Bonnie Sinnock (
Hello and welcome to Leaders. I'm your host Bonnie Sinnock, capital markets editor at National Mortgage News, and with me today is Jonathan Kearns, vice president of product at MISMO, the Mortgage Industry Standards Maintenance Organization. Jonathan has over a decade of experience with electronic signatures, e-vaults, and the digital closing process. And he previously was senior vice president at DocMagic, where he was responsible for digital mortgage platforms. I wanted to start, Jonathan, by talking a little bit about your origin story, if you will. My understanding is you worked with a startup initially, so I wanted to talk about that experience and whether that's something that has relevance that stays with you in your current work or not. And if not, why?
Jonathan Kearns (
Yes, sure. So I started in this industry way too long ago, actually built an e-closing and e-vaulting platform for the mortgage industry. Came out with it first in April of 2000. So there was a few of us who did it. Nancy Alley was with me, who's over at ICE, and then Kelly Purcell. So the three of us built this technology even before the e-sign law was enacted, because if you remember, e-sign law wasn't enacted until June of 2000. So we came out with our first product in April of 2000. So we built that along the way. We sold it to Wave Systems and then stayed with Wave Systems for quite some time. And then DocMagic bought that technology in 2014. So we got to go through a lot of different phases from the startup phase all the way through. And then Wave was a publicly traded company.
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And then Doc Magic is obviously a big player in the mortgage industry. So it was great to see it mature along the way. And it's funny, we talk about on the e-closing side, there were really two phases of e-closing. There was pre-crisis because we were doing a lot of good stuff in e-closing pre-crisis. And then the crisis hit and it pretty much stopped. And then there's post-crisis, and there wasn't a lot of technology that made it through the pre-crisis that, so there was a lot of what the e-closing solutions and e-vaulting solutions you see out there are what I call Gen 2s, second generations, where the DocMagic platform is one of the few that were still, there's a couple out there still, but one of the originals that made it through that crisis for technology. So you learn a lot about that and you learn a lot about the different industry segments and how the closing process actually affects them. Because really what you're doing with e-closings is you're changing business process. It's simply just a tool to help you change and gain more efficiencies. It's a business efficiency tool. And so it's been awesome to see that. And the industry changed over time. As an example, for years warehouse providers weren't overly excited or didn't want to participate because it's a change in their business process, but they adapted and learned how to do it and got comfortable with it to now where that's a non-issue.
Bonnie Sinnock (
So I wanted to flash forward if we could, and talk now about why the digital closing process and adoption is important today. I think of digital closing as kind of the last frontier, if you will, in mortgage technology on the origination side. I wondered if you could talk about how far into the process of getting that complete we are now and what the obstacles or challenges in the way of moving forward there are today.
Jonathan Kearns (
Yeah, so we've made leaps and bounds and strides over the last two decades and really in the last five years. And the pandemic helped considerably because we were forced to get into more of a digital or remote type of closing process. We had to figure out how we were going to close loans still without being able to sit this close together. But still today there's only about 7% of the mortgages that have eNotes. Now there's much more that are done hybrid. So you can have many different flavors of a digital mortgage. So there's a lot that are done hybrid. And in fact, on a closing of a house, if a mortgage isn't involved, it's about 35% to 40% now that are actually being done with remote online notary technology. So technology's there, we've built that. It's simple. Two things, business process change. Nobody loves business process and the mortgage process is very complex.
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There are many people who touch many entities that touch that loan throughout its life cycle. So if you originate it, great, but you got the correspondent who gets it, an aggregator, a warehouse provider, a servicer and an investor, an ultimate investor and then a securitization. All of those have to be able to accept that aspect. And then you've got state laws, can you do electronic notarization, can you not? So there's all these little barriers, but the two things that when we talk to lenders are really the barriers are education, getting key stakeholder and liquidity is a electronic mortgage as liquid as a paper note, can I sell it? I need to have my outlets. I don't want to. When you get it to your capital markets desk, they don't want a loan that they can only sell the two people instead of 10, right? They normally want 10.
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So you get that and then determining all those counterparties, what we talked a little bit yesterday in the session, is that that determining, being able to determine at a loan level how that specific loan can be, it's very important to have that information because as we said, we, we've got a lot of adoption already. We've got over well over 130 mortgage companies that have done eNotes, but they're not doing a large percentage, maybe a dozen or so that are doing large volumes percentage wise on their volumes of that. And they'll do it on one loan program or this other loan program. And now we're starting to see that scalability happen with them having this information at their fingertips and more investors coming on board on a daily basis. At the beginning there was a lot of in the middle those correspondence and aggregates weren't accepting them all the way. But in the last 18 months you've really seen a change in that of a lot of those correspondence and aggregates are now accepting digital mortgages.
