Re-thinking 'E,' Part 1: Allowing Perfect to Become the Enemy of Good
By Brian Boike
March 11, 2019
Brian Boike is Director of Product Strategy with Simplifile, Provo, Utah. Contact him at firstname.lastname@example.org. This is the first of a two-part series.
Every day we hear more and more about e-closings and e-mortgages, but we have yet to see any meaningful production. Taking that further, a completely digital mortgage continues to be complex and elusive. However, there is still plenty of digital low-hanging fruit ripe with value.
Lenders have yet to grab hold of these opportunities that lie within easy reach, missing out on the operational and cost-savings benefits of digital review and execution of the majority of the closing package by the borrower and electronic post-closing (i.e. a hybrid approach).
In a time of shrinking profit margins, it's a shame to see lenders wait to take advantage of real cost-saving initiatives or pass up on post-closing process optimizations that could yield significantly more ROI. By adopting a hybrid strategy now, lenders can realize significant cost and efficiency benefits immediately--all while delivering a superior borrowing experience. So why aren't more lenders adopting electronic closing and post-closing procedures?
Some lenders have decided to stand back and wait for 100 percent digital closings to become standard practice before making any investment in e-closing procedures. While the day when investors readily accept e-notes and borrowers remotely attend closings in the comfort of their fuzzy slippers is near, it will still be some time before it becomes the norm.
The problem here is that e-closing is no technical novelty; it is essential to running a cost-effective mortgage business. Lenders who put off the adoption of any electronic closing and post-closing procedures until the ideal scenario becomes a reality will be left behind.
While every loan can be executed digitally to some degree, only about 20 percent of loans qualify to be executed using a fully digital process, which includes a completely e-signed closing package, an e-note, e-notarization and e-recording. Based on available lender data, the average cost savings of a hybrid e-closing versus a paper-based closing is approximately $155 per loan. For a lender that's originating roughly 25,000 units in annual volume, moving to a hybrid e-closing environment would save more than $3.8 million per year.
Factoring in the 20 percent of loans that could be executed completely digitally, the cost savings per loan only increases by $69. Forgoing $3.8 million in annual savings today to wait and save $5.6 million at a future, undetermined date is the very definition of cutting off one's nose to spite one's face.
Especially in a purchase market where lender margins are drastically shrinking, the key to ensuring that a lender's digital push succeeds where so many others have failed is in institutionalizing processes that can generate efficiencies and produce real cost-savings and a rationale for continuing the effort. These cost savings can then be passed on to the borrower so that digital mortgages provide more value to the consumer than just convenience, as rate and monthly payment are still the primary reasons driving the home buyer's choice of lender.
Consumers and mortgage professionals alike value convenience most in matters that are frequently performed. Lenders and title agencies routinely perform closings; thus, they stand to benefit greatly from systematized and streamlined electronic closing and post-closing processes. Borrowers, on the other hand, will only close on a few mortgages during their lifetime. However, because they are reminded of their payment amount every month, to borrowers, cost is king.
This is a perfect example of how pragmatic digital strategy yields more competitive products. By taking a hybrid approach, versus waiting to go completely digital, lenders and title companies can realize cost savings and efficiency gains today while preparing for a full e-mortgage conversion.
The other often-cited roadblock to going digital is settlement buy-in. Getting settlement excited about digital post-closing is surprisingly more difficult than it would seem. Like lenders, settlement agents are actively seeking ways to increase their efficiency, yet settlement has been somewhat resistant to adopting tools to facilitate digital collaboration with lenders, even though most would welcome the opportunity to eliminate the archaic, time-consuming exchange of paper documents and create an automated document/fee delivery audit trail. This resistance largely stems from the lender-centric focus many digital closing solutions have taken, ignoring the very real problem on the title side of having to learn how to use all of the different closing platforms a lender might choose to adopt.
Thus, consistency and ease of use are the keys to getting settlement agents on board with digital mortgages and adoption. When the process is streamlined and designed to incorporate the title agent's operating environment as well, change becomes a much easier sell. Ultimately, it is not the press release or the pilot, but rather the volume that gets users comfortable and creates efficiencies. After all, digitally executing 100 percent of a lender's loans creates muscle memory for agents, whereas 20 percent just creates a need for an exception process. When there is value to be had on both sides, it is easy for lenders and settlement agents to collaborate as partners.
In today's environment, opportunities to execute a completely digital mortgage transaction are still few and far between. However, the majority of transactions can be executed digitally to some degree, and even a hybrid digital execution strategy still yields significant benefits over a completely paper-driven process. Thus, utilizing a hybrid strategy is key to driving the kind of volume necessary to bring settlement partners on board.
Having established and de-bunked the perceived challenges to going in digital, Part 2 of this series will outline just how "e" every loan can be and offer insights into how digital execution can continue beyond the closing table.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at email@example.com; or Michael Tucker, editorial manager, at firstname.lastname@example.org.)