Puerto Rico Mortgage Bankers Call for Lifting Restrictions Holding up $100 Million in Loan Closings
Submit Protocol to Governor for Safe Handling of In-person Transaction Amid Covid-19 Crisis
SAN JUAN – Puerto Rico’s mortgage bankers are calling on Gov. Wanda Vázquez to consider their proposal to safely lift restrictions on in-person transactions in the sector that are holding up more than $100 million in mortgage loan closings.
The closing-ready mortgage deals could not be completed last month due to the curfew/lockdown implemented by the government to curb the spread of Covid-19. The governor’s lockdown order allows banks and credit unions to offer “essential” financial services that do not necessarily involve person-to-person contact such as withdrawals, deposits and payments, but mortgage closings are excluded.
In mortgage closings, borrowers and notaries must be present to sign and validate mortgage contracts.
Puerto Rico Mortgage Bankers Association (MBA) President Silvio López said that his organization worked with the Mortgage Loan Officers Association, the Puerto Rico Bankers Association (PRBA), and the Puerto Rico Realtors Association to prepare a set of emergency protocols and directives for a mortgage closing process that “gives priority consideration to the safety and well-being of our employees and clients.”
Plan sent to the governor
The plan was sent last week to the governor and Puerto Rico Economic Development Secretary Manuel Laboy for their evaluation. An April 21 letter accompanying the plan, signed by López and PRBA Vice President Zoimé Alvarez Rubio, says the proposed protocols are in line with “measures already required and adopted by the government for other business sectors.”
The letter states that while a “safe home is an important aspect in the management of an emergency,” it notes that the “reality is that we have citizens waiting to finalize the [mortgage] closing of their new home, some of them with leasing contracts that have expired, others living with relatives as they wait to finalize the purchase, and [still] others in the process of selling their properties that are waiting for them to be finalized.”
The letter adds: “Mortgage closings are processes in which there is no crowding of people and are done individually, strictly with the necessary participants. Without a doubt, the particularity of the process allows the taking of suggested isolation measures to avoid potential contagion.”
“Laboy responded that they were working with the issue and that they would get back to us,” López told Caribbean Business. “So we are waiting for what they will tell us.”
López estimates that some $150 million in mortgage transactions pending closing were left hanging with the implementation of the curfew/lockdown on March 15.
“We are doing a survey to pin down exactly how many mortgages are waiting to be closed. We estimate that about 1,000 mortgages were ready to close but are now in limbo due to the crisis,” the mortgage bank executive said. “There is one institution that was processing 1,000 mortgages when the lockdown was implemented, but not all of them were ready to close because many were pending documentation. The average mortgage is about $150,000, and that times a thousand gives us about $150 million in mortgages that are ready to close.”
López added: “The problem here is that the more time passes, the validity of much of the [mortgage] documentation could expire.”
Safeguarding mortgage closing participants
Sun West Mortgage Retail Vice President Luis Raúl Padilla, a member of the MBA’s board, told Caribbean Business that the plan would allow mortgage banking to “operate in an organized manner in which 80 percent to 90 percent of the employees work remotely.” He said only the necessary personnel would remain working at the office to “make sure servers are up and everything is running.”
At least 24 hours before their appointment at the office branch, clients would receive all mortgage closing documents electronically and mortgage bank officers would discuss them via telephone or video conferencing, Padilla said, adding this would avoid unnecessary waiting at the office. On the day of the closing, customers would wait in their automobile at the branch parking lot until it is their turn, he said, adding that everyone involved in the closing would be required to wear face masks and gloves, and stay at least six feet apart.
Once inside, clients would interact with the notaries and other officials involved in the closing behind an acrylic window, Padilla said, noting that clients would have to bring their own blue pens to sign the documents. Real estate brokers would only be let in to hand over the purchased home’s keys and garage-door openers, he said, adding that their payments would be deposited in accounts they would provide. The plan would also allow the bank notaries to draw up both the home purchasing contract and mortgage deed, subject to client approval.
“We don’t want family members to come to the closings as was customary here, because it was a day of celebration for them,” he said. “We want to limit the number of closings per day and limit the closing process to no more than 15 minutes, with discussion of the transaction having been done beforehand. We are also planning four to five rounds of office cleanings. Perhaps taking the temperature of clients and having regular checkups of employees.”
Padilla said the island’s mortgage banking sector is “literally paralyzed” in terms of closings, given that notaries are not authorized to issue mortgage deeds. He said mortgage bankers are discussing this plan with the Puerto Rico Notaries Association, and have also sent a letter to Puerto Rico Supreme Court Chief Justice Maite D. Oronoz Rodríguez.
