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Mortgage Industry's Digital Divide

A decade ago, when mortgage brokers originated a commercial loan it could take up to four weeks to close the transaction. The time needed to mail and ship documents between borrower and lender and assorted other parties only added to the snail's pace.

But today's Web-based applications and other emerging technologies have cut the time needed to close a typical commercial mortgage loan by as much as 30%, say industry sources. E-mailing loan documents and other key collateral data has also trimmed the cost of shipping and storing large stacks of paper.

As technological revolutions go, however, this one is unfolding unevenly. Not all segments of the commercial mortgage industry are embracing the technology at the same rate. A study last year by the Mortgage Bankers Association (MBA) found that many firms still rely on time-consuming faxes, certified mail and reams of FedEx-delivered paper to process, close and monitor their loans.

The study, the first of its kind, fell just short of labeling the commercial mortgage arena as technologically-challenged. MBA polled a group of originators, lenders and servicers responsible for nearly $600 billion in loans during 2004. It also posed a general set of questions to all respondents, plus three sector-specific sets of questions tailored for originators, lenders and servicers.

“Things move in stages, and the commercial mortgage industry is still in a very early stage when it comes to technology. Many firms are just now in the process of converting their paper documents into digital format,” says Daniel Szparaga, senior director of the commercial/multifamily business group at the MBA.

“The complexity of a commercial property loan is one of the challenges. There are so many different people involved during the life of the loan, and many of them are working from different technology platforms that don't always mesh.”

A typical commercial mortgage-backed securities (CMBS) transaction is a case in point. Thousands of individual datapoints on hundreds of loans are siphoned through mortgage bankers, rating agencies, issuers, accountants, investors, B-piece buyers and special servicers.

Since data standards between firms still don't mesh, much of this information cannot pass seamlessly between these players, either. And this language gap forces companies to manually re-enter the information into their systems.

Data standards for the commercial mortgage industry are developed by the Mortgage Industry Standards Maintenance Organization (MISMO), a non-profit arm of the MBA.

Most industry sources believe that slower deal volume will spur the adoption of new technology among many commercial mortgage segments. That may take time, however, as deal volume remained strong into the end of August. Even so, their thinking is that decreasing volumes will require greater productivity gains, not to mention cost-cutting measures, among both lenders and originators.

Old economy

For now, however, most commercial mortgages are still originated and processed the old-fashioned way. For example, more than half of all initial loan proposals from borrowers to originators in 2004 were submitted via fax. The MBA report also found that more than half of all borrowers made their monthly payments with paper checks rather than wire transfers.

Still, some of the findings show that change is seeping into an industry where old-timers once penciled deals on the back of napkins. Roughly three-quarters of all survey respondents store electronic images of loan documents.

Converting paper documents into electronic images may sound elementary.But it's a critical step toward reducing the volume of paper that must be shipped between various players during the life of a commercial loan. Unless a document is scanned into a computer, it must be either faxed or physically shipped.

More loan proposals are sent from mortgage bankers to lenders via e-mail. While e-mail was used to send less than half of all proposals in 2004, market watchers believe that the balance has since shifted toward more e-mail proposals.

Another area that's benefited from e-mail is investor reporting. Most of the reports sent to investors in 2004 were done electronically, according to the survey. What's driving this transition into more of an e-commerce platform? Cost savings are one huge reason, not to mention added efficiency.

“There are huge costs involved in storing paper documents. In most cases, the lenders and servicers are absorbing that cost, too,” adds Szparaga of the MBA.

Hard numbers on the cost of storing paper documents are hard to find. But the survey sheds some light on the problem: Of the total number of complete loan packages that were received by lenders in 2004, less than 30% of that information was received electronically (meaning via e-mail).

The MBA survey defined complete loan packages as borrower financials, borrower credit information, property financials and rent roll data.

Time is money

Unlike most lending and origination firms, commercial mortgage servicers have automated much of their business in recent years. Much of the reason, say sources, is that loan servicing is a high-volume business.

More loans in servicing translate into added revenue. Since a typical loan servicer performs several different tasks during the life of a loan, exchanging information between multiple parties is a constant process.

Servicers do more than just collect money from borrowers. They also remit payment to investors. The MBA survey found that more than 90% of these remittances were paid out via electronic cash transfers, such as wire transfers. On the reporting side, too, servicers sent roughly 83% of all their investor reports electronically.

Midland Loan Services, the giant Kansas City-based commercial mortgage servicer, has spent the past few years both investing in and developing new software. Dave Bodi, an executive vice president at Midland, says that his firm's recent technology investments are already bearing fruit.

