At his real estate closing last July, Jose Ignacio Arroyo didn’t just purchase a new home. He made history.
The Weston, Fla., man participated in the first completely electronic real estate transaction. In other words, he bought a home, obtained a mortgage, and within just a few hours, that mortgage was sold on the secondary market — all by computer and modem.
In much the same way that computers have revolutionized the home-search process through Web sites that list houses for sale, they are changing the closing process.
The real estate industry stands on the front lines when it comes to trying out digital signature technology.
In October, a federal law made such signatures legitimate. Now, the early test cases in real estate show what hurdles businesses in other sectors may face — and what economic advantages may await them.
“The paperless format is a tremendous benefit to all participants,” said Joe Bryant of the real estate group of eOriginal Inc., a Baltimore company that creates paperless documents. “It eliminates time and a significant portion of the cost of the transaction.”
But public resistance could spell trouble for the new technology. Until enough benefits trickle down to consumers, there may not be much incentive to switch from the old-fashioned way of doing business.
President Clinton signed the Electronic Signatures in Global and National Commerce Act, which became effective Oct. 1. The act gives electronic signatures the same force as those written in “pen and ink.”
In the real estate industry, these two laws can greatly affect property closings. For example, consumers and businesses now can contract to buy or lease property, process a mortgage loan, transfer promissory notes and mortgages and notarize transactions — all by computer.
Paperless closings have many advantages. Perhaps the biggest: the time savings over a traditional closing, once the seller and buyer sign all the documents.
Paperwork can be transferred to banks and other parties very quickly, as opposed to using traditional mail.
That should eventually lead to cost savings, said Skip Straus, president of e-Cloz.com LLC in Weston, Fla.
E-Cloz has created a “paperless closing network,” a combination of hardware and software that allows subscribers to perform paperless mortgage transactions.
“As everyone uses the system more, the economies of scale will be recognized throughout the chain,” he said.
Paperless closings reduce the “post-closing process” — the time until all the documents are recorded and the title insurance policy is issued — from an average of 45 days to about three hours, Bryant said.
They save an average of $750 per loan, he said, in hours that would have been spent on tedious and burdensome administrative tasks such as photocopying and mailing paperwork.
He predicts that the cost savings will ultimately filter down to the consumer. But the savings won’t be seen until the paperless closing is streamlined and commonplace. That won’t happen for several years, experts say.
Other parties to a real estate closing — the closing agent, the title insurance underwriter and the local county records division — are reaping the time and cost savings.
“No individual customers are lining up, knocking on doors and saying they want to do an electronic transaction,” said Sue Baldwin, director of county records for Broward County, Fla. “I don’t think this will ever be customer-driven; I think the closing agents will implement it and guide their clients through the process.”
Another benefit of paperless closings is a reduction in the potential for fraud.
“For a paper transaction, we don’t know the origin of that document,” Baldwin said. “We don’t know who’s giving it to us for recording or if that document is valid.”
Baldwin said that a few years ago anti-government pranksters in various jurisdictions filed bogus deeds that transferred ownership of real estate owned by judges and elected officials.
It takes time and effort to correct such pranks once they show up in public county documents, she said.
With a paperless transaction, however, the origin of the document submitted for recording can be traced and the digital signature authenticated.
“There’s an electronic seal on the document, and if that seal has been broken, our system rejects it,” Baldwin said.
The seal can be broken, she said, if the documents are intercepted or tampered with prior to being recorded.
Paperless transactions also reduce “the gap,” the time between the closing, when the consumer signs the mortgage documents, and when the deed and mortgage show up in the public record at the county recorder’s office. This protects new owners, Baldwin said.
In the time before a new deed shows up in the public record, an unscrupulous person can sell the property more than once.
Broward County’s gap during busy periods in the past exceeded 45 days; with a paperless closing, the deed and mortgage appear in the public records within minutes of the closing.
Of course, the system has disadvantages as well. Because it’s so new, the parties are still working to get the kinks out so paperless closings can be streamlined. But the technology has not spread enough to make the closings common.
And setting up the technology can cost about $10,000 for a closing agent who wants to join the e-Cloz network, Straus said. Plus, the agent must pay e-Cloz a transaction fee for every closing.
But consumers are probably the biggest impediment to widespread acceptance of paperless closings. Many are leery of new technology.
“It hasn’t been around long enough for me to feel comfortable,” said David Bloom, who is closing on the sale of his Boca Raton, Fla., home.
“When you put your John Hancock on a document, you know it’s on firm soil legally. I don’t want to be an Internet guinea pig.”
When eOriginal conducted a pilot program of electronic mortgage closings in Florida last year, all 20 of the participants elected to receive copies of their mortgage documents on paper.
SPEED IS AN ADVANTAGE TO GOING ELECTRONIC
First, there’s a difference between electronic and digital signatures.
“If I send you an e-mail and type my name at the end, that’s an electronic signature,” said Alan Sutin, an attorney with Miami-based Greenberg Traurig and the co-chairman of the firm’s electronic commerce practice. “A digital signature is a form of signature that contains some assurances that it is authentic — that it is my signature and that it was intended to be attached to that document.”
When Jose Ignacio Arroyo signed his closing documents on a special computer screen in July, he created an electronic signature. It was then converted to a digital signature — with special encryption and authentication technologies — for transmission by modem to other parties.
In other words, the strokes of Arroyo’s stylus on the computer screen were changed to digital data.
To prevent tampering, they were also “authenticated,” a process that tacks a digital “seal” onto the signature. The seal will reveal if there has been an attempt to tamper with the signature.
Any parties that receive the signed digital documents must use special software to transform the document back to its original form. Once reconstructed, the document can be electronically stored.
Here are some ways that traditional and electronic transactions vary:
Traditional closing
– After signing a contract to purchase a home, the buyer calls banks or mortgage companies for rate information, requests an application package, completes it, returns it. Getting approval can take as long as 45 days.
– After approval, the closing, or settlement, is scheduled. The bank prepares the loan documents and transmits them by courier or overnight mail to a settlement agent — usually a title company.
– That title agent has the purchaser sign all the documents at the closing. Then the seller hands the deed to the buyer’s agent. The seller is then paid for the price of the house, and the closing agent makes sure each document is forwarded to appropriate parties, such as the title company and the county clerk’s office.
Electronic closing
– The buyer searches the Web for the best mortgage rates and applies — and receives approval — online. Approval can come within a few days.
– The bank prepares the closing documents and sends them electronically over the Internet to the closing agent, who brings them up on a specially equipped computer screen.
– The buyer signs each closing document on that screen. The deed is delivered by the seller and scanned into the computer. Then the closing agent zips the documents electronically to the appropriate parties, and the buyer departs with a CD-ROM containing copies of the documents … and his house keys, of course.
What’s the advantage?
Jose Ignacio Arroyo’s closing took about the same time as a traditional closing — about an hour or so. But the work afterwards — the paying of funds and sending of documents to the bank, the county clerk and the title insurance underwriter — took minutes rather than hours.
Also, Arroyo’s loan was sold on the secondary market to Fannie Mae, the nation’s largest provider of funds for home mortgages, in less than three hours — a process that takes 45 days with a traditional closing.
The faster the loan is sold on the secondary market, the faster the selling bank or mortgage company gets paid and has the funds for new mortgages.
— South Florida Sun-Sentinel
