Digitally signing an agreement
ComplianceFinanceJanuary 05, 2023

Reaching the eNote tipping point: Why mortgage lenders should embrace end-to-end digital capabilities

For years now, mortgage lenders have been inching toward end-to-end digital capabilities. First, banks and independent mortgage originators began digitizing upfront processes for greater customer convenience. Then, the COVID-19 pandemic hit, and its social distancing requirements drove the rapid adoption of digital functionality like remote online notarization (RON).

Yet, the mortgage note itself has remained a stumbling block in the path to fully digital mortgages. While federal legislation authorized the use of eNotes two decades ago, many lenders have been hesitant to replace paper notes with their digital equivalent.

The digital mortgage age has finally arrived

In July 2020, the Government National Mortgage Association, or Ginnie Mae, launched its Digital Collateral Program, which began recognizing eNotes as valid collateral and allowing issuers and custodians of Ginnie Mae securities to accept and transfer eNotes. The effort was enabled by Wolters Kluwer’s eOriginal®, which Ginnie Mae selected to provide eVault software and services.

Although financial institutions have primarily focused their digitization efforts on the front-end of the mortgage process, the closing process has remained mostly a paper-based manual process, making Ginnie Mae’s acceptance of eNotes a game changer. The American Bankers Association projects the total value of digital loans will jump to $200 billion by 2025 as more businesses implement eNotes to meet the evolving expectations of a modern customer who demands enhanced speed, greater convenience, and security from their lender.

The road to digitization

While digital lending isn’t new, the pandemic has accelerated the demand for technology-enabled digital assets, like eNotes and in the years following the height of the pandemic, the demand for digital options is only growing. An eNote is the electronic version of a paper promissory note to investors. Since an eNote is electronic, it needs to be created, stored, and assigned in a specific way to ensure the same legal enforceability as paper.

However, a mortgage note doesn’t become an eNote simply by being scanned by an optical device and converted to an electronic file. An eNote must be digitally created, signed, and stored in a tamper-sealed manner in an eVault. That way, the electronic file cannot be modified without the change being recorded in a digital audit trail. Finally, the eNote must be registered with the Mortgage Electronic Registration System (MERS).

While the legal validity of eNotes has long been established, Ginnie Mae’s acceptance will likely transform Federal Housing Administration (FHA) and Veterans Administration (VA) lending, which make up one-quarter of Ginnie Mae’s originations. *The FHA and VA already allowed e-signatures on their loan documents, but the Ginnie Mae rules for these securities prevented them from closing with eNotes.

Since the start of the program, over $8 billion have been securitized in digital mortgage eNotes. With the new expansion of the Ginnie Mae pilot program, the increase of eNote issuance for Ginnie Mae-backed loans should be the tipping point for eNote adoption across the mortgage banking industry.

The long-term benefits of eNotes

The benefits of digital mortgages aren’t limited to the closing process. Post-closing, going digital can have a demonstrable effect on loan quality and subsequently improve investor confidence.

Investors play an integral role in maintaining a robust secondary market and are the engines driving today’s digital financial ecosystems. Technology can verify the authenticity of the eNote and provide an online platform to properly track and transfer assets. This eNote “certainty” is critical to funding and overall valuation, especially for organizations that securitize, pool, or pledge assets in the secondary market.

In opinion piece published in National Mortgage News, TRK Connection CEO Terry Sundh wrote, “When loan documentation is created, executed, transferred, and stored digitally, it is nearly impossible to misplace that documentation, thus exponentially increasing the likelihood of delivering a complete loan file.”

Ginnie Mae’s acceptance of eNotes and expansion of their pilot program, fundamentally changes the mortgage landscape. If you’re like many smart lenders, you’re taking a hard look at how eNotes will fit into your operations. But to succeed, you need to fully understand how eNotes interact and engage with your existing closing operations and technology partnerships.

Read Part 2 of this blog series to learn how eNotes can take your mortgage lending to the next level.

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