The story of electronic mortgages continues to unfold, with First Houston Mortgage announcing its investment in an e-mortgage
platform. In an interview with Real Estate Technology News, the president of the company reveals why it was time to make the leap,
the role fate played in connecting First Houston Mortgage with the right technology provider, who it's working with on the investor side and the
challenges of bringing settlement partners on board.
(6/4/2007)
Even for those that take a regimented, planned approach to technology, fate sometimes has a funny way of taking over.
Houston-based First Houston MortgageCorp. has launched an IT solution that lets it originate fully electronic mortgages. How it
connected with the technology provider after giving up on other options is a classic case of being at the right place at the right time.
A new vision for mortgage lending
First Houston Mortgage is an all-retail operation licensed to lend in 18 states. It has 100 employees and has been in the business about 10
years. Current loan volume hovers in the range of $30 million-$40 million per month.
President David Zugheri described the company as a “small lender that acts like a big one.”
For him, the primary drive for moving to e-mortgages was removing paper from the process. First Houston Mortgage started moving in that
direction about three years ago by implementing electronic loan files. It began working with loan documents in PDF format and set up
a basic Web site that offered access to the documents.
It ran “hybrid files” — both paper and on-screen images — for a while, but in the last 18 months, it went fully paperless.
Still, something was missing: the closing part. First Houston Mortgagestill had to paper out to send documents to the title company.
“I thought, ‘I’m never going to get this. This industry just needs to catch up with electronic signatures at the closing table,’” Zugheri said.
Zugheri had done some investigation into e-mortgage platforms that address that problem, but he didn’t see anything that met his
needs. He was also turned off by the fact that most vendors he spoke with didn’t seem to understand the particulars of the lending
business.
“Very few people provided me the ground-level detail to make it happen,” he said. “There’s a huge knowledge gap between the
people who are tech-savvy and the people who know the mortgage business from a street level. Most of the vendors I ran into have
been in my office. They were the tech-savvy people, but they didn’t know what I wanted or needed at the ground level. They were
oblivious. They didn’t know what a Good Faith Estimate was, what a Truth in Lending was, what are recorded documents or what
documents go to a title company for a closing.”
At that point, fate stepped in. While at the gym one morning, Zugheri by chance discovered that his neighboring locker was used by
Andrew Krieger, COO of e-mortgage technology specialist Encomia. They started talking, and Zugheri realized that Encomia's
system would fill the gap. He signed on.
First Houston Mortgage started using the e-closing and upfront e-disclosure components of the system. It’s using the software as a toolkit for
creating SMART Docs, electronic signature capability and secure document archival. Using the system, its loans are stored in the
electronic vault of GMAC Bank.
Zugheri said he expects to be able to alleviate dependency on communication and document transfer via telephone and fax — that
should help his company process loans faster.
In addition, the e-mortgage software will go a long way toward preventing errors and allowing for quick document review by providing
a communication platform between the mortgage company, buyer and title agency.
First Houston Mortgage has closed its first e-mortgage with a title partner — the loan was sold to Fannie Mae. Although the note was
electronic, the recorded instruments were not sent electronically.
“The two of them (Fannie and GMAC Bank) had to buy into it — especially Fannie Mae, because they bought the note on an
electronic signature,” Zugheri said.
That deal was essentially a proof of concept, he added.
“We set out to become paperless, and Encomia closed the end part of it. The reason we did it was because, if not, I was going to get
out of this business. I will not take this business and the margins with the amount of work that surrounds handling a bunch of paper
documents. I can’t afford to, and I don’t want to,” he said.
In the next phase, he’ll attempt to build volume by getting title partners to sign on.
First Houston Mortgage is working with SMART Docs, which means it can tap loan information in image and data formats. It would like to make
better use of the data behind those documents, but much of that will be driven by the secondary market.
”Whatever the investors will accept, I have to feed their machine,” Zugheri said. “If they’ll take data from me, I’m all for it. But right
now, they don’t take data. They take pictures - PDFs. Most of them want an original wet-signature note before they’ll buy it from me.”
Facing limitations
It’s currently difficult to close a high number of mortgages electronically, Zugheri said, because e-mortgage deals for First Houston Mortgage
are limited to certain criteria:
- It has to be a loan in the Houston area so First Houston Mortgage can use the title company that’s supporting the new process (“Title
companies are one of the big issues with this,” he said. “We discovered we can’t really go to a title company and say, ‘You
need to close like this.’ They can tell us, ‘No, we’re not ready for e-signatures.’”);
- It has to be a refinance transaction;
- The loan amount must be less than $150,000;
- It can’t be a cash-out refinance (“We’re trying to do plain-vanilla loans on these first few as we prove the concept,” Zugheri
said); and
- The closing has to occur within 15-20 days.
“The perfect candidate has not resurfaced in my office, or we would be doing more,” Zugheri said.
Because other lenders throughout the industry will likely face similar problems — being able to do e-mortgages only for certain deals
and with certain title companies, for example — e-mortgage adoption will be a slow haul for the time being.
“Immediately, yes, it’s going to be a problem,” Zugheri said. “Nobody wants to risk that they’ll close this loan and not be able to sell
it.”
First Houston Mortgage, however, is taking a long-range view.
“We want to shape the industry. That’s why we’re doing this,” he said. “In the long run, you have to start somewhere. Should we not
do it because the title companies aren’t ready? Should we not do it because the recorders aren’t ready? No. What we should do is
take the story to the recorders and title companies.”
To that end, Zugheri sent out a letter to every title company First Houston Mortgage has done business with explaining the technology and
encouraging them to get involved by making the necessary investment.
“It’s a $100 piece of hardware - the signature pad. And the software’s free — we’re giving it to you. Get involved. This is coming,”
Zugheri said.
He acknowledged that major title companies are making progress with their own e-closing and e-mortgage investments but noted,
“They’re just not ready.”
Andrew Dubinsky, CEO of Encomia, noted that First Houston Mortgage is an early adopter and will be at the forefront of the mortgage
industry.
“As an early adopter,” he said, “the institution is preparing to reap the highly profitable returns as investors begin to purchase these
loans.”
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