union is negotiating with several counties to get them to set up the technology to accept mortgages filed electronically. She said loans using the upgraded technology will be available to credit union users beginning this summer. Response to the pilot project was generally positive, though the advantages weren't fully apparent to everyone. Wallace Felts, a Washington electronics-store owner who participated in the pilot program along with his wife, Elizabeth, says he wasn't fully convinced the new system was more convenient than a traditional closing, and that he felt wary of documents he couldn't touch. "You're dealing with something that's there but isn't really there," he says, referring to the documents he signed online. "It's scary not dealing with any paper, looking at a screen, in the back of your mind knowing that computers go down all the time, and thinking, what if my papers just go away?" Even so, he says, the process turned out to be a lot less complicated than he expected it to be. Ms. Cooper says the system yielded a savings to the credit union of about $241 per loan in reduced work time and paper handling. She says the credit union is considering offering future users of its electronic system a rebate for the savings. Other products, meanwhile, are yielding other benefits. Through Quicken Loans' EquityOnline product, home-equity borrowers type in some basic information, like the property address and borrower's Social Security number, the system then pulls a credit report and appraisal information from online sources and orders other relevant documents online without contacting the borrower. A few minutes later, the system asks the borrower when he or she wants to close the loan. While the borrower still must sign the closing documents in person, the documents are carried to the borrower's house by a notary so that the borrower doesn't have to leave home, and the only time the borrower deals with any paper or talks to a human is at the closing. Signed documents still must be sent by a human to be filed at the county recorder. -- Mr. Barta is a staff reporter in The Wall Street Journal's. New York bureau.
Here are some of the hurdles that have prevented widespread adoption of wholly electronic mortgages, and the progress that has been made.
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