A California mortgage lender says its partnership with a technology and warehouse funding provider made it the first to use a warehouse line of credit to originate a fully electronic mortgage and sell it directly to a government-sponsored enterprise. The transaction represents a unique mortgagee/warehouse lender relationship that’s rarely seen in the mortgage industry. If it catches on, it would represent a dynamic shift in how warehouse lenders operate.
San Ramon-based CMG Mortgage said its first two e-notes were originated with all-digital disclosures and e-signatures before it was funded electronically, transferred to CMG’s warehouse lender and the sold to Fannie Mae, making it among the first nondepository mortgage lenders to write such a loan.
The benefits of e-origination are numerous, the company said. The process removes paper, and allows for the digital transfer of documents and signatures. By transferring the loan to the secondary market electronically, the time it takes to get the loan off the lender’s warehouse line of credit was reduced from two weeks to two days, improving the lender’s cash flow capabilities.
The road to e-mortgage functionality took 18 months, Marshall Griffin, CMG’s chief financial officer, told Origination News. The company partnered with Cherry Hill, N.J.-based Cooper River Financial. The firm helped CMG integrate e-mortgage capabilities into its existing loan origination system, provided the e-mortgage-specific warehouse line of credit and established the policies, procedures and training to get the program started. Separately, CMG Mortgage applied and was approved to sell e-mortgages to Fannie Mae.
Both Fannie Mae and Freddie Mac have policies and procedures in place to purchase e-mortgages from lenders. The GSEs purchase thousands of mortgages every month from lenders from certain approved sellers, but they’re almost exclusively funded by lenders with their own capital.
Few warehouse lenders have the capability to let mortgagees originate e-mortgages. Specifically, they lack the software systems to accept the digital document before it’s transferred to a GSE for purchase.
When traditional mortgages are funded with a warehouse line of credit, the loan is originated and then transferred to the warehouse lender. That step establishes the warehouse lender’s claim to the loan should the originator fail, among other purposes. The loan is then passed onto the GSE for approval and funding.
That process can take up to a week, and all the while the originator is paying interest on the outstanding funds withdrawn from the warehouse line. While the paper process is less inefficient than e-delivery, warehouse lenders have a financial incentive to stay the course. The prospect of losing up to five days of interest payments to e-delivery is one reason many believe e-mortgages are less prevalent in the industry.
Griffin said that CMG is currently only approved to sell to Fannie Mae. But as it originates more loans, it plans to expand and seek approval from Freddie Mac. Griffin said CMG originates between $100 million and $150 million in mortgages across its retail and wholesale lending channels every month. The first two e-mortgages were written for a combined $800,000, Griffin estimated, adding that to start out, e-mortgages will account for a single-digit percent of the lender’s total originations.
Fannie Mae’s pilot program to purchase e-mortgages began in 2003, and the program’s steady increase is the result of lender participation in the program.
“We’re seeing more lenders express interest in paperless mortgages,” Christos Bettios, Fannie Mae senior product manager for paperless mortgages, said in an interview. “We think it’s a good thing because electronic processing improves the quality of the loan process.”
Fannie Mae doesn’t have set metrics or goals for growth of its e-mortgage activity, instead focusing on ensuring overall quality in all the mortgages it buys. But the GSE said it has the capacity to add qualified lenders to the program and is committed to buying more e-mortgages as the industry demand increases.
Bettios said accepting electronically submitted promissory notes is a faster and more accurate way to process the mortgages Fannie purchases. Without e-mortgages, originators have to physically mail loan documents to Fannie Mae, where they are processed manually before the loans receive final approval.
In the e-mortgage process, Fannie Mae receives the digital note in less than a minute from when the originator sends it—compared to the days it takes to mail physical documents. From there, Fannie can verify and certify the loan and purchase it as soon as the day it’s first submitted.
CMG’s goal is to have 10% to 15% of its total originations funded through the e-mortgage warehouse line by 4Q11. To get there, CMG will expand its offering beyond its retail division and include e-mortgages in its wholesale division that are originated by third-party mortgage brokers. It will also simultaneously decrease its traditional origination warehouse lines and increase the e-mortgage warehouse line to handle more capacity.
While the mortgage industry is facing increased market pressure and uncertainty, CMG said the benefits of e-origination made it a good strategy to allocate the resources to this new business. Paperless mortgages are more convenient for customers, allow CMG to hold a written loan for less time on its books and improve other efficiencies.
“Given the opportunity and the way to bust down that door, we felt we were in a unique position with Cooper River to move forward,” said Steve Majerus, CMG’s director of national sales and marketing.
CMG originates loans in 40 states, with heavy concentration in the western region of the U.S., including California, Washington, Arizona and Colorado. With Silicon Valley in the corporate headquarters backyard, it wasn’t difficult for the lender to customers willing to participate in a paperless mortgage process.
“Once we got the word out, it wasn’t hard to identify consumers that wanted to participate,” Majerus said. “We believe that going forward that as this improves and we include it in the entire closing process, we think it will be a favored way for customers to close on their loans.”
