Inefficient operations hurting commercial mortgage lenders

Real Estate Weekly, Nov 7, 2001

The profitability of commercial mortgage lenders - already hammered by declining margins due to increased competition and capital market volatility -- is being further eroded by the inefficiency of their operations and insufficient usage of technology to support their business processes. That's the conclusion of a survey released by Ernst & Young LLP Capita/ Thinking, Inc., a financial services technology company that sponsored survey.

The survey, which was conducted by Ernst & Young's real estate advisory services group, analyzed responses from 10 of the largest lenders in the commercial mortgage market today. Together, the survey respondents accounted for $2516 billion in loans originated in 2000. In addition, nine of the ten lenders surveyed originated loans with the intent of creating and selling mortgage-backed securities, suggesting that the survey covers a significant portion of the CMBS marketplace.

"For years, observers have wondered if the data-intensive commercial mortgage lending business is as efficient as it could be," said Joseph B. Rubin, director of the real estate advisory group's financial services practice at Ernst & Young. "Now, for the first time, we have a study of leading lenders that finds significant operational roadblocks and identifies serious 'points of pain' in the mortgage origination, underwriting, and closing processes that prevents the lenders from realizing efficiency and maximizing profitability."

Commercial mortgage lending is extremely data-intensive, and that data needs to move among the many parties playing a part in the transaction. The management and transference of that data is one of the industry's key operational weaknesses.

For example, one oft the participants admitted to manually keying data into eleven different systems from loan origination to servicing and only one of the ten respondents could electronically generate legal documents directly from its loan database. None of the companies surveyed receives data electronically from its borrowers.

"This inefficiency means that additional hours must be spent to process each loan, directly impacting productivity, profitability, and competitiveness," he said.

Among the other points of pain described by the lenders included in the survey:

* The inability to receive borrower financial information, appraisal data, and engineering/environmental reports in a standard format without having to manually key the data into the lender's underwriting system;

* The many different systems lenders use for each of their key business processes, causing data to be re keyed over and over to move data from system to system;

* The difficulty in accumulating the data of multiple lenders pooling assets for a securitization and efficiently transmitting that data to rating agencies and investors;

* The fixed cost associated with minimum required staffing levels during periods of low origination volume;

* The onerous and time consuming quality control procedures necessary to ensure data integrity in light of process and system inadequacies.

Those surveyed cited profitability per loan as their most important operating benchmark. However, the survey also showed that most lenders lack the means necessary to accurately compute profitability per loan because they have so little access to data on their cost of operations. Increased adoption of technology to capture loan data and streamline operations could provide lenders with a much more reliable picture of their profitability, Rubin said.

"The bad news is that the commercial mortgage sector does not benefit from published industry operating benchmarks or best practices, so the lenders can't tell how their operations and profitability compare to their peers. But they acknowledge that improvements to profitability are possible and necessary," he noted. "The good news is that they are already exploring' the array of new Web-based technology available to the industry that promise to streamline the flow of information and make the lender's business far more efficient from origination through closing and securitization. Lenders now have an ideal opportunity to enhance both their profitability and competitiveness through process improvement enhanced by these new solutions."