Digital mortgages come of age

July 2020

Covid-19 disruption has pressured industries previously reliant on manual processes to move towards new technologies that function and deliver on their contractual obligations. flow’s Janet Du Chenne assesses how the pandemic and structural changes in the US residential mortgage industry have accelerated the shift from a manual, paper-oriented and in-person set of practices to a process that utilises digital technologies

Given that technology has enabled industries to continue to function during the ongoing Covid-19 disruption, it is difficult to imagine a time before they existed. Yet it was only 13 years ago that the first iPhone launched and only nine years since Zoom first appeared on smartphone and laptop screens. Today 265,400 firms with a workforce of more than 10 employees use the virtual conference platform for remote working, a year-on-year rise of 354% for the first quarter of 20201. The impact of these life-changing technologies will continue to be felt beyond the pandemic. Digital mortgages are no exception.

Like the iPhone and Zoom, smart contracts such as Mortgage Electronic Registration System (MERS®) eNotes are relatively new as a construct although they were introduced in the US 16 years ago, under the 2000 e-Sign and Uniform Electronic Transactions Act (UETA) legislation that allowed the electronic signing of contracts such as the mortgage promissory note.

In the past two years, mortgage eNotes have surged in volume as the usage and acceptance of eNotes has increased. These tamper sealed smart contracts are stored digitally - in an eVault - in a way that ensures they have the same legal enforceability as a paper document.

MERS® – a US national electronic database which tracks mortgage ownership interests on behalf of lenders and originators, had a total of 597,139 eNotes at the end of May 2020 with 59,030 registered in the first quarter, three times the number of eNotes registered in Q1 2019.

Driving eNote adoption

The reason that a sharp rise in eNote origination began in 2018 was due mainly to the largest US mortgage lender Quicken Loans as an instigator and the willingness of several large warehouse banks to provide funding to this segment. This increased liquidity afforded by warehouse banks complemented the benefits as a quicker and more efficient way to speed up the mortgage process.

Before then, many smaller mortgage companies originated their own eNotes and sold them directly to government-sponsored agencies such as the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae).

Quicken Loans made a deliberate and strategic shift towards an end-to-end digital mortgage process2 by focusing on the eClosing platform, its borrower experience and utilising eNotes for ease of transfer wherever they were permitted by county. The lender was able to demonstrably speed up the lending process – also referred to as dwell time - by using eNotes with Bank of America Merrill Lynch (BAML) acting as its warehouse lender providing liquidity to this expansion. This pairing of non-banks with warehouse lenders is unique to the US mortgage lending space.

The continual increase of non-bank lending since the 2008 crisis drove an off- balance sheet approach to origination with warehouse banks providing funding facilities. Non-bank originated loans are packaged and securitised into the secondary market by the agencies, promulgating the creation of what is today is a market more than 90% agency-based.

In the flow article Digital homes, BAML’s Eileen Albus a Director within the bank’s warehouse lending division describes how Quicken Loans’ strategic decision to roll out an eNote/eClosing platform triggered the bank’s exploration of its ability and willingness to service eNotes. BAML engaged Deutsche Bank in this effort as a third party document custodian to implement an eVault solution to receive, house and transfer eNotes.

Chris Corcoran, Client Services Co-head in the Deutsche Bank Document Custody team“Our partnership with warehouse lender BAML helped to facilitate the process and drive eNote momentum”
Chris Corcoran, Client Services Co-head in the Deutsche Bank Document Custody team

“Our partnership with warehouse lender BAML helped to facilitate the process and drive eNote momentum,” says Chris Corcoran, client services co-head in the Deutsche Bank Document Custody team. “Before that time, when lenders started thinking about eNotes and developing them they left the document custodian and the warehouse bank lending community out of it. Neither were taken into consideration, because at that time the big banks were originating mortgages and so this whole warehouse lending community wasn't needed. Over the last 20 years the mortgage landscape has changed dramatically and they [mortgage loans] are predominately originated by mortgage companies that need warehouse lending.”

Facilitating the process

Quicken Loans’ steadfastness in making eNotes central to its overall digitisation strategy brought eNote possibilities closer to reality for the broader mortgage origination community and their warehouse banks. The Deutsche Bank Document Custody offering, which holds the collateral in safekeeping, was the obvious choice in the evolution of an eVault platform to service paper alongside eNotes in one location.

“So in a large part the change came about because the warehouse lender was able to insert itself into the mix and be willing to finance the origination of the eNote by the mortgage companies,” explains James Macmillan, Client Services Co-head in the Deutsche Bank Document Custody team. “And now all these warehouse lenders are coming to us for our expertise and what we can offer as a custodian using our eVault platform instead of developing their own.”

