Of all the innovations in the mortgage industry over the last 30+ years, few have the potential to be as transformative as electronic promissory notes, or eNotes.
As borrowers, lenders and investors embrace a fully digital mortgage process, eNotes represent an important milestone in those efforts, serving as digital evidence of what will eventually become an entirely electronic transaction. The mortgage industry will finally move to an electronic means of delivering and trading value among counterparties, nearly three decades after similar transitions occurred in the securities markets.
While eNote adoption has grown rapidly in recent years, wider adoption remains contingent on several factors, including eNote acceptance by the five “pillars of liquidity” – the government-sponsored enterprises (Fannie Mae and Freddie Mac), Ginnie Mae, commercial warehouse lenders, the Federal Home Loan Banks (FHLBank System) and private capital markets funders. The GSEs essentially established the market for eNotes but expanding to the other four liquidity sources will be critical to continuing this trend.
To achieve a situation where eNotes serve as fungible evidence underpinning the mortgage loan asset, all five pillars of liquidity must be actively engaged in the collateralized lending, funding, investing and trading of eNotes. This also helps drive further adoption by lenders, who require these financing options to drive business.
MERSCORP Holdings (MERSCORP) is working as the industry’s central utility with these five pillars to increase liquidity for registered eNotes by establishing protocols to manage risk, evidence collateral positions and collaborate with key stakeholders to reduce transaction “friction.”
eNote adoption on the rise
Like most aspects of the digital mortgage, eNote adoption is a cyclical process: as lenders and investors use, accept and purchase eNotes, they become more standard, and as eNotes become more standard, more lenders and investors use, accept and purchase eNotes.
Even though eCommerce laws such as the federal Electronic Signatures in Global and National Commerce Act (ESIGN) and the Uniform Electronic Transactions Act (UETA) have been in place since 2000, the acceptance and purchase of eNotes have accelerated only in the last few years, as the industry recovered from the financial crisis and subsequent regulatory changes.
Now that trend continues to quickly accelerate after lenders and consumers enacted social distancing, including a preference for remote closings, this spring in response to COVID-19. As a result, there has been a 1,300% increase in companies beginning the process with MERSCORP to integrate their operations to eNotes and a surge in the number of companies transacting on the MERS eRegistry.
In nine of the last 12 months, MERSCORP has seen record growth in eNote registrations, including a record 36,744 eNotes in June 2020. However, for the market to sustain this increased interest in eNotes, the five pillars of liquidity must increase their eNote funding and purchasing capabilities, a development we expect to advance significantly during the next six months.
As Fitch Ratings noted in its May 20 special report, “eMortgages Offer Operational Benefits to US RMBS,” it anticipates that “the operational benefits offered by eMortgages are likely to drive increased near-term usage in private label securitizations (PLS)” and that “eMortgages will gain traction post the coronavirus pandemic as originators address remote ways of conducting business.”
Maximizing eNote readiness with MERSCORP
As noted earlier, the symbiotic nature of eNote adoption requires action by both lenders and these “pillars of liquidity.” Given its role in driving eNote adoption, MERSCORP is uniquely suited to help both sides of this equation take the necessary steps to make eNotes and eMortgages a reality.
To date, Fannie Mae and Freddie Mac are the largest buyers of eNotes, providing a significant source of eNote liquidity. Working with MERSCORP and eVault providers, the GSEs have recently established an accelerated onboarding program to streamline the process of eNote adoption for its seller/servicers.
This revised program enables companies that are properly prepared to become active on the MERS eRegistry to do so in just two weeks. This change also provides another incentive for lenders to deploy the next-generation tools and infrastructure to remain competitive.
In addition, other pillars of liquidity are also adapting their policies and technology to include eNote acceptance. For example, Ginnie Mae’s Digital Collateral program is the culmination of nearly two years of effort to build out infrastructure to accept digital collateral for Ginnie Mae securities.
MERS has also been partnering with the FHLBank System to facilitate its strategy for the use of the MERS eRegistry by FHLBank member financial institutions wishing to pledge acceptance of eNotes as collateral.
While the nearly 30 private investors and warehouse lenders ready to fund and purchase eNotes today represents a marked improvement from two years ago, the industry has not yet achieved widespread adoption or seen companies purchase eNotes at scale.
To address this gap, MERSCORP is working with warehouse lenders and investors on education initiatives focused on the competitive advantages that funding and purchasing eNotes deliver.
Closing the loop
eNote adoption has accelerated in recent years based on a solid foundation that eNotes are not a recent mortgage technology advancement and the eCommerce laws supporting the legal validity of eNotes have been in place for over 20 years. However, new records for eNote adoption have been set in 2020 because now the mortgage industry is making a concerted push for digital mortgage adoption.
As the increased interest in eNotes comes to fruition, it will be important for the five pillars of liquidity to be ready to fund and purchase eNotes as the market shifts.
By partnering with the five pillars of liquidity to advance the use, acceptance and purchase of eNotes, and working with lenders to drive the implementation of eNotes, MERSCORP serves an important role in increasing eNote adoption in the mortgage industry.
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