This week, MortgageOrb spoke with Brad Messinger, senior vice president of the commercial markets group at Zenta, a provider of knowledge- and business-process services to the real estate industry. As he explains, the current credit crunch and associated market turmoils even in the commercial mortgage world have inspired some new trends – both expected and unexpected – in outsourcing plans. Messinger also offers his perspectives on CMBS and the collective markets as a whole.
Q: What processes are most commonly outsourced by commercial mortgage firms these days? Any notable trends or changes lately?
Messinger: Some of the trends that we are seeing are fairly intuitive, while others might come as a bit of a surprise to some. With new originations coming almost to a halt in the CMBS world, and slowing down for balance sheet lenders as well, the outsourcing of new loan underwriting work has slowed considerably.
However, loan originating firms have increased their outsourcing efforts in a number of areas: portfolio management and analytics, loan preparation for whole-loan sales, bond modeling, datatape design and maintenance, and data aggregation and management.
Additionally, many hedge funds and other investors are becoming interested in high-yield debt backed by commercial real estate. Some are new to the arena and others are not properly staffed to perform due diligence on loan portfolios.
We're already working for and in contact with 12 such players. Services that we're providing include site inspections, desktop reviews, full-scope underwriting, lease audits, etc. Two other market participants are increasing their outsourcing efforts – multifamily lenders and regional banks (who are looking to sell portfolios of whole loans). We're helping these participants with site inspections, cashflow modeling and datatape population.
Q: How do the credit crunch and other market struggles affect outsourcing decisions?
Messinger: One trend that may be surprising is that the investment banks are involving outsourcing providers in their conversations on how to restructure when the CMBS market returns. The operational delivery model of many investment banks will look different upon a return in the CMBS market.
Q: How should a commercial firm ensure its outsourcing provider is doing its job right? What specific performance metrics might be used for each of the various tasks a company might outsource (loan processing, underwriting, servicing, etc.)? Any other ways to minimize risk?
Messinger: We utilize advanced proprietary workflow, transition and quality-control systems (which are Six Sigma-inspired). We open up these systems to our clients to make the outsourcing process as transparent as possible. Doing so eliminates the "black box" feeling that many clients feel when sending work outside of their shop.
Additionally, we share performance metrics with clients detailing work product after an analyst performs a project and then again after the work product goes through one to three levels of review (depending on scope of work).
Clients should demand that all of their outsourced providers offer this level of transparency.
Q: What's your assessment of CMBS these days? How serious a concern do you think the delinquency increases many foresee will be? When might we finally start seeing the (positive) effects of the more stringent underwriting and conservative deal structures that became popular recently? How long might it take for these revised practices to filter to the bond side?
Messinger: Unfortunately, these are difficult questions to answer. Many issuers are now talking about issuing only one or two securitizations for the full year. Accordingly, we may not see the impact of more stringent underwriting until 2009.
However, I am not as concerned about the impact of delinquency increases as I am about the macroeconomic picture and the financial standings of the banks.
Q: What do you see in the due diligence arena these days? What are the most significant changes from a year ago?
Messinger: The two main changes are the focus on portfolio management and more conservative underwriting. The areas of insurance, real estate taxes, utilities, lease terms and more are all facing more scrutiny.
