According to almost everyone you talk to, the commercial mortgage industry is in need of an overhaul--technology-wise. Technology continues to be underutilized, and too many decisions are still made through the use of glorified Excel[R] spreadsheets--the key remnant of the industry's last major "innovation." [??] Not to mention the fact that too many lenders continue to use a hodgepodge of poorly documented, home-grown and antiquated applications. In addition to problems associated with inflexibility, older technologies are costly to maintain and less efficient than the newer platforms now available. [??] According to the Mortgage Bankers Association (MBA), there was $2.845 trillion in commercial/multifamily mortgage debt outstanding at the end of the third quarter of 2006. To help manage and service those loans, the industry as a whole is spending about $3.5 billion a year on mortgage technology, according to Needham, Massachusetts-based Tower-Group, a research and consulting firm.
As for the top-100 loan servicing organizations, they spend millions, or, based on my analysis, an estimated $650 per loan, on information technology (IT)--which is also about what they generate in net profit. That is a major investment. But are companies spending it on the right things?
Unfortunately, most technology industry assessments show the average organization spends up to 80 percent of its budget on maintaining existing applications and infrastructure, and these costs show no sign of declining. It's not hard to imagine the value of a more optimized IT infrastructure.
If the top 100 servicing firms could move to an IT budget more balanced between maintenance costs and new development/software, it could free up almost $40 million, or $150 per loan, to invest in reducing operational costs and/or in new services and capabilities, by my estimates.
Over the past few years, there has been an increasing level of pressure placed on the management of all types of financial institutions to get all possible efficiencies out of their existing systems. Virtually every major commercial servicer has implemented, with varying degrees of success, initiatives to keep costs under tighter control and to reduce those costs wherever possible.
In the next one to two years, they will find that few opportunities to cut costs remain within existing technology and people infrastructures, and that further reductions in expenses are not really feasible without seriously undermining and endangering their ongoing operations--which are already showing signs of strain.
While the complex and often unique nature of individual commercial mortgage transactions limit the perceived potential for high levels of business-process automation, there are several areas in which organizations could improve communication, data integrity and overall efficiency. This article examines the trends that are driving commercial lenders and servicers to confront their historic resistance to change, as well as why the traditional software vendors have been slow to respond. It also looks at the new enabling technologies that can significantly reduce the industry's operating costs and compliance risks, and improve customer service and satisfaction levels.
Global trends in technology
Let's begin by looking at the trends that are driving the need to change.
The global financial services industry is transforming how it applies technology to support its business needs at the enterprise level. In the opening address to more than 600 financial services executives attending the 2005 TowerGroup Financial Services Business & Technology Conference in Boston, Karen Cone, TowerGroup's president and chief executive officer, mapped this transformation starting in the mid-1990s--and identified the financial services mega-trends she expects to dominate the industry through 2010.
"The initial vision behind the business/IT governance models and the customer relationship management [CRM] and data-warehousing infrastructures first built in the mid-1990s focused on technology serving financial institutions at a truly enterprise level," said Cone. "In the 10 years since, we've experienced the peaks and valleys of economic upturn, downturn and recovery, regulatory emphasis, new technologies and processes, and an...