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Electronic Loans Slowly Gaining Ground

The process of creating a truly electronic mortgage has been excruciatingly, but necessarily slow, key secondary market players said here earlier this month.

James Newell, associate general counsel at Freddie Mac, said the need to move at what seems to many observers as an almost dilatory pace is simply an effort to get the process right the first time without making any mistakes.

"We've got to take this seriously if e-mortgages are going to become mainstream," Mr. Newell explained at the Mortgage Bankers Association's Legal Issues in Mortgage Technology Conference.

"If we do it wrong, it will affect entire portfolios of assets. Therefore, the process demands great attention to detail."

The Freddie Mac executive said that while it may seem that the e-mortgage "chicken has not yet cracked the egg," much progress has been made into creating the industry standards that are necessary to bring the vision of an efficient, consumer-friendly paperless process into reality.

However, one problem that has yet to be solved is the issue of authentication.

As Mr. Newell explained it, current technology cannot embed an "authoritative copy" identification in the original e-document and a "non-authoritative" marker in all other copies.

While the consensus solution is to create a central registry in note text that identifies the person in control of the original document and its location, the Freddie Mac attorney said the problem of authentication is going to be an "interesting exercise."

"Having an electronic equivalent of a negotiable instrument is a crucial element," he said. "In an electronic world, there's not an original document you can possess. Everything's a copy."

Looking down the road, he predicted that one day the term e-mortgage will be just as "archaic" as the terms jet airplane or color TV. But, he added, it will require an "attitude change" on the part of consumers, county recorders, lenders and even investors.

If the process is at all cumbersome, Mr. Newell said, consumers will turn their noses up at going paperless and it will prove next to impossible for e-mortgages to become mainstream. And if the nation's 3,000-plus counties don't budget the resources their recording offices need to accept paperless transactions, the idea may never fly.

But he also said that the primary and secondary mortgage markets need to take the effort seriously and not wait for the other side to flinch.

Many lenders are still reluctant to put a lot of money into going paperless, largely because there is no outlet for e-loans, he explained. At the same time, many investors remain uninterested because there has been no great demand for them to buy paper-free loans.

As for Freddie Mac, Mr. Newell said his company "remains firmly committed" to e-mortgages and will continue to work with the industry to make them come about.

Indeed, he commented that the company's quality control specialists are "salivating" over the prospect of e-mortgages and the benefits they offer on both the front and back ends of the lending process.

Meanwhile, John Richards, associate general counsel at Fannie Mae, offered his company's vision of a fully electronic mortgage, which he called the "Holy e-Grail."

An electronic mortgage should require online application and approval; the creation and collection of "smart" loan and closing documents; electronic signatures on documents that are then sealed and encrypted; and electronic recordation of documents that can be retrieved by investors and servicers in case there is a challenge.

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