Few Mortgage Innovations Actually Save Lenders Money. eClosing is One of Them.
Joe Garrett is Principal with Garrett, McAuley & Co., a banking and mortgage banking consulting firm that helps lenders increase revenues, control costs and better manage risk. For more information visit www.garrettmcauley.com.
The primary drivers of mortgage demand are interest rates and household formation, two factors that mortgage lenders cannot control. So it makes sense that when market forces put a damper on demand, lenders do what’s in their power to recoup lost revenue.
When the market slows, most lenders’ first instinct is to double down on strategies that drive sales. The irony is that in a volatile market, reducing costs does more for margins than replacing lost volume with more loans.
Mortgages have become commoditized, and history has shown us that competing on product differentiation rarely works. Many lenders tried to do that with sub-prime loans, and we all know how badly that turned out. Today, some lenders are financing non-QM loans to boost margins, but even they need to focus on cutting expenses.
The hard truth is that in a commoditized industry, the low-cost producer is the winner. If you’re a farmer, your bushel of wheat is worth the same as any other farmer’s bushel of wheat. And if you’re a mortgage lender, your 30-year fixed-rate conventional loan is worth the same as any other lender’s 30-year fixed-rate conventional loan.
The traditional ways of cutting costs only go so far. Commissions are almost impossible to reduce, and after laying off people, there are limited ways left to reduce expenses.
I remember in the early 1980s, lenders were reluctant to adopt loan origination systems. “The loan officers won’t like it,” they said, and “Our processors will find it too difficult.” Decades later, lenders are citing the same reasons for their reluctance adopt eClosing platforms.
In my 40-plus years in the mortgage business, eClosings present of the best opportunities I’ve seen to cut costs. Borrowers have taken to receiving and signing disclosures digitally, and I believe eClosings will be the next big advancement to create significant savings for lenders.
As I see it, digital eClosings come in four varieties:
First, the hybrid eClosing. This is where all of the closing documents are signed electronically with the exception of those few that need to be notarized and a wet-signed deed and promissory note. This closing takes place in the physical presence of the notary but requires much less time than a traditional closing.
Second, is the hybrid eClosing with remote online notarization (RON). Like the hybrid eClosing, all of the closing documents are signed electronically except those that require notarization. But instead of meeting face-to-face with a notary, RON allows the borrower to sign remotely from any device that has an internet connection, a camera and a microphone.
Third, is the full eClosing with an eNote and eVault, using a regular, in-person notary. All of the documents are signed electronically, including an eNote that gets automatically sent to an eVault connected to MERS. Registering the eNote with MERS creates a chain of custody that is maintained as the loan and associated servicing rights are sold. Think of the human errors that can be eliminated.
Fourth is a full eMortgage closing with an eNote/eVault and RON. This option can be completed online from anywhere and requires neither a physical closing ceremony nor wet-signed documents.
Lenders should prioritize implementing eClosing to begin reaping the benefits of process optimization now and not later. A great way to ease an organization into eClosings is with hybrid eClosings. This allows document drawers, funders and post-closing teams to get familiar with the process with minimal disruption to their current workflow.
As a company progresses toward adopting full eClosing, there are three main categories where it can find savings:
1) Post-close margin leakage: eClosings can reduce or eliminate leakage in secondary marketing and capital markets. Examples of leakage are extension costs, roll costs, late delivery costs and anything else that degrades the expected margin due to delays associated with a paper-driven process. Leakage may not have mattered in 2020 and 2021 when margins were so wide, but every basis point matters in tough times, and eClosings can lower or eliminate leakage. Everyone knows how frustrating and costly it is when a note is lost or damaged. This obviously can’t happen with an eNote. You can’t lose it, and it is delivered in seconds.
2) Labor: We have seen eClosings reduce the number of people need to close loans, resulting in significant labor costs savings. The funder will also save time by never having to check for undersigned documents or missed signature lines.
3) Process: Finally, let’s look at cost savings according to how you deliver your loans (i.e., hedged pipeline versus best-effort execution). The mistake-proof nature of eClosings can cut down on the number of missed deliveries and roll costs for those lenders hedging their pipelines, which can be up to or more than 10 basis points.
For those who deliver to the Fannie Mae or Freddie Mac cash window and are hedging their pipeline, the fact that the collateral is delivered in seconds rather than days allows deliver to a two-day price as opposed to a ten-day window. This is a good example of how control over electronic collateral is always more efficient and predictable than control over paper collateral. And for those who deliver to aggregator conduits through best efforts, the use of eClosings and their full-proof nature can and will reduce or eliminate costly extension fees from late delivery of collateral.
The simple calculus is that the greater the adoption rate of eClosings, the greater the savings. For larger companies, the savings with eClosings can add up to millions of dollars. And even the smallest companies will save money.
Stepping into the future
There is a learning curve for the closers, post-closers and closing agents, but a commitment by management will quickly show loan officers and everyone else involved in the process that eClosings make the entire process quicker and easier. And for the company itself, they will be a source of significant savings.
If there’s one recommendation I’d make for what looks like a difficult 2022, it would be to get started with eClosings and do so as quickly as possible.
Joe Garret has 35+ years of banking and mortgage banking experience and was the CEO for two successful commercial banks. He has been on the board of Directors of four banks, two as Chairman.
(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 NewsLink welcomes your submissions. Inquiries can be sent to NewsLink Editor Mike Sorohan at firstname.lastname@example.org or NewsLink Editorial Manager Michael Tucker at email@example.com.)