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Posting for
Tuesday, July 28, 1998
by: Bert Rush
brush@firstam.com
ELECTRONIC MORTGAGE ORIGINATIONS/ELECTRONIC COMMERCE/ESCROW AND CLOSING
One of the more "problematic" facets of that subject we've come to call "electronic commerce" is electronic mortgage originations--done over the internet.
Electronic originations concern us because the lender has no person-to-person contact with the borrower. This may invite frauds and forgeries. Also, lenders doing business on the internet typically compete on rates and terms--so they don't offer much customer service. The job of explaining loan terms and answering loan-related questions falls back on the escrow or closing officer--a time-consuming and risk-laden responsibility. And, these originations may generate more than their share of requests for "accomodation" services.
So it was good to read today--in the latest issue of the MBA's "Real Estate Finance Today"--that electronic originations may not be catching on, at least to any great extent.
(As you may have noticed, I haven't been able to transmit attachments for several weeks--due to a software mix-up we're still trying to fix--so excerpts from the REFT article are reprinted below.)
From Real Estate Finance Today, 7/20/98, "Currents--Of Baby Boomers, Generation Xers," by Marshall Taylor, p. 8:
"Although advancing in years, baby boomers will still shape housing and mortgage dynamics into the new millenium. That's some of the news from Fannie Mae's 1998 National Housing Survey, conducted by noted pollsters Peter Hart and Robert Teeter.
The survey also found surprisingly that Generation Xers, the twenty- and thirty-somethings, share many of the boomers' views regarding reverse mortgages and electronic originations.
***
What was striking in the survey was that more Gen Xers, 52 percent, than boomers, 48 percent, found reverse mortgages `somewhat or very appealing.' Still, as Fannie Mae pointed out, `These findings portend significant growth for reverse mortgage lending in the decades ahead.'
However, Fannie Mae found that `home equity does not at this time seem to be a large factor' in the retirement planning of boomers and Gen Xers. Only 8 percent of boomers and 6 percent of Gen Xer say that home equity will play a major role in their retirement finances. Instead, the generations evenly see home equity lending as a prime vehicle for renovating homes.
The conventional wisdom that Gen Xers, most of whom save grown up using PCs, would welcome electronic commerce in mortgages was shattered by the survey. `While more Americans today have access to the internet than in 1996 [52 percent versus 36 percent], there has been no increase in the percentage who say they would likely finance a mortgage online,' the survey said. In fact, that percentage has dropped from 20 to 15.
`Interestingly, there is virtually no difference in the percentage [17] of baby boomers and Generation Xers who would try to originate a mortgage online.' So it seems lenders would do well to keep those retail branches open for those Gen Xer software developers seeking a mortgage."
I've wondered lately how internet lenders were doing in terms of customer satisfaction--maybe this is an indication. I would expect tele-marketing lenders to fare even less well than those on the internet because, I'm guessing, telemarketers offer less convenience to the consumer, and less certainty with respect than loan terms and charges. Food for thought.
Questions, comment, argument? Just punch the "reply" button and send your thoughts.
**********
Following Tuesday's posting, Keith Pearson (L.A./Glendale) writes:
I think that the internet does not necessarily open us up for more fraud. Some of the fraud prevention techniques we use on regular deals will prevent fraud on internet deals (i.e. scrutiny of the structure of the deal, knowledge of the players, mandating that money go through escrows that we trust, etc.). I recently bought a house and used Loanworks which conducts all business over the phone and through use of the mail. I never met my loan officer in person. I was not too worried about this though since Loanworks is a partly owned subsidiary of Countrywide.
The trouble here is when we ignore facts which serve as fraud and forgery red flags. Any crook can set up an operation with as much money as it takes to set up a internet site capable of luring people into their schemes. Office leases are the cost of a few desks and chairs will not defer the same people who will conduct this fraud on the internet. The only additional risk factor is that it might be harder to track the crook down after the fraud has been perpetrated. Although I don't mean to minimize this risk, the crooks usually do a few "deals" and set up shop elsewhere under a different name now.
We might consider doing internet deals with only players we know (institutional lenders with internet sites that allow loan origination) as a fraud deterrent, and/or make sure that all documents are notarized in front of a notary we trust (i.e. notary of a escrow company we do business with regularly, FA notary), and/or make sure money goes through First American or its agents before closing. I think these measures will deter most of the fraud while allowing First American to share in the shift in business to the internet. Even though it is slowing now, I believe it will pick up as it gets easier and quicker to apply for a loan on the internet, for a couple of reasons. The first is price. The internet loans are cheaper to originate allowing the lender to undercut the competition on price. The second is that GenXers are more comfortable with use of the computer and prefer that to having to go to some lenders office to sign loan docs, etc.
Reply to Keith: Actually, the only internet-related mortgage-origination fraud I've heard about thus far was an advance fee scam done in Colorado. A "real" mortgage broker advertises on the internet--great terms for people with shaky credit. On a given day or days the lender comes to town and meets with prospective borrowers--by appointment--at some hotel meeting room. The lender takes a $300 fee to process the application, then leaves town--and maybe one in ten of the applicants ever gets a loan.
The other kind of fraud--which I'm anticipating but haven't seen yet--is the impostor/forger problem. You encourage me to stop biting my fingernails.