Since deploying its eVault with Quicken Loans and BAML, Deutsche Bank’s document custody team has received, reviewed, certified and delivered more than 200k eNotes on behalf of its clients.

Completing the eNote adoption

Until recently, only two of the three government-sponsored agencies had eNote programs that allowed these assets to be securitised into pools. US home mortgage giants Fannie Mae and Freddie Mac both self-custody their eNotes unlike paper, which is held by a bank or by third party document custodians. With Ginnie Mae (GNMA) – the third agency - on the verge of rolling out its eNote program this will further encourage market adoption. GNMA’s eNote program will rely on custodians to hold eNotes on their behalf.

Pending GNMA’s approval, Deutsche Bank will also serve as the agency’s eCustodian once it commences its eNote securitisation programme this summer. Thereafter, all three agencies will accept eNotes with Deutsche Bank’s eVault in the middle of the ecosystem.

Another milestone event was Deutsche Bank’s approval to serve as Freddie Mac’s first eNote custodian. In late 2018, the agency approached the Bank to solicit replicating its eNote auto-certification solution on Deutsche Bank infrastructure to relocate the custodial function for eNotes back to the document custodian consistent with its paper collateral process. This solution officially went live in January 2020.

The platform combines a Deutsche Bank-hosted automated certification solution with the Freddie Mac Loan Seller Advisor platform. The agency’s Samuel E. Oliver III, Vice President, Single Family Major Projects, hailed the development as a step toward integrating the mortgage industry’s bifurcated custody model.

Deutsche Bank will be able to provide Freddie Mac with a one-stop integrated solution that enables the mortgage lender to know within seconds whether their eNote certified or had exceptions. While the submission occurs on Freddie’s web portal, the verification is through Deutsche Bank’s infrastructure using rule engines that validate that the delivered eNote to Deutsche Bank’s eVault is the authoritative copy, that there is tamper-seal evidence as well as verifying the accuracy of relevant data points among other checks.

James Macmillan, Client Services Co-head in the Deutsche Bank Document Custody team“Our partnership with Freddie Mac means that we can now provide an end-to-end mortgage process all the way through to securitisation”
James Macmillan, Client Services Co-head in the Deutsche Bank Document Custody team

“Our partnership with Freddie Mac to launch the industry’s first automated e-note certification solution that enables a seamless eNote journey into the eVault means that we can now provide an end-to-end mortgage process all the way through to securitisation,” says Macmillan.

Deutsche Bank’s eVault is fully integrated into the bank’s overall Document Custody platform that in turn has B2B connections with several large warehouse bank lenders. Data and activity is exchanged throughout the day in an automated, secure and scheduled manner. This overall platform “solution is the first of its kind in that it interacts with the warehouse lenders,” says Macmillan. “Our eVault is both Fannie Mae and Freddie Mac-approved and is fully integrated with the document custody platform and image repository systems.”

Not only have the various eVault client integrations managed by Deutsche Bank provided its warehouse lenders clients with added comfort, they have also driven an overall acceptance of eNotes, serving all parties in the chain.

As of Q1 2020 Deutsche Bank’s Document Custody platform handled more than 90% of all newly originated and securitised eNotes. Not all of this volume will be warehouse lenders-funded eNotes as some lenders will self-fund and sell directly to the agencies. As Macmillan explains, “given that non-banks do a lot of origination themselves, the bigger banks are contented to play a warehouse facility role. Deutsche Bank’s clients generally prefer that their eNotes are handled and processed consistently through the Bank’s eVault irrespective of the warehouse line they utilise.”

Direct system-to-system interaction with several large warehouse lenders enables the Deutsche Bank eVault to facilitate the whole processing cycle.

The document custodian is playing an increasingly central role in the US mortgage ecosystem as time passes. “A certain number of warehouse lenders who have their own eVaults will still use Deutsche Bank’s eVault because we play such a central role in the e-note lifecycle. The market and our clients want Deutsche Bank to act as the central repository to speed up the process and improve consistency,” says Macmillan.

Beginning the next digital cycle

With these structural changes helping move electronic contracts forward, their intersection with Covid-19 precipitating the acceptance of digital tools is pushing the industry into the next cycle of innovation. “We’re now at the beginning of this cycle and having made the investments in our technology over the last two decades, we are well positioned as an industry leader,” says David Co, Head of Document Custody at Deutsche Bank.