Last month, Justice Oronoz issued directives allowing notaries to carry out “indispensable services,” including via teleconferencing, involving the authorization of documents related to wills and powers as well as medical and social services, particularly those involving the welfare of minors. However, the document does not specify other types of transactions, and only states that notary validation of business transactions involving an “act of unity” cannot be done remotely.
“We know this is complicated and we don’t want to rush this and get it wrong because we don’t want federal entities saying that mortgage documentation here is not valid,” he said. “We want to give the notaries and the Puerto Rico Supreme Court room to establish protocols and we will back them.”
Mortgage sector on the ropes
Nonetheless, Padilla said the plan should make it easier for the governor to allow mortgage closings to take place.
“We have seen that the executive order has been modified and that other businesses that, without a doubt, involve more risk have been allowed to reopen,” he said, noting that the crisis is a blow to a real estate and mortgage sector that had been recovering since Hurricane Maria, with the first uptick in years in property sales and values last year. “The impact on the economy is devastating in the sense that real estate brokers, appraisers, engineers and bankers have not been able to collect their money for services rendered. The wheel this turns is not only the direct business but also secondary banking transactions; it is a very negative impact.”
López said the plan strikes a balance between the safety of customers, employees and professionals, and businesses and the economic recovery.
“When you make these types of decisions, the balance moves toward one side or the other. We are trying to set up a procedure in which we minimize the risk as much as possible and maintain an economic process flowing, because people need to work and have bills to pay,” he said, noting that many families who lost their homes to the 2017 hurricanes and January’s earthquakes need to close mortgages for their new homes. “And people need to move into homes and cut their monthly installments because they are tight financially with the situation as it is.”
Virtual mortgage closings in the future
The proposed mortgage closing protocol is just a short-term solution to a problem that will require a long-term solution involving the local implementation and validation of virtual notarization and digital signature technologies, López said, adding that legislation to that effect, House Bill 1564, was introduced by Senate President Thomas Rivera Schatz and Sen. Héctor Martínez.
“The short-term solution involves what we are suggesting to the governor —a protocol to begin operating. That is not the most efficient way to operate because it is cumbersome. So this is not going to produce an important volume of mortgage closings in a month because the protocol will not sustain that. The process will be slow and more costly,” he said, noting that business transactions will have to take into account that Covid-19 contagion will remain a problem into the foreseeable future. “As in other countries, we need to move toward virtual notarization, and the technology needed for this is available.”
Still, López said the island’s Latin-based notary system will make the implementation of such technology more complex than is the case in most states.
“This is not going to happen next month, but the goal is to have virtual mortgage closings in which clients do not have to be physically present with the notary,” he said. “But there are some things that must be addressed to achieve that.”
In fact, Puerto Rico Notaries Association President Manuel Pérez Caballer cautioned in a recent hearing that Senate Bill 1564 could threaten the guarantees of legality, security and reliability if it does not include uniform mechanisms and platforms to prevent fraud and promote trust in transactions involving notaries.
“We recognize that this bill…is a step in the right direction, by proposing changes to the current Notarial Legislation to incorporate the use of technology,” he said. “However, the measure as it was filed establishes remote procedures that, in our opinion, cause confusion. The legislative intention would be defeated if, in its application, the changes to the Notary Law cause controversies by not being clear.”
Among the bill’s shortcomings, Pérez said, is that is does not specify that the clients as well as the notaries must be physically in Puerto Rico. It also does not provide notaries with safeguards to ensure that their clients are not being coerced by third parties to carry out processes, he said.
Pérez said that virtual notarization in Spain requires the use of a 360-degree camera to ensure the privacy of clients in the process. The bill as it is written could also encourage fraud because notaries can lose control of the documents validated in the virtual meetings, and alterations could be made to the original document, he said.
Pérez suggested that amendments be worked out with the various sectors that would be affected by the measure, including notaries, banks and cooperatives, the Property Registry and the Puerto Rico Supreme Court.
Impact of layoffs on mortgage closings
Both López and Padilla acknowledged that Puerto Rico’s soaring rate of layoffs and furloughs due to the Covid-19 lockdown could affect the number of pending mortgage closings because once clients become unemployed they become ineligible for loans. Still, they said that relatively few clients had said their job status had changed during the last few weeks.
“In the institution where I work we called our clients with mortgages in process with us to see if they were interested in completing the transaction, and we found that 90 percent said they wanted to continue with the process,” López said. “To date, most companies here have tried to retain their employees and continue paying them. Many jobs have been lost, but we have to see which jobs have been lost. If you lose retail jobs like those in Walmart, unfortunately, these people find it difficult to buy [property] due to the compensation they receive.”
Padilla said that the federal government issued guidelines facilitating the resumption of the mortgage closing process for people who are eventually rehired.