Bonnie Sinnock (
And we did talk at the digital mortgage conference here about that a little bit and that was what I was hearing from some of the attendees here, that they wanna have more flexibility in today's market as far as their execution and that that's been a challenge in notes and maybe to share for this interview what we talked a little bit about yesterday about what kind of the potential solutions to addressing that challenge are.
Jonathan Kearns (
Yes, really. So I think if the digital mortgage as the barrier is a wall and we just got to take 'em out brick-by-brick to bring down that wall, at some point it's going to crumble. And the next one is outlets. So we have FHA, FHA was a big one: 30% of the market is FHA. So Ginnie [Mae] now accepting eNotes is a huge deal. They just reopened that program, if you haven't heard, they opened that program in June again, so it's no longer a pilot, anybody can join it now. So that was huge because a lot of people didn't want to change their business processes for only two-thirds of their business. And what we're seeing too is that people want to see the money savings right up front. So a lot of times in the hybrid model you go change all your business processes, you do get some quality control, don't get me wrong, you're getting cost savings and business efficiency.
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But with an eNote, when you enter the eNote world, it's really easy to see the amount of money you can save just by the amount, how quick, how much quicker you can sell that loan. So when you talk to the ones who are doing large amounts of volume, their paper is taking anywhere from seven to 14 days to clear and get sold where it is anywhere from a half a day. I had one lender tell me to all the way to three days. That's a big saving. So if you're thinking, you know can save anywhere from three to seven days on your line of credit, that's real savings.
Bonnie Sinnock (
I wanted to back up a little and talk about what you mentioned before, which was remote online notarization and sort of the patchwork of state laws there. I wondered to what extent are those state differences an issue today? And have we missed our window for national legislation? Could that still be possible?
Jonathan Kearns (
Yeah, I don't think we've ever missed that window. Right, okay. So it would still help out. I think the MBA and ALTA have done a great job of working with the states to get the legislation somewhat normalized. So most states have pretty standard and comparable legislation in there, but of course it's state lawmakers, right? So they sometimes put their own little flavors on things and such. But I will tell you that the advocacy teams for this industry, ALTA and MBA specifically, do a great job in ensuring that the states aren't making mistakes. So there's some that have had to go that signed acts into law early on that had some problems. So they're going back and redoing those. But then there's some, right, they know what they're doing. Some you can do use other notaries outside states, some you can't. And those are just matter of choices.
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But the RON technology vendors are very good about keeping up with those and understanding all of the restrictions. But by far it's pretty standard across the board as far as national legislation it, it's passed the house and so we're hoping that it'll get it to the Senate and passed there. And again, MBA and ALTA are working heavily on getting that through and all as well as all of the RON solution providers. They all do a great job in lobbying that. Something that we need, if you look back when we did the e-sign law that really helped engage and understand that the e-sign is accepted and each state can enact uda but it can't be supersede e-sign. And so that's what we need, why we need state legisla or national legislation to set that common baseline.
Bonnie Sinnock (
I know electronic signatures are kind of the area where you have the deepest expertise. I don't hear as much about that today, but are there issues there that still need to be resolved outside the broader RON picture?
Jonathan Kearns (
No, other than education, no. You'll still get lawyers and compliance people who say, I'm not sure if it's legal. By and large, you're not having any consumer experiences. I mean of course there's some people who don't have smartphones still, so some people aren't going to electronically sign they want to do paper. But by and large initial disclosures I think are at 85 to 90% all done electronically now. So that electronic signatures, there's enough case study out there, there's enough case law, it's been tested and approved and all of the signature processes or solutions out there have done a great job in ensuring that they're compliant. We hit all those bumps back in the early 2000, I'd say 2001 to 2005. And really since then it's just been about education because there was a lot of case law back then and not just in the mortgage industry, outside of the mortgage industry on electronic signatures. And so they're widely used and that we've come accustomed of a fixating our consent. Because really that's what an electronic signature is. It's a sound similar process of saying, yes, I agree to go into this legally binding contract. And so we do that all the time on our phones when we download software, we agree those are all electronic signatures. So we don't really have that aspect to, again, sometimes there's education aspects to it, but other than that, from a legality standpoint it's rock solid.
Bonnie Sinnock (
Are there many or any sort of paper out challenges remaining in the closing process?
