The commercial mortgage technology revolution, redux.
Commercial real estate owners clearly demonstrated they were not ready for the online mortgages promoted during the dot-com boom. However, the business of originating and servicing commercial mortgages has gone through a dramatic transformation. Unfortunately, the technology platforms that support the business haven't yet caught up.
Historically, commercial mortgages were sourced, underwritten and closed on a one-by-one basis by local mortgage finance experts and funded by portfolio lenders or investors. Data was assembled and transmitted in hard copy, and funded loan files filled bankers boxes in the investors' loan administration offices. Loans stayed in the lenders' portfolios until maturity, when they were paid off or refinanced.
The capital markets have had a transformational impact on the commercial real estate finance business. Securitization has created new sources of capital and liquidity for commercial mortgages. Mortgage bankers have many new funding sources for virtually every financing need. Fannie Mae and Freddie Mac have proprietary lending programs for multifamily properties. Specialty finance companies provide mezzanine and bridge loans. Life insurance companies now originate for securitization programs as well as their investment portfolios, matching funding sources with borrowers' needs in terms of proceeds, rate and flexibility. Banks, which traditionally made short-term floating-rate loans, are now the major originators of fixed-rate conduit loans.
The demand and velocity of information to support the "new" commercial real estate finance business are enormous. In a commercial mortgage-backed securities (CMBS) transaction, thousands of data elements on hundreds of loans flow through mortgage bankers, issuers, rating agencies, accountants, investors, B-piece buyers, master and special servicers. Commercial mortgages are now a fungible commodity. However, the commercial mortgage life cycle is a disjointed and messy series of processes. Technology can bridge the gap, but what has been lacking in the past is a common language to transmit and receive data among the market participants and an integrated platform to support production, servicing and secondary market activities through the life of the loan.
The Mortgage Bankers Association (MBA) has sponsored the development of data standards for the commercial mortgage industry through the Mortgage Industry Standards Maintenance Organization (MISMO). There are three major components to the data standards. The first is an extensible markup language (XML) transaction architecture to facilitate data exchange among market participants. The second is a data dictionary to provide definitions and corresponding nametags for the data elements. The third is a data model that provides the relationships between the data elements, which is delivered as a specification for a specific type of data transfer such as loan boarding or a request for title insurance. MBA staff and industry participants have been working to make MISMO a reality. When completed, MISMO will maintain the standards and promote their usage.
The completion of the MISMO standards will greatly increase the accuracy and reliability of data transfer in the commercial mortgage business. Instead of entering and re-entering data manually, it can be delivered over the Internet, validated and then directly uploaded into in-house systems. This will result in increased efficiency and cost savings in loan production, underwriting, closing, securitization and servicing. As industrywide data-transfer utilities, the MISMO specifications don't require any change to the relationships between business partners. Unfortunately, the limitations of today's systems represent a major impediment to realizing the benefits of the MISMO data standards.
To fully utilize the new data standards, the prototypical commercial mortgage technology platform will be fully integrated and support the business through the life of the loan. On the front end, the platform will support the loan origination process through application, submission, underwriting, commitment, closing and funding. A single relational database will capture all information, analysis and reports generated internally or externally, whether as data elements, imaged documents or electronic files such as Microsoft[R] Word documents or Excel spreadsheets.
The system will have workflow management capabilities to administer the process of ordering and inputting third-party reports, such as appraisal, title, engineering and environmental. All credit committee packages, rating agency submissions and securitization files will be produced by the system. Revisions or updates to data will automatically flow through the system to update the output. The system will also provide management with tools to monitor the pipeline of loans in various stages of production and better run their business.
The fully integrated system will deliver closed loans directly into servicing. The data, documents and reports from the origination file become the underpinnings of a single electronic loan file, which will ultimately comprise the entire credit life cycle. All documents are imaged, transforming the servicing operations into a paperless environment.
All servicing and processing data, transaction histories, comments logs and borrower correspondence are maintained in the same database. Credit information such as property operating statements, rent rolls and site inspections are directly input into the system. Because all of the information is contained in a single relational database, it can be sorted and stratified across any combination of data elements. This provides significant enhancements to risk-management capabilities and portfolio-management strategies.
Process improvements built into and around the system will result in economies of scale and cost reductions. These include workflow tools that automatically distribute work to the appropriate internal or external party and provide tracking and exception reports to management. Automated ticklers alert managers to pending tasks via e-mail. Systems built using browser-based software will deliver intuitive navigation for both internal and external users.
Using the Internet or dedicated telecommunication lines, servicing and asset-management activities can be distributed anywhere in the world with real-time collaboration. Borrowers can receive and pay bills, submit financial statements and access customer service electronically. Investors can receive reports and have standard data files directly fed to their internal systems through Internet portals or secure telecommunications lines.
New technology platforms will be delivered on a hosted basis, which reduces upfront software and hardware capital expenses. These hosted systems will include all maintenance and upgrades, as well as business continuity and disaster recovery support. Lenders and servicers can significantly reduce their information technology staff and infrastructure, paying for the technology platform based only on their actual usage.
Will this vision become a reality? The first of MISMO's commercial data standards are close to being rolled out to the industry. But their acceptance and use across the industry will be somewhat dependent on users having technology platforms that can fully utilize the data. New, fully integrated technology platforms are being developed and installed, and major technology vendors are also building interfaces to facilitate the new data standards. I believe that we are truly on the cusp of a technology revolution in commercial real estate finance. Time will tell.
Stacey M. Berger is executive vice president of Overland Park, Kansas-based Midland Loan Services Inc., a provider of loan servicing and technology solutions to the commercial real estate finance industry. He can be reached at firstname.lastname@example.org.
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|Author:||Berger, Stacey M.|
|Date:||Jan 1, 2004|
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