That cycle has begun in earnest, with the virus forcing alternatives to the person-to-person interaction and wet ink-signing. Among these tools is the ability to electronically notarise mortgage documents remotely. In the US, notary guidelines at the state and county levels were always an impediment to the advancement and adoption of digital mortgages. Since the pandemic, electronic notarisation in the form of Remote Ink-Signed Notarisation (RIN) and Remote Online Notarisation (RON) have been spotlighted as practical tools to allow mortgages to close while keeping the individuals involved safe. Remote notarisation legally permits eNotes to be used to allow the mortgage origination to be completely remote and electronic.

RON has received increasing attention3. It uses an audio visual medium; vendors such as NotaryCam enable users to connect to a live notary and confirm their identity face-to-face on a webcam to complete the notarisation process. RON so far has been formally adopted by 24 states, while others have implemented temporary Covid-related executive waivers. Pending RON legislation at the Federal level could make RON an acceptable and enforceable standard in most parts of the US with potential passage after the 2020 elections.

As document custodian, Deutsche Bank will accept RON and RIN notarisations where they are allowed as part of the review process, regardless of whether eNotes were employed or not.

Before Covid-19, eNotes were growing at a modest pace as the industry collaborated on solutions to facilitate broader adoption, including acceptance of RON. “Then everyone was told to stay home, and industry collaboration ignited with a new and passionate purpose,” says Co.

David Co, Head of Document Custody, Deutsche Bank Corporate BankCovid-19 has moved things along quite a bit and digital has now really taken off with respect to bringing digital mortgages to the forefront”
David Co, Head of Document Custody, Deutsche Bank Corporate Bank

He adds that while many tangible initiatives were put in place over recent months, “Covid-19 has moved things along quite a bit and digital has now really taken off with respect to bringing digital mortgages to the forefront, and being put in place for a lot of operations and our clients. As first movers in that space, we’ve had a lot of client momentum and some traction particularly with implementing technology solutions.”

Deutsche Bank Document Custody platform at a glance

  • 200k+ eNotes received, reviewed, certified and delivered on behalf of clients since 2018
  • 90%+ overall eNotes currently originated and securitised in the US as of Q1 2020
  • More than 15 million loan files physically held in the facility

Digitising the process

The investment in scanning and optical character recognition (OCR) technology in the Santa Ana facility is further automating the mortgage process. High speed scanners with close to half-a-million page processing capacity per day convert paper into images to an OCR readable TIFF format. That is then interpreted by artificial intelligence and machine learning techniques, allowing the classification of documents and the extraction of specific metadata that is relevant to the Document Custody review process. These images are subsequently indexed and catalogued to Deutsche Bank’s image repository system while being accessible from the Document Custody platform.

This digital assembly line is enabling the facility to currently process thousands of loan document packages a day; justifying the capital investment that was made. Through put volumes are expected to double by year-end.

This technology stack along with the recent utilisation of API web services will enable file (both data and image) delivery and exchange real time with client platforms. It rounds off a modernisation effort that Deutsche Bank’s Document Custody team embarked on five years ago and is another step in the journey towards a full service platform. “Our API capabilities facilitate the seamless, integration with clients such as Freddie Mac and others with up to the minute event notifications,” says Macmillan. “We’re well situated now to take full advantage of this digital conversion and be on par with the most recent market developments.”

Taking stock and moving forward

These investments are a further reason to celebrate the 20th anniversary of the Santa Ana facility and its continued growth. To accommodate increased client file volumes in recent years, Deutsche Bank acquired an additional space for the file room; installed moving shelves to increase densification and recently opened a second file facility in Southern California.

The Deutsche Bank Document Custody business processed a record daily volume of client files in June, doubling its first half volumes. Jose Sicilia Global Head of the Trust and Agency Services business in Deutsche Bank noted that the platform “wouldn’t have been able to process these historical record volumes without the digital infrastructure developed by our technology team and the tremendous commitment of our operations group.”

Deutsche Bank Document Custody – Digital roadmap beyond 2020 is largely framed in the below set of current and planned initiatives:

  • Freddie Mac Deutsche Bank eCustodian auto-certification rollout and 2020 first wave of client adoption
  • Ongoing Deutsche Bank Document Custody eVault system-to-system integrations for both mortgage and non-mortgage clients
  • Continued expansion of eNote customers adoption with Deutsche Bank providing the eVault solution to an overall eco-system
  • Continued expansion of client integration initiatives using web service/API for bi-lateral data feeds and image delivery
  • Automation within Document Custody Operations leveraging artificial intelligence and machine learning tools


1 See https://bit.ly/2Z9Zzcf at theverge.com
2 See https://bit.ly/3e9Tot8 at housingwire.com
3 See https://bit.ly/2BHQNJP at blog.docutech.com

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