July 15: Notes on affordable housing, compliance tips, e-mortgages defined and what companies are doing about them

General industry trends

Addressing the recent talk about increasing affordable housing, Jeff Bode sent, “I have no idea how Affordable Housing became the ‘scape goat’ for the mortgage crisis. ‘Affordable Housing’ required the borrower to prove their income and credit history. It was the deviant private sector that determined that we no longer needed to prove income and down payment ability. At the onset of the crisis it was the subprime loans where income proof was not required that went south in the Fannie Mae portfolio. Only eventually, when the whole housing market was upside down, did the Affordable Housing loans start to crash at a much slower pace than the SISA loans. This is a false narrative that a political group pushed on the public that was just not true.”

Julian Hebron sends, “Because Renren who acquired Sindeo is also a large investor in SoFi, one wonders if that means SoFi might buying Sindeo at some point. Like many questions people ask when things like this happen, this one is a highly speculative, but there’s some merit to why it’s being asked, so I answered it with facts and figures to give industry colleagues some perspective.” (The Renren Network, formerly known as the Xiaonei Network is a Chinese social networking service.)

Are things busy where you live? Seattle tops the list of cities with the most construction cranes on their skylines, with 58. In second place, trailing by 22 cranes, is Los Angeles. Seattle’s minimum wage has gone from $9.47/hour to $11/hour in 2015 and $13/hour in 2016. The impact? Economist Elliott Eisenberg points out, “While the first increase had minimal employment impact, the second damaged low-wage workers. At $13/hour, the number of low-wage hours worked declined by a whopping 9%, while wages rose just 3%. As a result, low-wage worker income fell on average by $125/week! Small increases are manageable, large increases incentivize employers to bypass low-wage employees.”

Turning to increases of a different nature, are you critical of residential lenders expanding wildly and taking down new space? One industry vet wrote to me saying, “These companies are a careless-Yellen-remark away from scraping those plans and opening an ops center in a strip mall in Ohio – and eating Skyline Chili on their lunch breaks.”

Compliance observations

Compliance is the name of the game for lenders. I received this note from Janet Twombly, Director of Compliance and Servicing for The Compliance Group. “The Compliance Group has seen a recent emphasis in the several areas of compliance. First, TCG reminds lenders and brokers have a strong Bank Secrecy Act / Anti-Money Laundering Program that includes a Customer Identification Program in place which includes an annual audit of the Program. The CFPB, in addition to some state regulators, include the review of AML Programs in their periodic examinations and, if found deficient, will require lenders to put an action plan in place to strengthen the program.

“Second, lenders should also have strong controls in place to ensure compliance with the RESPA-TILA and TRID requirements for timely and accurate disclosures. Lenders should closely monitor for cancelled loans caused by an error in the disclosures with the origination process starting over. Third, the State of California has issued further clarification on acceptable documentation for evidence of the disbursement date by the settlement agents in its publication of Release No. 58-FS (Revised), Evidence of Compliance with Financial Code Section 50204, Subdivision (o): Per Diem Interest, on May 3, 2017.

“Lenders should review the requirements in the Release and ensure a process is in place after loan funding to obtain the appropriate documentation from the settlement agent for the loan record that supports the disbursement date as defined in the Release, ensure the borrower(s) is not overcharged per diem interest and issue refunds for any excess per diem interest charged. Lenders should also be reconciling the Final Settlement Statements issued by the settlement agent to ensure amounts reconcile to the latest Closing Disclosures and issuing a revised Closing Disclosure if necessary.”

E mortgages, notaries, notes…

Electronic this and digital that is an undeniable trend. The CFPB report published last year found that electronic loan transactions were faster than paper transactions, with borrowers feeling that they had better understanding of and control over the mortgage closing process. A mortgage loan where the borrower has a better understanding of loan terms, especially if loan payments are expected to change due to adjustable interest, for example, may lead to a borrower who understands what the loan requires before signing. Such mortgage loans are likely to perform better than mortgage loans where the borrower does not understand the loan terms.

