Mortgage

The growing use of e-notes is attracting the eye of the FHFA watchdog

The General Inspectorate of the Federal Housing Agency announced on Monday that it is closely monitoring the fact that the use of electronic banknotes is finally gaining momentum among government-sponsored companies.

"The use of eMortgages has both risk management benefits and potentially increased risks," the OIG told the FHFA in a report. The monitoring agency managed by IG Laura Wertheimer defines e-mortgages as loans in which the promissory note is created, executed, registered, transferred and electronically stored.

Despite much discussion about the efficiency e-notes could bring to the GSEs' process of buying newly borrowed loans from lenders, the use of electronic promissory notes by government sponsored companies did not exceed 1% until it rose to 3% in 2019. In the first half of 2020, e-notes were used in connection with 4.25% of the loans acquired by the GSEs.

The report notes that the use of e-notes has proven useful this year as the mortgage industry has to operate remotely in view of the social distancing restrictions in place to deal with the health risks associated with the coronavirus.

"eMortgages provide borrower convenience, minimize post-close verification delays, eliminate the need to physically transfer a note, and make it easy to close while enabling social distancing, an attractive feature during the COVID-19 pandemic," the OIG said in the report.

However, the OIG expressed concern that vendor counterparties may not comply with the laws governing the enforceability of electronic signatures and transactions. The possibility was also highlighted that access to e-notes could be impeded in the event that electronic vaults in which they are stored fail.

However, the report found that Fannie Mae and Freddie Mac have procedures in place to mitigate these risks.

"Both companies have told us that they have procedures in place to validate and approve eClosing and eVault providers, and that eMortgage sellers / servicers must use approved systems," the OIG stated in the white paper.

In addition, the FHFA OIG noted that Fannie has backup capabilities for its primary electronic vault, Freddie is working with the third party continuity plan provider to protect against system failure, and that both GSEs have information security measures in place.

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