The business case for electronic mortgages either just received a big boost or suffered a terrible setback.
A number of mortgage technology firms argue that the foreclosure documentation crisis that has erupted in the last month could be the wake-up call the industry needs to move to a completely paperless system.
On the other hand, some industry participants are worried that the recent scrutiny from judges around the country on original promissory notes and proper chain of title may considerably slow technology improvements.
"I think you'll have paper forever now," said Paul Bossidy, chief executive of Clayton Holdings LLC, a due diligence firm in Shelton, Conn.
Todd Moncrief, vice president of business development at Xerox Mortgage Services, a unit of Xerox Corp., said that logically, the foreclosure documentation crisis should speed the move away from paper, "because automation and technology can make sure all the i's are dotted and the t's are crossed."
In the near term, though, the adoption of new technology is likely to take a back seat, with servicers focused on working through the current issues, he said.
"Since all the foreclosures are being done on loans that were closed with paper and the normal signing process, it's going to slow the lenders and the servicers down some to go back through and do quality control on those," Moncrief said. "There's no doubt about that. It slowed us down today" in the shift to electronic processes.
Paper issues have bedeviled servicers in the last month, as Ally Financial Inc.'s GMAC Mortgage, JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and others acknowledged defects in how certain foreclosure documents were processed. It's unclear whether a completely paperless system would resolve some of these issues.
"A paperless system in and of itself is not the central issue," said Joe Filoseta, president and chief executive of DepotPoint Inc., a default servicing provider in Bellevue, Wash.
"If we do not reform the process to ensure that all parties involved from origination and servicing activities, including servicing transfers where chain of title is at risk, paperless notes and mortgages will only give us modest improvements in productivity and lower error rates," he said.
Christine Pratt, a senior analyst with Aite Group LLC, agreed, saying "it's not the ability to transmit information electronically. It's whether or not you're transmitting the correct information."
At the very least, the current crisis will give servicers a strong argument to demand funding for software improvements from their parent companies, and thus drive acceptance of a fully electronic system, said Fred Melgaard, executive vice president of DRI Management Systems Inc., a Newport Beach, Calif., provider of default management services.
"It's been incumbent on the originators to push the adoption of the e-documents," he said. "But there's been a shift of power. Suddenly servicers are where the risk is. They've been able to get budgets approved and IT resources."
Melgaard said the documentation crisis will undoubtedly bolster the case for technology as a way to prevent another breakdown in processes.
"How could they have mitigated these processes upstream?" he asked. "Certainly e-documents would help. … E-documents make things much more efficient. Copies are suddenly originals. … Systems can move e-documents from point to point without having to have physical pieces of paper. Something moves at the speed of light as opposed to the speed of FedEx. It's all about putting eyes on documents. The current issue is people didn't review" the documents.
"For decades, servicing has been about squeezing dollars out of the process," he said. "It is suddenly about squeezing the risk out of the process."
Technology proponents have pushed for a paperless system for years. The concept centers on using electronic documents instead of paper throughout the entire mortgage process, delivering loans to investors electronically and storing loans in an electronic repository, or e-vault.
The industry has slowly made progress. According to a recent survey of 50 mortgage executives by Xerox Mortgage Solutions, 49% have implemented paperless origination systems, while 47% are electronically delivering closed loan folders to investors. However, just 2% are using e-signatures at the closing of a loan.
In the survey conducted in May (before the industrywide foreclosure affidavit issues came to light), 82% said they believed it would take three to seven years for the industry to process more than 50% of mortgages completely electronically.
One hurdle to going paperless, experts say, has been the acceptance of such a system by a variety of players.
"You've got to have a number of parties in the mix that will accept that," including warehouse lenders and investors, said Jonathan Corr, chief strategy officer and executive vice president of business development and product strategy at the origination software firm Ellie Mae Inc.
The two biggest mortgage investors, Fannie Mae and Freddie Mac, have policies allowing the purchase of e-mortgages from lenders, but they buy only a limited quantity of such loans, and only from certain approved sellers.
"The ones who stand to lose the most" from any bungles in the mortgage process "are the ones who are going to drive this change. And that's the investors," Filoseta said. "Whoever's providing that money in the secondary market, that's where you'll see the great majority of effort to create this more holistic system."
If nothing else, the legal challenges to foreclosures with weak paper trails offer lessons for those who seek to bring the mortgage industry into the digital age.
"I think e-documents present a good alternative and, if clearly understood by everyone involved, by all stakeholders in the transaction, that's the future," said Bill Garland, senior vice president of servicing portfolio solutions at ISGN, a mortgage technology firm.
"With all the emotion involved today, there needs to be clear understanding and trust of how that technology is going to work, and of course what are the checks and balances that ensure it's been done properly."