REQUIRED READING: New Hazards Prompt Firms To Streamline With Technology

In a commercial mortgage lending environment gripped by a steep origination slowdown and mounting concerns about distressed-loan servicing challenges, professionals along all points of the loan life cycle are taking a closer look at their arsenal of technology weapons.

Ideally, these tools will provide much-needed production boosts to help shops continue to succeed in spite of conditions. But to make the best use of technology – from loan origination software to investor reporting tools to workflow management systems – all commercial mortgage firms must be aware of the latest vital trends in technology, as observed by the experts: the leading tech providers for the industry.

On the loan origination side, declining transaction volumes have dictated that originators achieve an unprecedented level of efficiency if they hope to maintain long-term viability. The mantra of doing more with less often requires verifying not only that the current software of choice is optimal, but also that employees are using it to its full potential.

For instance, ‘With technology, everyone wants to understand how to structure assets correctly, because right now, the spreads are incredibly wide for conduits,’ notes Maynard Ahner, senior vice president of the software products group at Midland Loan Services Inc.

Midland's Enterprise! product is designed to manage the commercial mortgage loan cycle from origination to securitization (if applicable) to servicing and portfolio management. Ahner reports that because of widespread profit-margin compression, originators have been placed under significant pressure to close deals faster and at a lower cost.

This drive for better throughput via technology is particularly marked in the case of Fannie Mae or Freddie Mac transactions, which are often multifamily dealmakers' best bet at the moment but require additional and potentially time-consuming information transfers.

Additionally, profit-conscious originators may wish to leverage their existing technology – which may include previously untapped features – to transition into new product lines or programs and maximize the return on their firm's tech investment.Â

‘During these troubled times, people realize that they can put their people on more revenue-generating opportunities and in more knowledge-based roles,’ explains Jason King, director of financial services and insurance at Hyland Software. Specifically, he recommends relying on computers for the dizzying number of imaging and document-processing steps involved with originating the average commercial mortgage.

Keeping up
While lending will undoubtedly continue to slow, the servicing side of the commercial mortgage industry is predicted to see a brisk increase in workloads – especially with a growing number complex commercial mortgage-backed securities (CMBS) transactions now headed toward probable distress.

Barry Benedict, president of Benedict Group, says that servicers have – so far – managed to stay ahead of the approaching CMBS default/delinquency curve and have found their in-place technology adequate for tackling loan complications.

‘When they run into problems, we give them a what-if scenario where they can try different approaches for restructuring the loan, pick the one that's best and then apply it to their production portfolio,’ he explains. The company has also recently added greater system functionality in asset management to its LOANS! For .Net servicing software to complement its workflow management module, which includes support for collections and related tasks.

Other technology providers report similarly successful results among their clients – thus far. Princeton Financial Systems' customers, which typically include large insurance companies, asset managers and similar members of the investor community – rather than servicers – tended toward conservative deals in recent years and have now evaded major problems, according to the company's senior managing director, Joseph P. Daddario.

Of course, he cautions, ‘That could change. The economy has a big effect.’Â

Even in the absence of masses of troubled loans, nervous stakeholders have noticeably increased their efforts lately to ensure that portfolios are – and will remain – sound. ‘Investors are definitely looking at things more closely,’ remarks Susan Graham, president of FICS.

‘These portfolios have become higher-touch portfolios because of their assets and the focus on those assets now,’ Midland's Ahner agrees. Document management, especially correspondence trails, has consequently taken on greater importance for servicers, and real-time interactive Web tools for both borrowers and investors have become nearly mandatory technology. Day-old information will no longer suffice, he warns.

‘Reporting is a big piece of the puzzle,’ says King. ‘There has got to be transparency in all of those transactions.’ Within Hyland's OnBase enterprise content management system, for instance, customized viewing settings that present only the data sets immediately relevant to a particular investor have jumped in popularity.

Similarly, in response to pressing demands from borrowers and investors for immediately accessible, accurate loan information, Benedict says his firm now plans to roll out an Internet-based version of its product that can also run on mobile devices. The initial release is slated to include both borrower data and property data in order to address transparency concerns.

Daddario stresses the importance of taking full advantage of all opportunities for information within any loan-servicing tech offering.

‘If a client is properly using the product, then they know everything they could possibly know about the property and the borrower,’ he says, adding that certain pieces of information, such as current property condition, will naturally still require analysis beyond what is available in a remote system.

MISMO's gradual emergence
The intrinsically labor-intensive nature of CMBS reporting and servicing transfers has slowly encouraged many members of the industry to at least consider moving away from manual, Excel-based procedures and incorporating more standardized data protocol, such as the XML-based Mortgage Industry Standards Maintenance Organization (MISMO) standards.

Despite the promised reduction in data-keying and massive gains in efficiency achieved by switching to MISMO, however, many servicers have been reluctant to relinquish their old familiar spreadsheets – for various reasons.

‘Part of the problem is that not all commercial servicing systems can support the MISMO files,’ Graham points out. ‘It is an expense to have it programmed into the system.’ Low-volume servicers may find that the undertaking will never make economic sense, given the post-conversion wait period for the return on investment.

For others, the hesitation stems from the perceived current quality of the standards. ‘It is a little premature to adopt [MISMO], because I don't think the standards are quite stable yet,’ states Benedict. ‘But they are going be critical for us and probably all vendors. We are going to have to embrace them.’

Ahner reports that several companies have already warmly welcomed the MISMO functions within Midland's system and are generally pleased with the results. Numerous industry participants labored over the standards for quite some time before their release, he notes, and the early adopters that have already passed the implementation stages have resolved any lingering stability issues.

