REQUIRED READING: Improve Your Approach To Labor-Intensive Loan Tasks

As the real estate industry weathers a storm in the origination markets, commercial mortgage servicing operations are generating vital cashflow for mortgage bankers, portfolio lenders and financial institutions. In fact, many firms are severely reducing commercial conduit lending activities and renewing their focus on increasing operating efficiencies in their servicing divisions.

Consequently, proven approaches that combine today's state-of-the-art servicing technology with process improvements offer servicers an effective strategy for achieving highly efficient and cost-effective commercial mortgage servicing. This approach can boost the overall bottom line and position the servicing operation for greater efficiency and increased capacity for years to come.

Implementation of up-to-date technology – by the servicing operation itself or through an outsourcing partner – is a first step toward achieving meaningful process improvements. For servicers willing to harness what today's fully integrated platforms have to offer, the benefits can be pervasive.

With an integrated, Web-based system, loans are seamlessly transferred into servicing after they close. The data, documents and reports from the origination file become the basis for an electronic loan file. All documents are imaged, making the servicing operations a paperless environment.

In addition, all servicing and processing data, transaction histories, comments logs and borrower communications are maintained in the database. Credit information such as property operating statements, rent rolls and site inspections is then input directly into the system.

Because all of the information is contained in a relational database, it can be sorted and stratified across any combination of data elements. Doing so can provide significant enhancements to risk-management capabilities and portfolio-management strategies while increasing the income margins through process efficiency.

Further efficiency and cost reductions can result from process improvements built into and realized through the system, such as workflow tools that automatically distribute work to the appropriate party and provide tracking and exception reports to management.

Automated ticklers alert managers to pending tasks via e-mail, for example, while systems built using browser-based software deliver intuitive navigation for internal and external users. Using the Internet or dedicated telecommunication lines, servicing 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 standard data files through Internet portals.

With a robust technology platform in place, servicing operations are in a position to rethink and re-engineer countless servicing activities for greater efficiency, practically transforming the way servicing staffs work on a daily basis.

To illustrate this point, I will highlight three important servicing processes – financial statement analysis, asset management and servicing transfers – describing how current technology combined with transformed processes can increase operating efficiency.

Statements
Spreading property financial statements has traditionally been a labor-intensive activity, as large commercial mortgage-backed securities (CMBS) servicers collect and analyze tens of thousands of financial statements a year.

Using older methods, the servicer created and mailed individual letters to borrowers or property managers, tracked the financial statements as they arrived in a spreadsheet, spread and analyzed the statements in Excel, and then uploaded the statements in a correct format for the particular loan product, such as CMBS loans, agency loans, private investor loans, etc.

Applying today's technology, servicers can now schedule the spreading of financial statements directly in their servicing system workflow tool – automatically requesting the financial statement from the borrower via letter or e-mail. When the statement arrives, the scanning of the image will automatically trigger the workflow process and assign the statement through a Web-based system to the appropriate servicing personnel.

Using the borrower's formatted electronic image and the integrated information from the servicing system to spread the statement can dramatically improve efficiency. Finally, the advanced platform rolls up the analysis into multiple preformatted templates to accommodate each investor's deliverable format.

Another major area for improvement is borrower-initiated asset-management requests, such as assignments, assumptions and defeasance, which are often time-consuming and expensive. Furthermore, these activities require knowledgeable resources, but experienced asset managers can be a scarce commodity in today's market.

Older methods required asset managers to spend an inordinate amount of time requesting loan files and manually scanning the paper documents for relevant information on the requested transaction. Asset managers became highly paid administrative resources, retyping and photocopying documents required for a transaction and making handwritten notes in loan files.

Now, asset managers can significantly reduce the time spent on administrative activities associated with a transaction – reducing costs through increased transaction speed and optimized headcount.

Electronic imaging, which uses optical character recognition to store an image of each loan file, enables asset managers to handle borrower requests as they are presented in the workflow system.

With this method, managers can retrieve entire loan files electronically and scan the documents for relevant sections. They can then cut and paste – without retyping – key parts of the document into a prepared correspondence template, deliver it to the borrower, save the correspondence, and make comments or annotations directly into the servicing system that completed the transaction.

The financial analysis and business case can be stored electronically in the loan file, providing appropriate backup documentation and improving data integrity.

Transforming transfers
Technology developed by the Mortgage Industry Standards Maintenance Organization (MISMO) is helping to revolutionize servicing transfers, another activity that was once labor-intensive and costly.

Older servicing transfer methods required significant manipulation of the data when they were moved from one source to another. Multiple personnel manually entered the data into key fields within the servicing system and then – because the data had no boundaries and few, if any, edits – had to perform multiple quality-control checks and physical file reviews to ensure its integrity.

The newer MISMO technology allows data and documents to be transferred using a common definition and edits, thus minimizing the required time needed to transfer data between third parties.

There are three major components to the new data standards: The first is an XML transaction architecture to facilitate the 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.

The transfer requires little human labor involvement and performs many edit checks within the standard. Today's available up-to-date technology systems already comply with the MISMO standards.

Moreover, recent transfers of data between interim servicers and primary CMBS servicers have shown significant cost and time savings in the more labor-intensive servicing activities.

As demands for greater efficiency intensify, servicers must find ways to leverage personnel across their operations. The best servicers will therefore employ strategies that reduce costs without compromising high-quality service.

In short, coupling today's state-of-the-art systems with practical process improvements has proven to be a successful strategy for a number of firms, and more servicers are implementing the approach. Why? Employing technology, improving key servicing processes and maintaining service quality is possible – all with a minimal rise in headcount and a proven return on investment.

Maynard Ahner is senior vice president of the software products group at Midland Loan Services Inc., an Overland Park, Kan.-headquartered provider of servicing and technology solutions for the commercial real estate finance industry. Ahner can be contacted at (913) 253-9223 or mahner@midlandls.com.

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