Along those lines I heard from Jennifer Parker, GM, Digital Mortgage Solutions at Notarize, who wrote, “The notary world is changing at a very fast pace. Ohio’s governor signed their remote notarization bill last week, which goes into effect in 90 days. This comes right on the heels of both Texas and Nevada passing their remote notarization laws. Texas was so significant for more than one reason in that it was a collaboration between Texas Land Title, Texas Association of Realtors, Stewart Title, First American Title, JP Morgan Chase, Wells Fargo, Notarize, Mid America Mortgage, Microsoft, and of course, the Texas Mortgage Bankers Association led by John Flemming, who was the author and master-mind behind the bill. We all agreed Texas would serve as model legislation and signed off on a letter to the Governor as such. This agreement is critical as it’s the first step in collectively moving the industry forward.”

Companies do indeed provide a wide variety of services from application through post-closing. For example, Phil Reichers with Pavaso writes, “Pavaso provides the most robust eClosing platform on the market bringing all stake holders together, providing transparency, real time status of closing, and a second to none borrower experience. The Pavaso system can close Hybrid’s and eNotes, providing a one stop solution.”

But it seems many are lenders grappling with LOS platforms that cannot integrate with today’s technologies because they were not designed to do so. Many of the LOS platforms currently in use are decades old and their creators couldn’t have anticipated the digital lending tools that are available today. Vendor work-arounds exist but they can only get you so far, and many lenders are still not able to completely process electronic mortgages despite the availability of digitally ready components. Often, the LOS and those digital components don’t exchange information seamlessly. To accommodate the emergence of digital mortgages and maximize their potential, lenders can prepare by doing two things: 1) Choose a Point of Sale (POS) portal that offers your prospective borrowers an attractive way to apply for a mortgage online, and 2) Ensure your LOS can effectively handle the necessary integrations to effectively support the digital lending experience.

A while back Janice Smith with MERSCorp Holdings wrote, “MERSCORP Holdings, Inc. released an educational video explaining the benefits of transitioning from an all paper mortgage process to electronic mortgages (eMortgages) and electronic notes (eNotes). The video illustrates the #eMortgage process and highlights the benefits for borrowers, lenders, warehouse lenders, servicers, document custodians, and investors.  Here is a link to The eMortgage Experience video. We have also updated the MERS® eRegistry webpage with helpful documents and links to places where mortgage industry participants can go to learn more about becoming eReady.”

There have been other developments this year. For example, NotaryCam’s eClose360 online notary platform was approved by Freddie Mac for eMortgage origination. Mortgage lenders who sell their production to Freddie Mac can execute a full set of loan docs, register with MERS eRegistry and fund in near real-time and share those benefits with their partners and borrowers. Companies like NotaryCam offer businesses and individuals the ability to legally notarize, sign and execute documents online. NotaryCam is a Fannie Mae-approved provider of SMARTDoc and eVault solutions. In February, eClose360 was tested and approved by the GSE as a digital mortgage solutions provider.

Mid America Mortgage purchased the eNote from North Carolina’s first eMortgage transaction. The transaction, which was completed entirely electronically, was a refinance for a property in Winston-Salem and was executed by Hickory-based North State Bank. Upon completion of the closing, Mid America could purchase the resulting eNote within one business day after receiving the final loan package. North Carolina Secretary of State Elaine F. Marshall noted, “This was our first North Carolina eClosing. It is not our last. We want this to become a regular option for lenders and their customers because of the many advantages eClosing offers versus the slower, traditional paper-based system.”

Simplifile has expanded its e-recording network to include 15 additional recording jurisdictions across the Western and Midwestern United States.  As members of the Simplifile e-recording network, settlement agents in these jurisdictions can now electronically submit documents directly to the county recording office via Simplifile’s secure e-recording service.

Moody’s rating agency weighed in earlier this year on the acceptance and development of e-mortgages (“loans whose critical loan documentation is created, executed, transferred and stored electronically”). These mortgages, “will likely benefit residential mortgage-backed securities (RMBS) transactions by improving data quality and loan documentation…Lenders and servicers that fail to comply with the established legal framework run the risk of an unenforceable e-note, but the handful of court cases involving challenges to e-mortgage foreclosures have provided clarity around the servicer’s ability to demonstrate that it has the necessary control over the mortgage note to permit it to foreclose.

