On a Wednesday at 4 p.m. in June 2017, I was in a small, packed office in midtown Manhattan.
The overcrowded conference room, with at least five more people than any fire marshal would recommend, was stacked comically high with paperwork and an eclectic collection of cheap pens. As I neared the end of the third hour and the ink of my seventh pen, I realized the mortgage closing process may be somewhat antiquated.
After closing on my first home, it was inconceivable to me that every other expense in my life has gone digital, but the most significant purchase I’ve ever made required hundreds of signatures and several handwritten checks delivered in person. By comparison, I have been able to repay my student loans, comparable in magnitude to a down payment, exclusively through online portals.
How COVID-19 is accelerating digital advancements
The COVID-19 pandemic has changed nearly every facet of our lives. One potential silver lining for the real estate world may be a forced reckoning with the mortgage closing process. Technological advances like e-closings are accelerating this arduous process into the digital age. The U.S. Census Bureau released figures in July citing the rise in homeownership across the country as the pandemic fuels the demand for single-family properties outside of urban areas. This is confirmed by the significant spike in mortgage applications seen in the second quarter of 2020.
The first signs of digitization of the mortgage origination process were seen in mid-2010 when lenders began adopting digital disclosures. Despite the availability of technology, the market has been slower to fully embrace digital closings that enable the full loan package to be electronically reviewed, recorded, signed and notarized. A true e-closing includes a digital promissory note (“eNote”), a virtual closing appointment and the electronic transfer and recording of documents by the county, all of which can be remotely coordinated and executed by the parties involved. The market started to pick up pace in recent years, and we’ve seen the number of e-mortgages increase by more than 450% from 2018 to 2019.
However, most pre-COVID closings were some form of a hybrid, which included a mix of the printed paper-heavy “wet closing” process and required at least some of the loan package to be signed or notarized in ink. Since March, we have seen these trends dramatically accelerate as the regulatory regimes that had prohibited e-notarization were (and still remain) temporarily relaxed out of necessity.
The transformation of real estate closings
Suddenly the idea of any number of bodies in a small conference room became unfathomable. Technology became crucial to the workarounds put into place, and digitizing the process has become a fundamental health and safety issue for the many parties involved — the borrowers, settlement agents, notary signing agents, escrow officers and multiple sets of attorneys. “The pandemic has accelerated lender, title provider and legislator evaluations of electronic and remote notarizations,” explained Nora Apsel, co-founder and CEO of Morty, an online mortgage platform for home buyers.
As a result, she predicts, the temporary allowances for IPEN (In-Person Electronic Notarization) and RON (Remote Online Notarization) will likely be followed by permanent legislation at the state and federal levels.
The mortgage world is simultaneously facing a surge in demand and unprecedented challenges. The record-low interest rates of the moment are adding to the spike in mortgage and refinancing applications lenders are receiving, and their capacity is greatly strained. As a result, lenders are quoting closing windows as long as six months versus the average time-to-close of 48 days. As in-person closings are no longer a possibility, the market has embraced the technology necessary to go entirely digital. Patrick Burns, the CEO of tech-enabled title and closing company, Spruce, said, “COVID-19 made digital closings a necessity to get business done and has lifted the veil on how much we can simplify the real estate transaction via technology.”
The many benefits of digital closings
Digital closings not only allow lenders to manage their workflows remotely, but they significantly improve overall efficiency. Michael Bensimon, senior loan officer at Freedom Mortgage, embraces digitization. “I’m thrilled with the move toward digital,” Bensimon said. “I can utilize my time better and my ops team utilizes their time better. We didn’t need COVID to show us that [going digital has] been a win across the board.” However, Bensimon also echoes the concerns that are top of mind for an industry whose greatest risk is underwriting a fraudulent loan.
Perhaps most importantly, tech companies trying to accelerate the move to digital are not tone-deaf to the risks Bensimon refers to. Apsel says, “Of course IPEN and RON need to be adopted in a way that doesn’t expose cracks in information security, fraudulent closings or issues downstream in securitization that increase lender risks and costs (which are almost always passed on to the borrower).” Assuming the risks are managed, she says, “in the not-so-distant future Morty expects all closing docs to be signed digitally with an increasing percentage signed remotely.”
The expanse of the digital adoption
We certainly seem to be headed toward digitization at both the state and federal level. As of July, there had been 27 states to enact some form of RON law. These COVID-fueled changes came alongside the vocal support of the Mortgage Industry Standards Maintenance Organization (MISMO) for model RON legislation developed by industry associations. MISMO has also established standards while the Mortgage Bankers Association (MBA) kicked off a RON certification program.
While there are many things that will return to their pre-pandemic steady states, it is highly likely digital closings are here to stay. Consumer behavior has been dramatically reshaped by COVID-19, and whether regulations currently relaxed by states during the height of the pandemic are amended or reverted in the future, it seems we’re moving toward the inevitable digitization of the closing process. The events of 2020 have brought us toward the future reality sooner than expected.
And I’m confident — along with the tech companies moving us forward — that consumers will embrace the acceleration. “I believe homeowners will no longer accept the status quo and demand more convenient and affordable options,” Burns summarized.
I hope all those pens will find a new home.