Jonathan Kearns (
Sure. Again, so the process is there, but there's always people in the process. So just like when you do a closing, everything's great, you get to the closing table and the closer themselves doesn't want to do it right because they're not used to it. You have that same thing of papering out and then how does that actually work when you've got an electronic mortgage that you then have to paper out, you need to process around that and then because you're selling it and because it is a negotiable instrument, it's true liquidity, then you need to have a understanding with your trading partners. Because it's not a standardized process yet, right? All the trading partners, each one's going to be different. So the GSEs don't really do paper out in their aspect. It's more so on the non QM type stuff or other investors that aren't accepting eNotes at this time. But you just got to work through that process with them. But it's not a huge standardized process on how that works. Technology's there, the MERS e-registry supports it, how to do it, the legal framework is there. It's just business partners. It's the people being comfortable with it. Just because it's legal doesn't mean your compliance department's going to be okay with it.
Bonnie Sinnock (
Right. Is there work at MISMO on standardizing that process more? I know MISMO looks at both the data standards and the operational standards. What's the progress like there?
Jonathan Kearns (
So we're working on that with the industry. And again, MISMO, while I work at MISMO, we don't create the standards. It's the industry that comes together and creates a standard. So it is something that they work on in what's called the e-vault/e-doc interoperability work group. They tackle these challenges when real world problems come up. It's exactly what this community's built for: Hey, we're having this problem, we've had this paper-out process. So it's something that they're working on right now. I think we're making great progress on it. We're hoping that that will become obsolete and in the next number of years where everybody's just accepting digital mortgages. But the reality is right now some people aren't. And so we do need that paper out process. So we're working on that. But you're right, we work on, obviously MISMO is known for its data standards, but we do work on operational things.
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There's all sorts of different things, best practices, checklists even legal language... In 2019...President Trump signed a Taxpayer First Act. And that had huge ramifications for us in this mortgage industry because we use that the tax transcript in the loan file and we share the loan file with everybody. So we had to let the borrower now know that we are sharing their tax information with third parties. And so the industry came together and did that. So that was a MISMO effort. So it's just collaboration to come in and do that together. There's lots of that nature that we're working on to do to streamline the process. The loan, the production cost of a loan is sky high. It's at an all time high for sure. Now there's only so much we can do with that in standardized standardization because a lot of that is LO compensation.
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So not much a standards body can do about that. But we can really work on trying to standardize processes and work on how to resolve the exception processes that cause a lot of money. But also we spend an enormous amount of time, energy, and money in this industry verifying data...The checker checks,the checker checks the checker. And so that we're trying to figure out ways and work on ways that we can really solve that issue. Because what is the system of record in a mortgage? It's the documents...but we're never making the decision off of the documents. We're making decision off of all the data we trade. And so we've got to do all this verification of this. So what if we could have the documents and the data just travel together and we could create a seal around it that has a level of insurability that this data has not changed. So that's really what we're working towards. So that way now we have the ability, we don't have to spend all of this money checking and verifying and looking at the different data against the system of record, which at this point is still, well it's the documents, paper or electronic.
Bonnie Sinnock (
Yes, I wondered how much progress are you seeing in, we hear a lot of buzz around income and asset verification. There's some collateral verification. A lot of things have made their way into the data validation world. But I was hearing adoption is still somewhat limited. And maybe, tell me if I'm wrong, but also that part of the issue is that consumers want one process where they could maybe pull all their underwriting data at once and everyone's working on that. It's my sense, for sure, but I wondered what your view of that process was.
Jonathan Kearns (
Yeah, so you're absolutely right. That's one of the biggest challenges here. And as a consumer and even as a lender or an underwriter, I'd rather get the information from the source. And the source isn't the borrower. The source is not the borrower, the source is the bank, the source is the employer. Those are the sources. That's where we want to get the information from. But it is a challenge because of all of the consumer protection laws that we have in place and rightfully so, we need them. But it makes it the process a little bit more difficult to gain access to that information. So there are many entities, MISMO included, that are working on how can we make that more expandable, think the borrowers want it, we're all used to it today we all log in Venmo, we attach our bank accounts and we go through Plaid and technologies of that nature.
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If you use a FormFree or even Rocket Money, which used to be Truebill, I use that. I connect up, I connect all my accounts, we all do it now. So it's not a vast departure, but getting that information is, from my understanding, the hits that we can actually get. So we need more data accessible to really make that valid. So there's a lot of entities working on that. I don't think it's a technology problem. I think there's a lot of great technologies out there we're working on... There's things that standardization can help [with] and we don't have a data standard out there, but [we're] getting the groups together and pushing towards and getting more open standards from accessing the information. So it wouldn't be a MISMO standard, but it's getting standardized on how the sources let us gain access to that information.
