The Evolution of eMortgage, Part 1: A Short but Rich History

It all started with software.

The late ‘80s and early ‘90s marked the beginning of the development of mortgage technology. Computers had hit the mainstream nearly a decade before, and newly-founded tech companies were hard at work figuring out how they could develop solutions that would make the mortgage process more accurate, efficient and manageable.

At first, these technologies were relatively rudimentary, providing lenders and servicers with basic capabilities such as the ability to generate documents over the computer and print them out for borrowers to sign. Since then, mortgage technology has undergone a remarkable evolution, transforming into a robust tool that, at its best, enables mortgage industry professionals to complete the entire mortgage process from start to finish without having to print or put a pen to a piece of paper.

At its essence, that’s what a full eMortgage is: the electronic completion of the entire mortgage documentation and closing process, including document generation, delivery, signatures, notarization, authentication and validation.

The history of eMortgage starts with the development of the technology that makes this process possible, but it certainly doesn’t end there. To understand the state of eMortgage today and where it’s headed into the future, it’s important to delve into its complex and interesting past.

1999: MISMO is established

1999, the Mortgage Bankers Association (MBA) founded MISMO, the Mortgage Industry Standards Maintenance Organization. MISMO provided a more formal organizational structure for a group of industry entities (primarily technology vendors plus Fannie Mae and Freddie Mac) that had been meeting informally as XML Mortgage Partners to establish early data standards with each other.

MISMO was established with the purpose of creating and maintaining a universal set of XML data standards and business data definitions which would allow all participants in the mortgage origination and closing process to “talk” to each other in a common language, rather than developing a unique data interface for each new business partner.

The founding of MISMO was just the first step to creating a larger framework for eMortgage. Its genesis demonstrated that the shift to electronic processes had now become prominent enough to warrant a set of widely accepted industry guidelines.

1999-2000: ESIGN and UETA passed

Early eMortgage practices weren’t officially legally recognized until 1999-2000, when two pieces of important legislation surrounding eSignatures were put into effect: The United States Electronic Signatures in Global and National Commerce Act (ESIGN) and the Uniform Electronic Transactions Act (UETA).

UETA, completed in 1999, asserted that electronic documents and eSignatures held equal legal weight to paper documents and physical “wet ink signatures.” It is a state model law and has now been adopted by 47 states (the remainder having passed their own eSignature laws), paving the way for mainstream acceptance and use of electronic documentation and signatures during mortgage transactions in the United States.

State by state adoption of UETA was initially slow, and so Congress and the Clinton administration created a national eSignature “safety net” by passing the ESIGN Act in 2000. This law established the national legal validity of eSignatures in all states, even those that had not yet adopted UETA, paving the way for interstate commerce using electronic records and signatures.

Together, ESIGN and UETA established that anytime a physical document or handwritten signature is required to fulfill the terms of a transaction, electronic documents and eSignatures can legally be substituted.

2001: MISMO adds eMortgage

The passage of ESIGN in June 2000 sparked great interest in the use of eSignatures for the mortgage process. Fannie Mae and Freddie Mac both saw the potential value and cost savings of eMortgages, and each pursued their own early initiatives. But they also quickly came to realize the benefit of having open eMortgage standards and guidelines that would span the mortgage industry, rather than creating their own proprietary requirements.

This was the genesis of the eMortgage Workgroup within MISMO, where all participants could contribute ideas and build common eMortgage standards toward the future. The well-known MISMO SMART Doc® electronic document format, in fact, was originally developed by a Fannie Mae consultant, but Fannie Mae then volunteered it to MISMO, to be developed as an open industry standard moving forward.

Many of you are familiar with MISMO’s thrice-yearly Summit Meetings (originally called Trimester Meetings) in January, June, and September. But during those early years of eMortgage, there was so much work to do that the eMortgage Workgroup also held “Interim Meetings” – working meetings between each full MISMO meeting to further the development of eMortgage standards and guidance.

2002: PRIA

Many representatives of the property records industry participated in those early days of MISMO, and they eventually formed a “sister” standards organization for their industry needs – the Property Records Industry Association. PRIA has added great value to the eMortgage framework, especially through their development of data standards for eRecording that allow recordable documents to be submitted and recorded electronically, greatly accelerating the traditional paper process.

2003: eNotes

The mortgage Note presented a special challenge. Legally, the owner of a paper Note is the entity that holds the original, ink-signed paper document. A well-established industry was in place to originate, manage, transfer and hold those original paper Notes on behalf of originators and investors.

But how can you check whether an electronic Note is the original? Each copy is digitally identical to the original. The consumer lending industry has evolved a system where each eVault carefully holds their own “original” eNotes and programmatically watermarks any copies that they send out externally. But since mortgage loans involve much greater debt obligations, some lenders and investors weren’t comfortable with that, and wanted a higher degree of assurance against tampering or fraud.

To vet this question, MBA created the “National eNote Registry Task Force” – a broad group of industry participants who came together several times to develop the concept of a single eNote registry that would be used to identify the legal ownership of each electronic Note that was originated. The Task Force ultimately published a National eNote Registry Requirements Document, and MERS announced that they would build and operate such a registry. It opened in 2004 as the MERS eRegistry and has been the central registry for eNotes ever since.

2006: ESRA and SPeRS – multi-vertical eSignature support

While the passing of ESIGN and UETA legislation was a crucial first step for establishing a legal infrastructure around eSignatures, the country still had a long way to go when it came to developing standardized practices and legislative frameworks that would enable the full realization of eSignatures and their adoption in the mainstream.

Enter the Standards and Procedures for Electronic Records and Signatures (SPeRS), an educational resource and set of eSignature guidelines and best practices developed by participants from multiple vertical industries.

Around the same timeframe, the Electronic Signature and Records Association (ESRA) was born. Founded in 2006, ESRA was founded specifically to address the compliance and legality of eSignatures. It acts as a vehicle for legislative advocacy on multiple levels and strives to actively educate legislators, lenders, investors and the general public about the legality and validity of electronic documents and signatures.

Since its genesis, ESRA has been instrumental to the development of legislation that has empowered digital mortgage practices to grow and thrive. But its work is far from done.

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It took the development of many technologies, standards and laws for eMortgage to evolve to its present state—that is to say, more flexible and comprehensive than ever before. And while the mainstream adoption of full eMortgages has become much closer, there are still obstacles to be overcome before this feat can be achieved.

Stay tuned for the next part of our blog series, which will cover the state of eMortgage today.