WE’RE HEARING despite all the progress the mortgage industry has made in going paperless, it's perhaps more than a little ironic that the most important event in the mortgage process—the closing—is still largely a paper-driven affair.
Indeed, completely paperless, electronic mortgage closings are still a rarity. Vendors say we're still at least a couple of years away from when mortgage signings are commonly done on computer tablets and other electronic devices rather than on stacks of paper.
“Paperless processing has come a long way in recent years. Many of the internal processes within the mortgage lender can be and are paperless,” says David Hultquist, vice president of marketing at Capsilon Corp. in San Francisco. “But sadly the process comes out of paperless and goes back onto paper at certain key points, in particular when it comes to the closing. Even lenders who are paperless in their internal processes will typically print out that loan package and deliver it to the closing agents.”
The number of lenders that are able to do paperless closings and the number that actually do it are two completely different numbers, according to Keven Smith, president and CEO of Mortgage Builder Software Inc. in Southfield, Mich. Although the technology exists to do paperless closings, he estimates that only about 5% to 10% of closings are done electronically.
"A lot of lenders are electronic as far as getting the whole mortgage in place, but the actual final signing of the mortgage is still done with paper," he says. "The technology is there, it's robust, it's proven, it's mature, but it's really a matter of lenders and borrowers adopting it."
Part of the objection, Smith and Hultquist say, is that while consumers are used to doing lots of other financial transactions electronically, many of them are just not ready to make that leap when it comes to something as important as a mortgage closing, or at least lenders think they're not.
"Borrowers can say that they would love to sit on their couch at home and sign all these documents, but when it's the largest transaction they're ever going to make in their lives, usually they want to be sitting there with someone holding their hand as they review those documents. And a lot of the time that is on paper," Smith says.
"To some extent, some people are more comfortable with paper and pen, especially when it comes to legal transactions" like mortgage closings, Hultquist says.
Besides consumer comfort with paper documents, there is a more substantive issue preventing full electronic closings, says Jonathan Kunkle, president of the document services division of Denver-based LenderLive Network Inc. Namely, certain documents, such as the deed and the mortgage, often need to be notarized.
Under the ESIGN Act of 2000, Kunkle says, any instrument used in the sale of personal or real property can be executed electronically and is enforceable as such. "But in the case of a mortgage loan, where the instruments to be recorded in each county are required to be notarized, the notarization stands as an impediment to a full electronic closing.
"We're not going to get to a completely electronic state until we resolve those documents that require notarization," he says. Most notarized documents, he adds, are stamped with the notary's seal, which essentially requires that they be on paper.
"Although we as an industry can technically support a notarization electronically, that notary still must be sitting next to the consumer when they execute the deed of trust or mortgage, affidavits and riders," he adds. "Further, not all counties accept electronically executed and notarized security instruments for recording. As a result, the efficiencies of electronically signing a document that has to be recorded do not exist today."
Despite these hurdles, vendors expect a fully 100% electronic mortgage process, from start to finish, including the closing, to be commonplace within the next few years. The benefits to all parties to the transaction—lenders, borrowers, regulators, investors—are too big for it not to happen.
"Adoption is going to grow substantially," says Smith. "Soon to me would be the next year or two.
"It saves a lot of money not to have the labor to print out all those documents, have somebody sign them, and then scan it all back in," he says. "If you can do it electronically from end to end, the whole process flow moves more smoothly."
Hultquist says he thinks the industry is "a couple of years away" before electronic closings become a commonplace occurrence.
"What definitely needs to happen in the future is for electronic document management as a whole to become strategic and essential to making mortgage loans and not something that comes at the end of the process for archival purposes," he says. "Lenders need to take the idea of paperless processes throughout their whole organization and throughout the loan cycle. When that happens, it will be very natural to include the closing process among those other business processes."
George Yacik has been covering the residential mortgage business for more than 20 years and writes frequently for industry publications. He can be reached at firstname.lastname@example.org.