Bonnie Sinnock (
I had heard that that was one of the challenges, that there's sort of a piecemeal approach to that right now, for sure. And that's another place where standards can come in too.
Jonathan Kearns (
Exactly...The challenge with that is so standards can definitely fix that. The challenge is most of the people who own that data aren't mortgage, right? So the data's different than the mortgage data. So we're looking to how do we standardize there? There's a couple standardized bodies in ...financial services for the banking side, but then you've got the employment side and then you've got the tax side. So there's all these different parties to it. It's not just, it'd be easier if it was just all mortgage information, but it's definitely more consumer information at the end of the day.
Bonnie Sinnock (
And it did sound like even though the question of "Is there a privacy concern here?" when you look at adoption, right, are the consumers worried about that? It seems to me that maybe is less a cause [for concern] than wanting all the information in one place. You can tell me if you think differently ... it looks like based on our survey, there's actually a high rate of people using really insecure methods to submit their documents. They're texting over a PDF or their photo of their document or emailing it. Totally. Even though there is the predominant method is I guess sending those same documents through a secure system is my understanding.
Jonathan Kearns (
Yeah, you're spot on. The technology's not the problem. It's we're doing it way more insecurely right now. So gaining access to that information to let those third parties, you're already giving them the information. And me as a borrower, again, I don't want to do it, go to my bank, get it, do that. We already allow that. So there's the technology exists, but you're exactly right, you're spot on
Bonnie Sinnock (
For the industry side. Does MISMO get involved in the standards for security protocols or is that kind of outside your scope?
Jonathan Kearns (
Thus far it's been outside our scope. Rick Hill had been working on that for years on InfoSec security standards. It's a high cost of getting that done every year and things. We work on things inside a certain security standards inside a certain initiative such as RON right now we're updating the RON standards and we're having a great debate on what should be the identity proofing the standards right now is KBA and credential analysis. And we're looking at are there better technologies out there that can do that now? Cause that was, even though those standards came out in 2019, they were really finished right in 2017. So they're five years old. So the RON industry has matured, but as a whole, we don't do this junk at this point. Security infrastructure when we do our certifications. So if you're not aware, we do e-mortgage certifications, we have a RON certification platform certification, we have an e-closing certification and coming in 2023 will be an e-vault certification. And so around those, there's certain security measures, two factor authentication, how you do it, but not across the board. But it's definitely something we're interested in because lenders have to do a lot of that and report into a lot of different entities to show that they comply. So it'd be great. And technology partners too. It'd be great if we could standardize that process.
Bonnie Sinnock (
And when you mentioned that it has a high cost, I do recollect, I've heard that from some mortgage companies that it can really blow out your budget if you have an incident or just to have the security in place. But having the security place is preferable to having an incident.
Jonathan Kearns (
For sure. And that really changed over about three years ago where security, it was almost like insurance. The threat landscape changed completely in our world where once the ransomware started, so then you had to have the security, it wasn't a nice to have anymore because before that it was like, okay, yes, they might steal some data, which is a big deal, don't get me wrong. But that's a lot different than if they encrypt all of your data and you're out of business. So the threat landscape changed completely about three to four years ago. And that really changed not only lenders but technology platforms on what they had to do in the security we had to go through in order. Even if you go on your phone now, mean three years ago you hardly ever had a passcode to get into your phone or face id. Right now everybody's got it. It's a requirement. So same thing on that, everybody's used to multifactor authentication, everybody's used to going into their VPN or anything of that nature.
Bonnie Sinnock (
You mentioned e-vaults and that definitely seems like an area where you would have security issues and other challenges and it looked like that was one of your areas of expertise too. So are there particular current issues there that you would speak to?
Jonathan Kearns (
I think the biggest issue we have from a security aspect, they, all of the vendors do a really good job. They understand their role and their role of an e-vault. So that's the difference between, the difference between a document management system and an e-vault is an e-vault maintains the integrity of that electronically signed document. It knows it's signed it and it can tell you whether it's been modified or not. And in the mortgage industry it's hugely important because those are money. Those notes, the notes in the vault, that's real dollars and you're talking millions and millions of dollars. So they do a good job on that. Where we really run into challenges in the industry from an e-vault perspective is interoperability. All of the eNotes, right, are MISMO SmartDocs. But that standard was created 20 years ago. I mean, it's a version one, we're on version three now and it's still version one.
