New pandemic rules make it easier to navigate mortgage closings

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For the past five years Pat Kinsel, CEO of Notarize, chiseled away at getting his remote online notarization (RON) technology used in the housing industry to make the mortgage process faster and easier.

He made sure it met industry standards, including the ability to sell mortgages on the secondary market using RON. What took Kinsel years to build was accelerated in a matter of days by COVID-19. In March, many states issued shelter-in-place orders, which took in-person notary meetings — as well as other important steps in the homebuying process — off the table.

Responding quickly to changes in the country, the Federal Housing Finance Agency (FHFA) put in place loan origination flexibilities which applied to all Fannie Mae and Freddie Mac-backed mortgages.

“We were glad to see the FHFA announced the easing of certain guidelines,” says James Duncan, director of education and engagement at Thrive Mortgage in Texas. “As a lender, we didn’t want to do a fist bump and say ‘woo hoo we’re in the wild west again.’ But loosening those rules will help buyers.

The FHFA recently extended these four key flexibilities until June 30:

  • Expanding the use of power of attorney and remote online notarizations to assist with loan closings
  • Alternative appraisals on purchase and rate term refinance loans
  • Alternative methods for verifying employment before loan closing
  • Flexibility for borrowers to provide documentation (rather than requiring an inspection) to allow renovation disbursements (draws)

Remote Online Notarizations (RONs) eliminate in-person meetings

Almost overnight, RONs were given the greenlight to move forward. Once the FHFA allowed remote online notarizations (to assist with loan closings), governors quickly issued executive orders making RONs allowable, in place of the traditional paper and stamp notarization process.

Before COVID-19, RONs were only legal in 23 states. After the pandemic hit, that number rose to 42.

“We’ve seen a huge explosion for RONs in financial services,” Kinsel says. “They offer dramatic cost savings and time savings, not to mention they can dramatically reduce fraud.”

Getting documents notarized the traditional way meant you had to find a notary public, meet them in person, prove your identity, sign the papers and they stamp it. With RONs, all of that is done online.

Now, you upload your documents to your computer or smartphone. You can photograph them, access them through cloud storage or scan them into your device. You prove your identity by taking a photo of your government-issued ID and answering some personal questions.

The third step is to do a video conference with the notary public to live-video sign your documents, using a digital signature (this can be a chosen font or you can upload your signature). The notary agent will confirm your identity and notarize your document. Your notarized document is then immediately available.

For Jim Campagna, the CEO of SnapFi, in San Jose, California, getting documents notarized was the most challenging part of closing a contactless loan because of California’s stringent notary rules.

“We’re the first lender in California to close a mortgage transaction and not have contact with anybody. What’s gotten in the way of that is notarization,” says Campagna. “In California, they have historically not allowed remote notarization. So we had to get creative.”

Campagna’s team was allowed to use a RON outside of California, the notary seal was affixed digitally and a Chicago title company recorded it. It was a lot of hoops to close on a loan remotely, something Campagna hopes will change in the future. Since California issued a state of emergency, regulations on RONs have relaxed a bit, but the future is uncertain once things begin to resume post-pandemic.

“We’ve seen a lot of interest in closing transactions this way. It’s not only safer from a health perspective, but it saves people time,” Campagna says. “You used to have to walk into a title company and sit down in front of a one-inch stack of paper. Now, you can close from your home office or wherever.”

Drive-by appraisals reduce costs and save time

Appraisals became a major complication when shelter-in-place orders rolled out as appraisers didn’t want to go into people’s homes and homeowners didn’t want appraisers to enter their property. In the lockdown states, some appraisers weren’t allowed to travel to the property.

In response, the FHFA allowed exterior or drive-by appraisals for rate-term refinances. So, appraisers never have to step foot in someone’s home and borrowers could still go forward with the refinance process.

“The exterior-only appraisal has been around for a long time,” says Bill Lanciloti, Jr., owner of Suburban Appraisal Services in Newton, Massachusetts. “Before it would be used for someone who has a million-dollar mortgage and wants to borrow $100,000 — it’s a no brainer. Drive-bys reduce cost to borrowers and at least the bank has something in their files to keep with guidelines. It was less than 5 percent of our business, now it’s gotten more popular.”

According to FHFA guidelines, purchase transactions require a desktop appraisal. This would consist of an independent licensed appraiser looking at data from MLS listings from their own home office. However, Lanciloti says lenders might ask for additional information such as interior photos.

Companies like Verisite use geocoding technology to confirm the photos were taken inside the residence.

The benefits are that drive-by appraisals typically cost less than full appraisals and they take less time. The homeowner doesn’t need to be present, which can help speed the process.

Drive-by appraisals should be an option some of the time such as in refinances, but are not necessarily good for every transaction, especially if you’re buying an older home, says Lanciloti.

“Before the pandemic I would’ve probably said drive-by appraisals are not such a good idea, but now you can get a lot of information from photos, and there’s information online that’s helpful. If it’s a younger home, the chances that it’s deteriorated are much less. I think drive-bys are fine in some situations,” Lanciloti says.

Construction loans can use desktop appraisals, as well, as long as lenders adhere to loan-to-value (LTV) requirements, including that second homes with LTVs higher than 85 percent get a traditional appraisal.

In some circumstances, homeowners can get appraisal waivers, which you can read more about here.

New technology likely to stick around after pandemic

Many lenders hope that some of the COVID-19 mortgage flexibilities stick around after the health emergency is over. New technology that has made e-closings possible is something that the mortgage industry has been slow to adopt, Duncan says, but with the pandemic lenders are forced to move past the old way of doing things.

“I don’t think the industry is going to go back to the way it was. Any lender that does go back to the old way is doing so at their peril, it’s going to put them at a disadvantage,” Duncan says.

One of the main reasons for this is that tools like RONs, electronic processing and even drive-by appraisals in some instances, speed the process, something borrowers value.

“Prior to COVID-19, our average turn time from application to cleared-to-close was just under 17 days.  Since COVID-19, that same average has only gone up to just above 17 days,” Duncan says. “There are other lenders in the industry asking us ‘how did you do it?’ They want us to help them set up their own e-closing platform. We’re happy to share the knowledge.”

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