FHA mortgages with electronic signatures are about to become more common at real estate closings but the era of the all-electronic settlement remains down the road.
Mouse on the Dotted Line, Please
Since the start of the Internet era, there have been pioneering souls who wanted to digitize the closing process: Instead of sign here and sign there, the idea is to replace pen-and-ink with electronic signatures and thus speed and simplify the closing process.
It sounds like a logical idea, but in practice it's proven difficult. For instance, can a digital signature be forged or stolen? Will all parties to a closing accept electronic signatures? Can digital signatures be used on all documents or just a few? Are digital signatures too easy; that is, might people "sign" binding legal documents without sufficient notice or awareness, agreements that are one-sided or which truly lack mutuality?
Is an E-signature Really a Signature?
In 2000 -- 14 years ago -- the government passed the Electronic Signatures in Global and National Commerce Act, also known as ESIGN. The purpose of the legislation was to set out standards for electronic signatures to assure their safe use in business in place of "wet" or ink signatures
An electronic signature under ESIGN is generally defined as "any electronic sound, symbol, or process attached to or logically associated with a contract or record and executed or adopted by a person with the intent to sign the record.” However, HUD will not accept voice or audio signatures.
The results of the electronic signature movement have been mixed. You can order goods online with little trouble, but when it comes to real estate, the use of e-signatures to replace the borrower's John Hancock has met with resistance. Why? Lenders and lawyers in many cases remain unconvinced, wondering whether the validity of a deed or mortgage note might be questioned years from now because an electronic signature was used to seal the transaction. Adding to the unease, mass data thefts raise questions about the security and validity of electronic transactions in general.
FHA Mortgages and Electronic Signatures
HUD has now stepped into the picture with a new set of rules which will allow the use of electronic signatures to speed the lending process. The guidelines apply only to FHA mortgages; however, if it can be shown that the process works with one type of financing, the standards set by HUD will undoubtedly spread throughout the lending system.
While HUD will accept electronic signatures for FHA mortgages with some forms and documents, it will not allow ink-free closings at this time. For instance, HUD will not accept an electronic signature on an FHA mortgage note before December 31, 2014. After that date, it will allow electronic signatures on forward notes but not for reverse mortgages, what HUD calls Home Equity Conversion Mortgages or HECMs.
Although HUD is willing to accept some electronic signatures, it's not the only party with interests at the closing table. "At this time," says HUD, "the use of electronic signatures is voluntary" so there can't be ink-free settlements until everyone agrees to electronic signatures -- including both the borrower and lender.
There's little doubt that electronic signatures have the potential to speed and simplify mortgage closings, but just to be on the safe side, borrowers might want to retain a paper copy of all closing records for tax and estate purposes. After all, as Gandhi said, "there is more to life than simply increasing its speed."