Finance & Investment: The Future of Automation: Is CRE Ready for Full-Scale Electronic Loan Processing?
- Feb 10, 2012
By Keat Foong
In the airline industry, consumers can begin and complete the ticketing process entirely online. But the commercial real estate industry has long lagged behind when it comes to employment of such electronic automation. Ultimately, it may not be practical, or even desirable, for the industry’s loan processing to be as advanced, but automation continues to progress, with several successes on the horizon.
“We are on the verge of the technological issues being solved. Once that happens, it will become more interesting for everyone to participate (in the new systems),” predicted Jim Flaherty, president of CMBS.com. Flaherty thinks the commercial property industry is close to the universal adoption of XML, a computer language that renders the data contained in scanned documents, formerly incorporated in, say, pdf or Microsoft Word files, machine readable and automatically transferable into back-office storage systems.
One concern specific to the commercial real estate industry is the question of how to avoid the repeated input of data at various stages of the mortgage loan cycle. As CMBS.com explains, “origination data reaches the lenders in a wide range of formats and levels of completeness.” As data is input throughout the mortgage financing life cycle—from origination through underwriting, closing, servicing and even disposition—it can eat up significant human labor hours, with potential for typing errors or lost information. For example, the mortgage originators receive third-party re- ports in a variety of files. The transfer of information to their computer systems often involves copying and pasting.
To automate the data transfer process in the commercial real estate sector, the Mortgage Industry Standards Maintenance Organization, or MISMO, a “technology standards development” organization for the real estate industries, has identified a need for a common XML language and a data dictionary that ascertains and defines the common terms used in the industry, such as “loan amount” or “credit risk.” With the achievement of these two requirements, data could then be easily transferable from system to system. “MISMO has gone through all the property types and identified key data to understand in each of the sectors,” said Flaherty, who is also a governance member of MISMO’s commercial workgroup.
Currently, in the commercial real estate world, electronic commerce is most matured on the back end—in the loan servicing stages of the loan life cycle—and least advanced on the loan originations side, according to Flaherty. “I think where we are in the cycle is very early,” he said. However, “when the lender takes the application and moves through commitment, closing, servicing and disposition, all that part of e-commerce—that is mature. It is way better than it has been.”
One reason that processing on the loan servicing side is more technologically advanced than on the originations side lies in the nature of loan servicing. The repetitiveness of the loan servicing process lends itself well to, and creates a greater need for, automation, suggested Stacey Berger, executive vice president of Midland Loan Services. “Origination is a one-time event, (but) servicing on a 10-year loan entails hundreds of processing, asset management and payoff events. There are hundreds of discrete actions in servicing over the life of the loan. Originations, by contrast, though by no means simple and easy, is a one-time process,” Berger pointed out.
In the area of loan originations, it appears that Freddie Mac may be among those that are most advanced in placing the system online at the pre-application, application and underwriting stages. At the other end of the spectrum, life insurance applications are still submitted in the form of paper packages that are Fedexed, emailed and “pdf’ed,” noted Larry Stephenson, executive vice president & regional manager for NorthMarq. Falling in between the two groups in technology utilization, CMBS loan originations today employ technology to a greater extent than life insurance companies but less so than Freddie Mac.
There may be several reasons that certain financing sectors are less automated than others. “Multi-family properties can be complicated, but even the most complicated multi-family property transaction is not as complicated as a mall transaction that has 50 leases for 50 tenants. Each individual mall lease differs and displays its own tweaks,” said Stephenson. Indeed, NorthMarq had attempted to develop an automated underwriting system but ran into difficulty in handling the large number of variables in the commercial mortgage loan.
Next Steps for XML, MISMO
In order for the commercial real estate industry to advance computerization further, XML needs to be more universally adopted and the data dictionary completed. CMBS.com’s Flaherty explained that an XML spreadsheet can, for example, incorporate more information by allowing for more than the two dimensions possible in an Excel spreadsheet. MISMO is in fact currently working on developing standards for commercial real estate loan originations that would allow the borrower to submit property information in XML files to the lender. “We are trying to make it as basic and fundamental as possible. MISMO has not been as successful so far because of the massive dictionary. However, the loan originations standard is not as massive.”
MISMO is about halfway through the development of these standards for loan originations, and the standards should be completed in the next few months, reported Flaherty. Meanwhile, at the servicing end, the Dodd-Frank financial reform law requires the adoption of XML for all CMBS investor reporting. “By the spring of 2013, 2014, all back-end investor reporting for CMBS will be in XML,” he said.
At the loan originations end, however, it remains to be seen how many lenders will take advantage of the borrower-input XML technology that will be made available. “Companies may be using (these) tools to underwrite financial statements wherever that is available,” said Mark McCool, executive vice president & head of servicing at Berkadia. “But loan originations is more borrower- than technology-focused. We are on the phone with the borrowers, walking them through the approvals process. That is a more personal relationship, and it is a differentiator and important to us. Additionally, at the end of the day, the originator needs to know every aspect of the loan they are recommending.”
In this regard, commercial real estate financing at the application stage may by choice never reach the automation level achieved by the airlines and many other industries.
For examples of successful application of automation on both the origination and loan servicing sides, see “Midland, Freddie Mac Achieve Advances in Online Automation.”