Loan Modification

FHA To Accept Some Electronic Signatures, But Not All

By Peter G. Miller

HUD has announced that it will now accept electronic signatures on certain FHA mortgage documents.

You could look at this and say, wow, FHA loan closings are coming into the modern era. This will speed things up and make closings less expensive.

And, in fact, HUD should be congratulated for moving forward in a technological sense.

That said, I don’t think there’ll be much change in the marketplace. It just won’t happen that you’ll have a totally paperless closing anytime soon involving FHA loans or any other type of financing. Here’s why:

The New Standard

HUD says that it “will accept electronic signatures on third party documents included in the case binder for mortgage insurance endorsement.”

“Third party documents are those that are originated and signed outside of the mortgagee?s control, such as a sales contract. An indication of the electronic signature and date should be clearly visible when viewed electronically and in a paper copy of the electronically signed document. Mortgagees must employ the same level of care and due diligence with electronically signed documents that they would for paper documents with ‘wet’ or ink signatures. Additionally, mortgagees are reminded that the origination case binder must be maintained in either hard copy or electronic format for two years from the date of endorsement.”

The catch is that FHA mortgage settlements, like all closings, are complex events. It’s not just the FHA  and the borrower at the table. Local governments want their taxes. Papers need to be recorded. Lawyers, appraisers and brokers need to be paid. Property insurance must be in place. And lenders have lots of documents they want signed.

The Rule Explained

Could it be that all the paperwork associated with an FHA mortgage settlement can now be signed electronically given the number of different and sometimes conflicting interests at closing?

“No,” says HUD spokesman Lemar Wooley in response to an inquiry from FHALoanPros.com. ”The mortgage note and other mortgage documents produced by the lender cannot be included in the case binder for endorsement if they were signed electronically by the borrower.  Because they are originated by the lender, they are not considered third-party documents. The HUD-1 falls into this category too, as much of the information included on the HUD-1 is provided by the lender, and the HUD-1 must be approved by the lender.

“Only those documents that are fully executed before the lender receives them or gets involved are eligible.  If the lender has a hand in creating, approving, or causing execution of the document, it is not eligible. The most common example is the sales contract.”

Fair enough.

Someday it will happen that electronic closings will take place, events that will not sacrifice a drop of ink. The HUD announcement is one step toward that ultimate goal, but by no means are we anywhere near the widespread use of entirely electronic closings.

Full post as published by FHA Mortgage Guide on April 26, 2010 (boomark / email).