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And so when we created standards back then, there [were] a lot of options I would say. So not everybody creates SmartDocs the same way and thus how you validate the SmartDocs and the data is remember SmartDocs have the ability, we talked about the data, traveling with the document and be able to verify that SmartDocs do that today, the eNotes are that, right? So they're all the e-vaults verify that information programmatically to ensure that it's a valid SmartDoc. And the data section where it says your loan is 5% in the view, it also says 5%. So the eNotes have that ability to do that today. So they do that great. But we might have challenges. The challenges come into play. So I put 5%, I might put five, zero, zero I might just put five, I might put the percent in the value and not all these little crazy things that the interoperability. So that's really the challenge we have with e-vaults today. Security-wise, they're all pretty good. They do a good job. Again, they understand their role maintaining the integrity of that electronically signed document.
Bonnie Sinnock (
Okay. You mentioned a word before that I'm going to take and put in a totally different context. You mentioned modification and it got me to thinking about eNotes used in the servicing world for that purpose. We've seen Ginnie Mae make some changes around that. What's that today? What's the current state of the use of eNotes and modifications? How is that going? Are they broadly used in that context? Are there challenges to work out there?
Jonathan Kearns (
I think it's still getting broad adoption across that. I wouldn't say there's challenges. In fact, last year we did an initiative inside MISMO just to create a flyer that says what you can do e-mods on and what you can't do mods on. Because there's different, even inside an company, and since you mentioned Ginnie, I'll use them. There were certain ways you could do mods and certain ones you couldn't do e-mods on. So there was a lot of confusion on what you could [do.] And if we're confused human nature is to go the path of lease resistance, then I'm not going to do it. So that's what we decided to do that and that changes all the time. People get more and more comfortable with doing that. I think the first aspect was we don't want to push this on the borrowers or the homeowners, but the homeowners want it.
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There's been a lot of companies that have been doing it for decades since the first crisis that they've been doing electronic modifications and sometimes the investors don't even know it, right? Because again, electronically signed documents are easy. So you're starting to see more and more of that now. We ramped up a lot because we thought maybe in the forbearance with all the forbearance that there was going to be a lot of foreclosures and thank goodness we didn't have to go through that. But you definitely see a lot of platforms now specifically doing e-notarization and utilizing e-modifications. There's a couple companies that focus on that.
Bonnie Sinnock (
Right. I was thinking of some of the fintechs in at least one of 'them that I can think of in the servicing space that do focus on that. And they seem to be a little surprised that the uptake was as strong as it was in that area.
Jonathan Kearns (
Yes, well it makes sense for that industry. You've got a bunch of people who are working with these borrowers and a lot of times when you're trying to help that homeowner stay in their home and they're on the default side, there's a reason why they're typically defaulted. Their life's not going the way they want it to go. Nobody wants to lose their house. So they've got a lot of other things to worry about at that same time typically. So being able to get them in that space and just get them to close the documents, because it's always for their benefit, I should say most of the time, it's for their benefit, right? We're trying to help have homeowners stay in their home. And so that, I think that's really helped out because you're not chasing the people down anymore. It just makes logical sense to be able to do that electronically than do it paper.
Bonnie Sinnock (
So I thought maybe to close, we'd kind of come fill full circle and come back to that fintech topic, kind of where you started in the business. As you look at what the mortgage fintech landscape is like today, how do you think it's different and what do you think today's fintechs are doing right and what challenges are you seeing in that space, if any?
Jonathan Kearns (
Yeah, so the biggest challenge we see is interoperability. So what we see is that's why the cost of loans are so high, is because the amount of data we trade, again, outside LO comp, <laugh>, the data, we trade, we have all these different integrations, but it's the same data set we're sending. We're sending loan information. There's not much different. Now you may need this little piece over here and this little piece over here, but we need to streamline that process and then we need to make sure that we're verifying it. So that's what the fintechs should be focusing on now. So we talked about verification of income and assets. That's a huge piece that we need to solve for the industry. And then we need to be able to trust our data better and build simpler integrations. We shouldn't have to have, I remember when I was at DocMagic, I think we had over a hundred different integrations. You shouldn't need that.
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I should send, if I need loan application, I send, if I need selling data, I send it here. Underwriting, we should have maybe a dozen data sets and that's it. So that's what we really need to do. Standardize the interoperability portion of how we trade data, create a trust process. And I talked about one way to do it, but there's many ways maybe I was on a call, we have what's called senior advisors, and it was a very large liner. He says somebody should stand up just a centralized repository to have all the data we all feed the data in so that we have one source of truth. It's an interesting thought. The industry doesn't love doing that, sharing that data, but if you can create that self-contained document and data that's verifiable, then you've really solved a problem there. And now you have the ability to create more seamless interoperability.
Bonnie Sinnock (
All right, great. Well thanks. I think that's all the questions I have for today. Thanks for joining us.
Jonathan Kearns (
Thank you for having me. It was a pleasure.