In an earlier blog series on eNotes I discussed the lack of Ginnie Mae’s support for digital documents as a challenge for adoption. I’m excited to announce that this recently changed. On July 17, 2020 Ginnie Mae launched the digital collateral initiative for its mortgage backed security (MBS) program. This program could potentially be the savior for the document custodian.
The main function of the document custodian is to safekeep the collateral and protect the investor. When the collateral (promissory note) is digital, the custodian role changes significantly. A digital asset does not need physical protection. With Fannie and Freddie product delivery, the “controller” and “location” in the evault is the investor instead of the custodian, in essence, eliminating the document custodian role. The investor certification process, which was historically performed by the document custodian, is automated leveraging “smart” document standards.
The Ginnie Mae Digital Collateral Initiative mandates an eCustodian to perform the certification for digital documents (the eclose). The eCustodian is an added distinction by Ginnie Mae for existing custodians. This approach is much different than Ginnie Mae’s cousins’, Fannie and Freddie. For Ginnie ,you must be an approved custodian to also support the eCustodian duties. While the note will be in a digital format, other documents are accepted in both a physical and electronic form. Accepting electronic documents will certainly help servicers clear exceptions for the final certification. No more mailing physical copies between entities. Ginnie Mae is placing volume restrictions for the digital collateral at the beginning to confirm activities run smoothly.
Another scenario where the document custodian could remain relevant is around warehouse lending. Warehouse lenders typically do not have an evault and rely on the document custodian to perform any activities on the note both digitally and physically. Warehouse lending will likely continue to play a role for the document custodians even during the digital mortgage era.
Impacts on the Document Custodian
It’s likely the document custodian will be financially impacted substantially with the move to digital documents. With this recent announcement, it filled the unknown void on where Ginnie Mae stood with digital document requirements. Now that the agencies have outlined the plans and requirements for digital closings, lending entities can plan accordingly. Some items that a document custodian would want to evaluate would be the following:
- Fannie/Freddie portfolio size: If the document custodian has a large concentration of Fannie/Freddie products, it could be time to diversify. Activity will decrease over the coming years reducing the document custodian footprint needs for this loan channel.
- Warehouse lending: If the document custodian has a significant warehouse lending client book, their role may not be impacted significantly. Now is the time to have discussions with partners to understand the digital strategy and remain a relevant player.
- Ginnie portfolio size: The document custodian will want to build a long term strategy around the future of mortgage. If the document custodian desires to sustain revenue and activities, I recommend applying for the eCustodian distinction and upgrade systems to meet the digital collateral requirements. This could be an opportunity to build efficient processes around the digital documents.
- Pricing: With lenders and settlement agents moving toward digital closings, the physical footprint is reduced while processes can be automated. Pricing could be under pressure as the cost to service decreases with digital documents.
Overall this announcement is both exciting and challenging. Digital documents have been in the spotlight for decades, and adoption is finally taking hold. This will drive a significant change in the document custodian landscape in the next decade. Who will come out stronger in the end?