“So the moment one is rehired, instead of waiting four months or five months to close the transaction, it is enough to show evidence of two months of income and a letter from the employer,” he said. “In the case of the self-employed, you must prove your business was operating 15 days before the mortgage closing.”
Meanwhile, apart from the backlog of pending mortgage closings for properties, local banks are also processing an increasing number of applications for mortgage refinancing, prompted by the historic drop in interest rates since last month. Mortgage banks are reporting that while refinancing of mortgages were no more than 20 percent of transactions as recently as two months ago, they are now reporting that this has increased to between 50 percent and 80 percent of transactions.
“We are working with many clients who want to refinance their mortgages. With the 10-year U.S. Treasury bond going as low as 0.55 percent, you can now get mortgage loans for 2.5 percent for 30-year mortgage loans, and they could still go lower. In my 24-year career I have not seen anything like this,” Padilla said, adding, however, that while such transactions are being processed, they cannot be closed while lockdown restrictions remain. “People with mortgage loans at 5 percent or 6 percent interest are calling us to do streamline refinancing, which does not require a credit report or an appraisal. But these transactions are on hold.”
Cerritos, Cal.-based Sun West—which was founded in 1980 and has 28 branches throughout the United States, including six in Puerto Rico—broke records in March by generating more than $400 million in mortgages, Padilla said. The mortgage bank’s local offices normally generate about 100 mortgages a month, but in March the number shot up to 189, he said, adding that the company’s digital platform, lowratespr.com, has facilitated transactions.
“Clients submit their case and in 10 minutes they get an answer, subject to appraisal and credit reports. We also offer a lock-in rate and ensure an offer for up to 90 days,” he said, noting that the mortgage bank went paperless nine years ago, when it first opened on the island. “Technology and ensuring offers to clients have been key in our success. We have the technology to certify required documents virtually. Our clients submit PDF documents online.”
Padilla said that many people who live in apartments are also calling to inquire about single-family homes, given that they feel cramped in the current lockdown conditions.
“First, with the earthquakes and now with this pandemic, I do not want to hear about apartments for the rest of my life, they tell me,” he said. “This is leading toward a movement of single home purchases by younger people.”
Demand spurs Sun West to hire
In fact, increasing demand for mortgage services in Puerto Rico and the states has prompted Sun West to hire locally for temporary and eventually permanent jobs involving mortgage origination, loan set up, quality control and underwriting for transactions done remotely stateside and on the island.
In November and December, Sun West offered 50 scholarships that included 20 hours of “very intense” training in mortgage banking, Padilla said, adding that 300 had applied. He said 36 people passed the course and only eight managed to pass the required U.S. licensing test before the lockdown was implemented.
“We like to invest in our human capital,” he said. “So we decided to employ them even if many of them still do not have their license, yet. All we required is that they have a computer and Wi-Fi to work from home. We hired 25 of them on a temporary basis during the pandemic crisis. We have given them two weeks of training in quality control and loan set-up. They will be working with stateside customers because transactions are being processed there given that they accept electronic signatures.”
Padilla said that Sun West is opening an additional 50 positions for those students who have graduated from high school or are still in college.
“It is a temporary job for 60 days to learn about the business. They can apply at sunwestfinancial.com and then they will be called for an interview,” he said, noting that applicants must be at least 18 years old, know English and have a computer and Wi-Fi service at home.
Salespeople are usually paid a forgivable draw, which is an advance of about $1,800 or $2,000 a month, $300 in car allowance, $100 cellphone allowance, and 125 basis points for each mortgage transaction generated, Padilla said. For example, based on the 125 basis points, a salesperson may earn $1,250 on a $100,000 transaction, he said.
“The average production of my sales team in Puerto Rico is $800,000 a month,” he said. “Loan service and customer service jobs pay $15 an hour. There are about 90 Puerto Rico residents that we hired plus the retail staff, which brings the number to 125.”
Another 50 may be hired for loan setup depending on how the market evolves in about 60 days, Padilla said. Many part-time employees may get permanent jobs after taking and passing the U.S. licensing test in June, he said, noting that as a permanent employee they could benefit from fully or partially funded medical and 401(k) plans.
“We have to see how the market reacts after the lockdown is lifted,” he said.
Padilla said he has been pleased with the “quality of talent” among Puerto Rican professionals, something he says bodes well for the island’s future despite the current difficulties.
“We have hired 24 web developers and computer engineers in the last two years,” he said. “We have them at the San Patricio office and they have developed platforms copyrighted here that are being used not only in Puerto Rico but in the states, the Philippines and India. We do all of this here. We are doing a sort of Coquí Valley here.”