But based on the results of prior attempts to introduce standardized data technology to the commercial mortgage world, other technology vendors remain slightly cynical about wide-scale MISMO implementation.

In 1993, the Mortgage Bankers Association introduced a database called the Commercial Real Estate Asset Management Systems database, recalls Daddario. ‘Everybody was going to use the exact same database. It didn't work,’ he plainly states. ‘Now, there's MISMO, and I'm sure they're struggling. They're probably having more success on the residential side than on the commercial side.’

‘I find a real reluctance – even among our clients,’ he adds. ‘They tend to have their own ways of doing things, and they don't like change.’

Additionally, even the more change-welcoming firms may now have priorities more urgent than switching systems or rushing to adopt the latest data standards. Establishing fundamental economic health has taken obvious precedence, and King believes another year or two may elapse before companies can safely devote a sizeable amount of attention to MISMO and similar issues once again.

A paperless loan life cycle
The slow path toward MISMO adoption parallels the push for – and corresponding resistance to – paperless functionality in commercial mortgage technology.

‘Paperless is here,’ FICS' Graham states, adding that automatic imaging and capture systems have proven to be especially useful, and borrowers and investors alike appreciate being able to view statements and reports online without needing to wait for mail – or even e-mail. Origination documentation, including tax statements and insurance policies, can also be scanned in order to increase convenience.

But Graham foresees an adoption split between large commercial servicers, who may be forced to adopt paperless technology to stay competitive, and small servicers, who may not immediately experience or recognize efficiency gains by switching to new and initially more time-consuming procedures.

‘They're used to a certain process,’ she says. ‘It works for them, and they're not at the point where they have time to evaluate changing that process.’

The fixed costs and elevated level of expertise required for going paperless might also deter many smaller firms from switching to paperless systems, according to Ahner. Moreover, records-management duties may even increase – an especially serious concern during a time of smaller staffs and aggressive cost-cutting.

Essentially, ‘When can a loan be paperless from origination to the end of its life?’ asks Daddario, highlighting the question that will inevitably work its way into any substantial discussion of industry technology. ‘That's a legal issue.’

‘Right now, the systems can probably house all that information,’ he continues. ‘But somebody has to say that that's good enough – that it's as good as a legal document.’ Although some law firms have advocated a paperless commercial mortgage workflow for as long as 15 years, the perhaps false sense of familiar security obtained from printing a loan document and placing it in a fireproof cabinet continues to dictate practice at other law firms, as well as at many commercial mortgage shops.

On the other hand, Ahner reports that some major industry players, such as Deutsche Bank and Cohen Financial, have gone forward with a paperless initiative that may inspire others to follow suit.

Optical character recognition, which enables the user to search an electronic document rather than view only a picture of the page, may be one key feature that encourages adoption. ‘It's important to make the images better than paper,’ Ahner says.

The commercial lag?
Technology vendors agree that the stumbling blocks along the way for both data standardization and paperless operation may be inherently larger for commercial mortgage firms than for their counterparts on the residential mortgage side.

‘The portfolios are much more dynamic, and there are a lot more factors that affect the commercial world than affect the residential world,’ says Daddario. Property information, tenant information, complex multiple-borrower information and other ever-changing data must be constantly juggled, creating a challenging workload for servicers in particular.

These demands are, of course, mirrored in the shops' systems, which may contain thousands of fields and a great deal of inter-system variance – thus inhibiting progress toward a single streamlined style.

‘It's harder to define a system and maintain the compliance of it because of all the complexities involved with servicing a commercial loan,’ Graham remarks.

Although platforms have made major advances over the past few years and become somewhat more uniform, these systems were long overdue for enhancement, notes King. In contrast to residential mortgage offices, which have largely run on standardized platforms for a while, commercial mortgage shops are likely to have maintained individual spreadsheets and legacy systems for over a decade.

With regard to technology, ‘The commercial folks have a different mentality,’ says Daddario. ‘They just don't have the volume that the residential people have. For a [commercial mortgage] company that has a volume of $5 billion, that may not actually be that many loans.’ Thus, vendors' response to client demand will be altered.

The technology providers agree, however, that no matter the type of mortgage, data security ranks as a top consideration for customers. All vendors must demonstrate unequivocal mastery of this critical area, especially if their procedures involve heavy transfer of personal data.

‘Because we work with our clients on the support side, we take data from them all the time,’ explains Benedict. ‘But now we do it in such a way that it is scrubbed before we get it.’ The company also places an officer on staff to oversee this process at each firm using Benedict Group's product.

Although system features such as dual authentication and secure sign-on can offer a certain piece of mind, King warns companies to avoid simply looking for what he calls ‘security buzzwords.’ Instead, ask the prospective vendor for its complete security testing documentation and audit trails; a reputable company should be immediately willing to comply with the request.

With any tech solution, maintaining comprehensive security requires constant post-purchase attention from the mortgage firm as well, Graham reminds buyers. Smaller companies without dedicated information technology staff members may be especially vulnerable to firewall lapses or neglected system updates.

Ultimately, in addition to the threat of data breaches, with the employee training required to adjust to a new system, implementation costs and the other hurdles associated with going forward with a new system, is anyone actually interested in buying tech these days?

The vendors insist that they have seen not only sustained interest in their products, but a greater drive from forward-thinking companies to invest in potentially money-saving tools – despite the short-term costs.

‘It is a troubled time,’ acknowledges Daddario. ‘But it's also an exciting time. The industry will come out of it – it always does – and from our perspective, it's going to be good for our business.’


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