WILLIAM DRAYTON, U.S. CONGRESSMEN (1825-1833) AND FORMER PRESIDENT OF BANK OF THE U.S. (1840-1841), said, "Change starts when someone sees the next step." According to the Mortgage Industry Standards and Maintenance Organization (MISMO), SMART docs (securable, manageable, archivable, retrievable and transferable documents) are the next step in creating a completely paperless e-mortgage process. "[Not] since the widescale adoption of LP [Loan Prospector[R]] and DU [Desktop Underwriter[R]] will a technology change the way we do business more than SMART docs," says Tim Anderson, executive vice president of e-mortgage solutions at DocuTech Corporation, Idaho Falls, Idaho. But what exactly is a SMART doc, and what will it take to implement it into today's mortgage process? And is it something investors would be smart to latch on to, or just another hyped technology doomed to wind up with hundreds of other discarded bright ideas?
The key to successful e-mortgages
Everywhere we look, we see evidence of an increasingly electronic world. We contact our friends using e-mail more than the telephone, post photos of the kids on our home Web sites and look on the Internet for information rather than depending on a brochure. But buying a house without ever putting pen to paper? Surely that's taking it too far.
Yet every day we hear more evidence supporting the move to a completely electronic loan process--from application to closing. In January of this year, MISMO announced its industry standards for e-mortgages, including specifications and supporting documents for implementing paperless mortgages with digital signatures. Fannie Mae and Freddie Mac have pushed the idea forward by publishing guidelines that lenders can implement to send e-mortgages their way.
Freddie Mac notes that electronic mortgages "have the potential to simplify and streamline the mortgage process by reducing administrative costs and processing time, as well as improving quality control, drastically reducing paperwork and minimizing manual steps." (Freddie Mac News Archive, March 5, 2001.)
In addition, the secure and legally binding electronic signature is now a reality. According to CBS Market Watch (January 31, 2002), Quicken Loan customers were able to complete and electronically sign their mortgage applications fully online six months ago. Even leading county recorders are getting into the act, accepting property files electronically and looking to implement technology that will allow electronic deed transfers.
Meanwhile, low interest rates and the refinancing boom, together with budget cuts and increased demands, are forcing a widespread need for technology that can shorten, streamline and improve the cumbersome mortgage process while at the same time reduce costs. According to first-half results from the 2002 Mortgage Bankers Association of America (MBA)/STRATMOR Group Peer Group Roundtable study, lenders are spending between $800 and $1,000 to process, underwrite and close/fund a loan. In addition, they are spending $130 to $175 to post-close, ship and put a loan through quality control.
"Given all the investment in production technology and the benefits afforded lenders in the sheer scale of this spectacular refinance boom," says Linda Simmons, Amelia Island, Florida--based industry consultant with the STRATMOR Group, "one would anticipate a reduction in these costs over a period of time. Yet we've seen an increase in fulfillment costs over the past five years [15 percent], including a slight increase in 2002 over 2001.
Some of those increases may be due to the early efforts to create electronic files before the technology was ready. With today's inexpensive printers, fax machines and copiers, a lender could scan the documents and produce a so-called electronic loan file--but it would be electronic only in name rather than function. This is so because what is created is simply a static computer image rather than an actual electronic representation of the data. This image contains a one-time picture of the data and document, which cannot be manipulated. The result is a static file that fails to streamline the process or solve the data collection issue.
"You have not changed the process since it's still based on and around getting paper forms in the first place," says DocuTech's Anderson. "In a shrinking margin business, the only way lenders are going to make additional money is to invest in business-changing technology that actually reduces costs and steps."
That business-changing technology, according to Simmons, is based on something like the SMART doc approach. "One of the more effective ways to lower these costs is to reduce the need to screen the data and documents, and enhance the means to keep data and documents in sync and deliverable simultaneously," she says. "The answer is something like e-mortgages and SMART docs."
What is a SMART doc?
In simple terms, the SMART doc is a way of electronically representing a mortgage document--both in appearance and data content. MISMO defines it as an electronic document that binds data and presentation together, creating a single immutable file in which the integrity of the data can be guaranteed. The good news: It ensures that what the borrower sees and signs on the computer screen is the exact document that will be stored electronically as well as the exact data used for...