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Standardize this! Efforts to bring profound new efficiencies closer to reality in the commercial and multifamily mortgage markets are moving along. The Mortgage Industry Standards Maintenance Organization (MISMO) is leading the way.

THE IMPORTANCE OF STANDARDS IS GROWING, AND THE MORTGAGE BANKERS ASSOCIATION (MBA) IS LEADING THE WAY. Within the domain of mortgage finance, the commercial and multifamily industries operate uniquely. Unlike the residential industry, the very nature of commercial finance--characterized by large loan amounts, complex and subjective analyses and the lack of a consumer/political nexus--resulted in structural preconditions that were "givens." Originating and underwriting transactions had long cycle times (the period from start to finish). Necessary information was embedded in reams of paper and extracting that data was as much art as skill. The facts of a deal required additional due diligence beyond what was presented. The net effect was a consensus that there was a certain way deals were done and by which the industry operated. There was also very little reason to change the basic process. The entire industry value chain operated in a consistent manner.

The seeds for change were planted during the real estate recession of the late 1980s and early 1990s. One of the casualties of this event was the thrift industry, and among the regulatory responses to this crisis were the actions that ultimately resulted in the creation of a nationwide secondary market for commercial debt. In order to minimize taxpayer expense, the Resolution Trust Corporation (RTC) essentially created a public capital market where none existed before.

The creation of a commercial mortgage-backed securities (CMBS) market was the first of three waves of change over the last 10 years that have had profound effects on commercial finance. It bolstered the linkages between the public debt markets and individual financings. It changed the degree of disclosure and transparency required for transactions and it also highlighted that the processes involved in making and servicing commercial mortgages were inefficient. What was previously viewed as an unchangeable part of the landscape came to be seen as process bottlenecks that had to be changed in order to increase profitability.

The second wave--technological--resulted from dot-com era visions of trying to migrate everything to the Internet. It was initially based on a value proposition that if a firm used just one Web-based application for, say, all its origination activity, the resulting cost savings would be huge. While at some very high level this made sense, it didn't take into account the numerous process changes required to transition to the new ways.

Lenders and servicers saw no market share increases or profitability gains, largely because information portability (i.e., interconnectivity) was neglected in favor of automation alone. The recent rise of extensible markup language (XML) is a response to this need, and heralds a period of rapid technological innovation where interconnectivity and processing capability are united. It has proved far harder than initially thought, but the dot-com dreams are being realized. As you read this, more and more firms are beginning to underwrite, process and sell commercial mortgages through a Web interface.

The industry is now witnessing the third wave of change. Because of the influence of the secondary markets and technology, this third wave will manifest itself as an era of data and process standardization. At its most fundamental level, a standard is nothing more than agreement. A data standard is an agreement between trading parties and stakeholders to apply a precise meaning to a specific data element or set of data elements. For a process standard, it means agreement to perform some activity within a range of allowable sequences.

In addition to the benefit of lower costs, there are two additional key benefits from this rise of standardization: transparency and consistency. Information can flow between trading parties without an accompanying translation table, and the net effect is the industry is increasingly speaking the same language. And as the adoption of process standards grows, industry players are increasingly able to make improved pricing decisions because the predictability of the effort behind activities is better known and communicated.

The standards revolution has already begun. The industry is normalizing its information into data standards through the activities of the Mortgage Industry Standards Maintenance Organization (MISMO). The MISMO Commercial Working Group, led by chair Catherine Rodewald of Prudential Mortgage Capital Corporation and vice chairs Joanne Denver of David L. Babson & Co. and Ken Beyer of MortgageRamp, is replicating in the commercial and multifamily industries the success of the MISMO residential standards.

The MISMO commercial standards are being built to meet the specific needs of commercial finance within the larger framework of a mature and stable standards body that can meet the market's need for transparency and consistency. More information on the commercial standards effort can be found at www.mismo.org.

The industry is also analyzing its processes along the dichotomy of commonly accepted, industrywide activities and proprietary, value-added ones. This is another area in which MBA--with its broad, diverse industry support and active membership--plays a critical role. Through its committees and task forces, it shapes the discussion and codifies the growing list of "common steps" into "industry standards."

Just as the industry is shaping its data into a common core model with specific extensions for unique or proprietary needs, it is similarly adapting this model to the inventory of its processes. The creation of back-up certification for Sarbanes-Oxley compliance, the development of the ACORD Form 28 (Evidence of Commercial Property Insurance) and the delineation of a servicer's duties in Article III of CMBS Pooling and Servicing Agreements (PSAs) are all examples of this in action. More information on these and other activities in the world of commercial finance can be found at www.mortgagebankers.org.

One common concern about standards is that they somehow commoditize the underlying activities. Experience indicates that the opposite is true. Standards do not drive change; they're a response to change. At some point in an industry's lifecycle, structural obstacles to standardization diminish. Once this occurs, external forces drive the development and implementation of standards--the data needs of the CMBS marketplace, for instance, or the growing needs for transparency in many financial activities. The adoption of standards is a fundamentally need-driven exercise. That is one reason why MISMO is so successful--those firms that will actually use the resulting standards are the ones out there in the trenches developing the data dictionaries, the XML architectures and the data-transfer specifications.

MBA invites you to join in to help shape the direction of change in our industry. The view of the future from here is incredible.

Daniel Szparaga is senior director of MBA's Commercial/Multifamily Real Estate Finance Division.
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Title Annotation:Cover Report
Author:Szparaga, Daniel
Publication:Mortgage Banking
Geographic Code:1USA
Date:Jan 1, 2004
Words:1077
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