According to MERS eRegistry data, eNote registration in 2020 (through November) increased 264% from 2019, and the number of companies transacting on the MERS eRegistry increased 121%. These numbers indicate clear momentum for eClosings. But take these numbers in context, and a clearer story emerges. Only 4% of all transactions were e-enabled in 2020— it’s evident that the real estate industry is still in the early stages of eClosing adoption.
So what’s holding the industry back from implementing and executing eClosings? At the Future of Real Estate Summit (FORES21), eClosing experts discussed how COVID-19 helped nudge the final eClosing puzzle pieces into place and how businesses can overcome the remaining hurdles to eClosing implementation. Moderator, Rob Chrisman, was joined by Margo Tank, Partner at DLA Piper & US Co-Chair, Financial Services Sector, and Clayton Collins, Founder & CEO of HW Media.
The pieces to the eClosing puzzle are in place
eClosings occur in a complex ecosystem composed of many participants and components. Over the past decade, in some states, most of these pieces have fallen into place to enable digital closings. Tank walked through the five pieces necessary to make eClosings possible.
- The varied and multiple participants in the process must be “swimming in the same direction.” eClosings require multiple and varied participants including sellers, buyers, appraisers, inspectors, governmental agencies, and many more. For an eClosing to happen, all stakeholders must have the necessary tools and processes in place to enable eClosings.
- The legal framework. Federal statutes and regulations along with state regulations must be in place to enable eSigning and remote notarization of documents. In the past few years, a number of eSigning and eNotarization laws have been passed. “There is a great deal of complexity in the number of laws to enable [eClosing] transactions,” Tank said. “Over the past 25 years, these laws have slowly come on board.”
- Technology platforms. Over the past few years, many eClosing solutions have sprung onto the market including document generation and notarization platforms. “Today, there’s virtually no material element in the closing process that’s not e-enabled,” Tank said.
- The mortgage industry infrastructure. Fannie Mae and Freddie Mac were champions of eNotes at the onset of the COVID-19 pandemic. “Their role in the ecosystem was to add special terms to the uniform instrument to address eNotes… This was a very technical and necessary piece of the pie where you had to have a pointer to where the information for an eNote could be stored,” Tank said. More recently, the FHA, VA, USDA, and Ginnie Mae also moved forward with instructions to guarantee or insure eNotes.
- Judicial recognition and enforcement of rights conferred by eClosings. There are now several cases highlighting the ability to use eNotes. “The courts are starting to understand [evidence to prove an eNote],” Tank said. “Court systems have been fully supportive in enabling the closing process.”
We’re still in the “early innings” of eClosing implementation
Collins said that despite all of the pieces falling into place to make eClosings possible, the real estate industry is still in what he calls the “early innings” of eClosing implementation. “The game is started, the tools are there, now it’s about adoption,” he said.
Collins outlined a few areas he believes will move the needle in adoption and overall integration of eClosings:
- Training and education internally. Organizational change requires buy-in from impacted teams. “We have to train and push adoption and requirement of the utilization of eClose solutions,” he said.
- Collaboration and education among participants. Title & escrow businesses, lenders, underwriters, and others in the transaction ecosystem each have individual requirements that must be met in order to perform eClosings. Additionally, these partners must effectively integrate their processes and systems in order to complete a digital transaction.
- Expansion of end-to-end models that streamline the number of technologies used in a transaction. The average loan file from application to close touches 12 or more hands. “I don’t think we want to move to a place where that’s also hitting 24 different software systems to move a file,” Collins said. He added that mergers and acquisitions (M&A) in the mortgage technology landscape will likely deliver an easier path to implementing eClosings because technology will be more consolidated and integrated. He also said that this consolidation will reduce the burden of tech implementation on mortgage companies with lean IT teams.
The remaining roadblocks to industry-wide adoption of eClosings
“There are a number of roadblocks [to eClosing participation] that ebb and flow depending on whether we’re in a refinance boom or a financial crisis,” Tank said. One common roadblock is deciding whether to build an eClosing platform or license one. “There’s been a build or buy dilemma for 20 years,” she said. Many title and lender businesses will go through the RFP process with an eClosing platform only to decide that they want to build a platform themselves. It’s only after years go by that they understand the full complexity of eClosing solutions and their limitations in creating a fully-compliant and user-friendly solution.
In addition to the “build or buy dilemma,” Tank echoed Collins’ sentiment that technology platform interoperability is a challenge. “There are many platforms that are serving every part of the transaction, but they need to be more interoperable,” Tank said. “We need to have the full closing process with the various platforms be able to talk to one another.”
One barrier that Tank expects to continue is the preservation of legacy digital channels. She said that “getting everyone invested in making a change” which includes buying new systems, training, and education, can be a challenge. To remove this barrier, eClosing advocates will need to capture the hearts and minds of all functions of the business necessary to move eClosings into a meaningful part of the business including legal, compliance, and IT.
The time to adopt eClosings is now
“Everything in business rides on momentum, and right now we have momentum,” Collins said. He cited an ALTA survey which found that in 2019 only 14% of businesses were using digital closings. In May 2020, Qualia ran a similar survey which found that 24% of businesses were using remote online notarization (RON) eClosings. “Utilization jumped 10 percentage points,” he said. In December 2020, HousingWire reported on progress and found that adoption soared 547% in 2020.
“The industry can’t lose momentum,” Collins said. In 2021, it’s expected that lenders will be focused on purchase transactions as refi volume slows down. “Lenders will look for ways to be more efficient and increase margins,” he said. “Ignoring anything related to a more efficient mortgage process would be foolish, and we know that remote online notarization (RON) and eClosings are an important part of the path to efficiency.”
To watch the full conversation between Chrisman, Collins, and Tank, click below to watch the recording now.