According to Bodi, the company has spent far more than most firms on developing its proprietary and commercial software. It does trouble him, however, that many other companies, notably on the lending and origination side of the aisle, haven't taken a similar aggressive stance.

“The commercial mortgage industry as a whole has been pretty slow in adopting new technology. There remains a tremendous opportunity to automate many of these processes, too,” Bodi says, adding that the booming market of recent years may be partly responsible.

“When the margins are good and the business is thriving, it's hard to get many people to focus on new technology.” At mid-year, Midland held a commercial loan servicing portfolio of roughly $174 billion.

Technology tools

Midland uses plenty of homegrown software. It also sells its software to other commercial loan servicers, including competing firms. In 2003, for example, the company developed its Enterprise Loan Management (ELM) system.

This software enables Midland to produce centralized electronic files that contain the original loan and collateral documents, including rent roll and accounting data. Bodi recalls when this information was scattered around a dozen different offices in as many cities.

“Now we can file the document in one place and the borrower can submit quarterly, or even monthly, operating statements on the collateral directly into the document,” he says. Most securitized loans, which have many different interests at stake, require that borrowers file this data routinely.

One advantage is that software and data tend to be more standardized on the servicing side. According to Bodi, most servicers no longer rely on hard copies of Microsoft Excel or Adobe spreadsheets to process a loan. He describes this scattered approach as common among many lenders and originators that still utilize outdated software.

While there's more to the Midland technology platform than the ELM system, Bodi credits these centralized electronic files for streamlining the servicing process.

He also no longer wastes time tracking down a scrap of paper with some vital loan data written on it. These small steps can add up to larger efficiencies, and that's increasingly important in such a competitive market.

“We're being asked [as servicers] to do more for our clients at the same price. If our margins get thinner, this technology can help us win more deals by offering the best servicing,” he says.

Moving parts

Consolidation among servicing firms is another reason investing in technology is a good defensive strategy. Ten years ago, the top 10 firms serviced roughly half of the $190 billion in commercial mortgage loans, according to the MBA. The remaining 50% of loan servicing volume was distributed between 127 firms.

Fewer firms are taking down more of the business. In 2005, for example, the top 10 firms serviced roughly 78% of the $1.4 trillion in loans. And the balance of that pie, or 22%, was divided up between just 77 companies. Most industry sources say that consolidation will continue.

But Stacey Berger, executive vice president at Midland, believes technology isn't the catalyst for industry consolidation because its emergence has made companies, big and small, more efficient. “When you're in a commodity business such as servicing, being the lowest-cost producer can only help. That's what these [technology] tools enable us to do, too.”

Taking their cue

The single-family mortgage industry has led the way in adopting new technology in recent years. Much of the reason for this is structural. After all, most cookie-cutter, single-family mortgages involve far fewer principals than a typical office building or hotel loan. The dollar amount at stake in most single-family loans also rarely ever approaches the dizzying heights of some commercial mortgages.

Comparisons between the residential and commercial segments of the industry may therefore be unfair. But sources on both sides of the aisle agree that the residential model is the one to follow. New technology has dramatically changed the way that most home sales are closed, too.

“What everyone wants at a residential closing are no surprises. It always used to be that there would be some kind of surprise at the closing table, too,” says Tim Anderson, vice president of eMortgage Solutions at Stewart Transaction Services, a subsidiary of Stewart Title Co.

In 2004, Stewart developed and patented a collaborative electronic loan file for single-family mortgages called SureClose. This online transaction management software is similar to Midland's ELM system. Both, for example, allow various parties to collaborate on documents electronically.

But the difference between the two applications is most notable at the closing. Unlike most residential closings that can be blind — meaning that last-minute issues can take buyers and sellers by surprise — SureClose helps ensure that all pre-closing terms are ironed out in advance.

“This gives the borrower and the lender complete transparency at the closing table. That means no more missing documents,” says Anderson. Borrowers using Stewart for title insurance can simply log onto a Web site to review all of their loan documents. Once the loan is closed, too, Stewart puts all of the loan documents onto a CD for the borrower.

But can the average closing and subsequent servicing of a complex commercial mortgage loan aspire to be this seamless? Anderson acknowledges that commercial loans involve many more players than residential loans. Commercial mortgages also require attorneys, borrowers, servicers, lenders and even bondholders, if the loan is securitized.

“I think it will someday be possible to do a truly paperless e-mortgage on the commercial side,” predicts Anderson. “I just think it will be many years before that happens.”

Parke Chapman is the senior editor of NREI.

NREI publishes a monthly technologye-newsletter. For story ideas, contact Parke at [email protected].

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