eMortgage: A Scary Tale for Entrepreneurs on the Barriers to Technology Adoption
It's Halloween, time for scary things and a good time to be reminded that the technology journey isn’t for the faint of heart. As the Gartner Hype Cycle tells us, the path to technology usage and adoption isn’t smooth – its filled with a long anticipatory climbs and scary plunges, only to be followed by additional anticipatory climbs with their own mini plunges, and often the entire original concept of the product-market fit is turned on its head before emerging – and that’s for the technologies that are successful.
And so, with Halloween coming up and several recent positive posts about the promise of technology to change housing, I thought is was worth a pause and inject a scary tale into the mix. So, grab your hot cider and gather around the campfire and enjoy the ride.
The Birth of a Digital Asset
In 1999 the Uniform Electronic Transactions Act (UETA) was adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) and on June 30, 2000 Congress enacted The Electronic Signatures in Global and National Commerce Act (ESIGN) to facilitate the use of electronic records and electronic signatures. These laws set the stage for movement from paper contracts and assets to electronic assets. The Promissory Note and the Deed of Trust could now be digital and therefore, so could the entire mortgage process.
The term and the concept of an eMortgage, a mortgage where all the loan documentation, including the Promissory Note and Deed of Trust is created, executed, transferred and stored electronically was born.
This was the height of the dot com bubble in the United States and technologists from the mortgage industry and technology firms from outside the industry who wanted to disintermediate existing players raced to the market with solutions. The benefits to electronic records seemed clear – electronic records were more efficient and cost effective than paper for institutions and consumers.
It takes a Village to Raise a Digital Child
There were clearly some hurdles that were identified early and Industry players put in place infrastructure such as the MERS eNote Registry and eMortgage Industry Standards so that the digital asset could be exchanged by supply chain partners and was defensible in court. Everything was set and a few early adopters made it to market. Unfortunately, by early 2003, the dot com bubble had burst and along with it most of the eMortgage efforts.
Nevertheless, lessons were learned from the early adopters and those lessons were incorporated into the next iteration of products and by 2005, the Government Sponsored Entities (GSEs) were running a few scattered pilots and programs with some new early adopter lenders – mostly in the wholesale channel, largely with the value proposition of a faster closing for mortgage brokers. Then the 2008 mortgage crisis hit and the industry’s focus moved away from the wholesale channel and business generation, and toward risk management. By 2010, eMortgage was on life support.
In 2014, a new push for eMortgage came from an unlikely Government source – the Consumer Financial Protection Bureau (CFPB). The newly formed agency was working on the Know Before You Owe Rule, and had come to the opinion based on their research that Electronic Mortgage Closings Benefit Consumers. They launched an eMortgage Technology Pilot and they created a requirement for all lenders to provide closing documents to consumers three days before closing. To implement this cost effectively meant that lenders and closing agents all had to update their systems, and all needed the capability to share electronic documents and receive electronic signatures. There were new evangelists and once again eMortgage was on the anticipatory climb portion of the hype cycle.
However, even after the implementation of the ruling and even though digitization of the front end of the process had accelerated rapidly during this time, adoption of eMortgages was extremely slow. In 2016, Freddie Mac and Fannie Mae jointly fielded a survey to determine what was holding back lender adoption. The key issues that emerged were:
the number of entities in the supply chain that interacted with the asset, and the lack of adoption and consistency of process and technology across the entities
the challenge of recordation of the electronic property lien
the lack of standards for electronic notarization
The front end of the process that was largely in control of the lender was both easier and lower risk to digitize, but also more immediately provided returns in customer acquisition. On the back end, the process was still manual and paper driven.
Technology vendors, the Property Records Industry Association, the Mortgage Bankers Association’s Industry Standards Organization (MISMO), American Land Title Association the GSEs, and more all continued to do the painstaking work state by state, county by county, to resolve the issues identified. New lenders - this time technology natives like Quicken Loans - emerged in the space, but once again, now 16 years into the journey, they were still early adopters.
Finally Achieving Product /Market Fit
The coronavirus pandemic has finally been the impetus for widespread eMortgage adoption both by steamrolling through various local concerns related to remote notarization and electronic recording, as well as creating incentives for resistant supply chain members to adopt the technology. For eMortgage adoption, like many digital technologies, the coronavirus has accelerated the next several years of planned adoption all into the near term to meet the need for both employees and customers to conduct business electronically. However, this wouldn’t have been possible if various players along the way had not continued to have a vision of this technology and continued to chip away at the barriers – one by one.
Like most network-based technology adoption, organizational adoption, begets more organizational adoption. Each node on the supply chain that adopts makes it easier and more cost effective for the next organization in the supply chain to adopt. The journey isn’t over, but after years of technology firms pushing the industry, the industry is now pulling. After all of these years there may finally be Product/Market Fit.
One day we will all wonder why we had to:
Take time from work and drive to a closing table, sitting for several hours to read a stack of documents that we had never seen before
Initial every page and sign dozens of times an incomprehensible stack of legal documents,
Only to have those documents scanned to turn them back into digital form for use – with people painstakingly checking that the data matched the documents,
While keeping the paper documents in expensive physical vaults to be enforced if ever needed
Maybe that time is now
Lessons for Digital Asset Entrepreneurs
I tell this tale, not just to scare the reader this Halloween, but because there are similarities in eMortgage to other digital assets, like tokens. What lessons can be learned for potential blockchain solutions focused on digital assets?
Lender decisions on technology implementation focused on a digital customer experience, rather than the backend infrastructure. Business cases based on revenue generation were significantly more compelling than cost cutting
Customer facing technologies were largely completely within a retail lenders control. Digital assets involve multiple trusted supply chain partners (warehouse lenders, servicers, document custodians, investors, etc.), and coordinated adoption with a consistent process and technology created challenges
Digital assets still face a patchwork legal framework across the U.S. – differing electronic notarization rules and eRecording rules introduced risk and complexity into adoption
The painstaking groundwork over two decades was not wasted; it enabled the adoption to happen within the window of opportunity when market conditioned changed
The early adopters of eMortgage that stayed with the program were companies that had compelling, albeit sometimes niche product/market fit. Finding the right niche with a compelling value proposition to gain a foothold is key to incremental improvements in the technology and process, while waiting for market conditions to become favorable
Digital transformation of an asset that is heavily traded and must be defended in court required an organized consortium of actors in both the public and private sector to be successful in a systematic way
In the end, as in all horror movies, for the survivors the dread clears, the music swells and humanity is able to emerge stronger and better for the fight.
I know some of you have been in the eMortgage world more continuously than I have. What thoughts do you have for people looking at other digital assets?
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Article by Ann Epstein