The Federal Housing Finance Agency's Office of Inspector General indicated Monday that it is keeping a close eye on the fact that electronic note usage is starting to finally take off at the government-sponsored enterprises.
"Use of eMortgages carries both risk management benefits and potentially heightened risks," the FHFA OIG said in a report. The watchdog agency headed by IG Laura Wertheimer defines e-mortgages as loans where the promissory note is created, executed, registered transferred and stored electronically.
Despite a lot of talk about the efficiencies e-notes could introduce to the GSEs' process for purchasing newly originated loans from lenders, use of electronic promissory notes at the government-sponsored enterprises did not exceed 1% until 2019 when it rose to 3%. In the first half of 2020, e-notes were used in conjunction with 4.25% of the loans purchased by the GSEs.
The report points out that e-note use did come in handy this year given the mortgage industry’s need to operate remotely amid social distancing restrictions put in place to address health risks associated with the coronavirus.
"eMortgages offer borrower convenience, minimize post-closing review delays, eliminate the need to physically transfer a note, and make closings easier while allowing social distancing, an attractive feature during the COVID-19 pandemic," the OIG said in the report.
However, the OIG expressed concern about the potential for vendor counterparties to be noncompliant with laws that govern the enforceability of electronic signatures and transactions. It also highlighted the possibility that access to e-notes could be impeded in the event that electronic vaults in which they are stored go down.
That said, the report noted that Fannie Mae and Freddie Mac do have processes in place to mitigate these risks.
"Both Enterprises told us that they have processes to validate and approve eClosing and eVault vendors, and eMortgage seller/servicers are required to use approved systems," the OIG noted in the white paper.
In addition, the FHFA OIG noted that Fannie has backup capabilities for its primary electronic vault, Freddie works with the third-party continuity plan vendor to safeguard against systems outages, and both GSEs have information security measures in place.