“A fully electronic mortgage origination process can enhance the quality of mortgage loans by helping borrowers become better informed by allowing them access mortgage documents prior to closing and improving loan data quality by reducing the number of transcription errors and missing documents that result from manual origination processes. Electronic originations can also benefit RMBS by making the note more easily accessible to servicers, which can over the long-term help reduce delays in foreclosures.

“The few decided cases involving challenges to e-mortgages suggest that as long as the servicer can establish a transfer history that shows the servicer as the holder of the e-note, the servicer has standing to commence a foreclosure. Though most mortgage lenders have adopted at least a fragmented approach to electronic mortgage processes, the lack of nationwide legislation on e-notarization and the hurdle of market-wide acceptance has limited the broad adoption of fully electronic mortgage originations.

“Though most mortgage lenders have adopted at least a fragmented approach to electronic mortgage processes, the lack of nationwide legislation on e-notarization and the hurdle of market-wide acceptance has limited the broad adoption of fully electronic mortgage originations.”

The Moody’s report went on. “The benefits of e-mortgage origination are enhanced when it is part of a fully electronic process in which there is a seamless workflow from mortgage application to closing and where some underwriting and post-closing quality control is automated. A fully electronic process can create a better mortgage experience for the borrower, enhance data quality and allow for easy access of the e-note by the servicer in the event of loss mitigation and foreclosure proceedings.

“A fully paperless mortgage origination process can improve mortgage data quality by replacing many of the manual tasks in handling, processing and reviewing paper documents that can introduce human error and fraud. Post-closing quality control of the data can be automated to allow the originator to efficiently verify that all closing documents are complete, signed and included in the mortgage loan file. Lenders can set up digital checkpoints within the origination process to ensure data accuracy and completeness. Originators can increase the certainty that mortgage loan files are properly executed and complete by automating these post-closing quality control steps because they can significantly increase the size of their quality control samples to include their entire population of loans rather than a smaller, manually selected sample.

“Both federal and state legislation create standards for e-mortgage enforceability. The federal Electronic Signatures in Global and National Commerce Act (ESIGN) and the Uniform Electronic Transaction Act (UETA), a model act that was adopted in all but three states (Illinois, New York and Washington adopted their own legislation), provide that electronically signed contracts are as legitimate as paper documents, that a digital notary stamp is as legitimate as a raised seal on paper, and that an e-note stored electronically is as authentic as a paper note stored in a custodian’s physical document facility.

“Although case law has thus far supported the creation of a framework for enforcing e-notes, fully electronic mortgage growth is hampered by a lack of legislation in many states governing e-notarization. Lenders would require a nationwide acceptance of enotarization to originate mortgage loans where the process is 100% digital, from loan application to closing, in all 50 states…. Because federal law is silent on some aspects of e-notarizations, some state legislatures have enacted statutes governing them; however, fewer than half of the states have such laws. Where there is no state law on e-notarization, notarization is done on paper manually…”

(Thanks to PC from Texas for this one; feel free to sub in Irish names & Guinness if you like, or Dutch names and Heineken.)

Three rednecks were working up on a cell phone tower: Cooter, Jeff, and Tony. As they start their descent, Tony slips, falls off the tower and is killed instantly.

As the ambulance takes the body away, Jeff says, “Well, shucks, someone should go and tell his wife.”

Cooter says, “OK, I’m pretty good at that sensitive stuff, I’ll do it.”

Two hours later, he comes back carrying a case of Budweiser.

Jeff says, “Where did you get that beer, Cooter?”

Tony’s wife gave it to me,” Cooter replies.

That’s unbelievable, you told the lady her husband was dead and she gave you beer?”

Well, not exactly,” Cooter says. “When she answered the door, I said to her, ‘You must be Tony’s widow.’ She replied, ‘You must be mistaken. I’m not a widow.’

Then I said, ‘I’ll bet you a case of Budweiser you are.’”

Rednecks are good at sensitive stuff.

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Rob Chrisman