For most professionals involved in financing commercial and multifamily real estate, Carly Simon said it best — these are the good old days. Low rates, plenty of capital and an inexorable receptiveness toward complexity have resulted in an unprecedented and sustained volume of transactions. While it remains to be seen whether this era is merely a high point or the start of a paradigm shift, one trend is unmistakable: Commercial real estate finance has visibly evolved since the days prior to Y2K, and technology has been a key driver of this change.
In the 1990s, the Internet was in many ways a novelty and e-mail was primarily an internal communication vehicle. Paper was the only transactional medium. Today, firms have built transactional capabilities into their web sites. Many firms send information to their trading partners electronically, and more firms than not have adopted some level of “paperless-ness” in their operations. In fact, because so many servicing processes are really focused on the collection and transfer of data from borrowers and third parties to investors and rating agencies, some servicing firms view themselves as technology companies that are active in the real estate markets.
The Mortgage Bankers Association (MBA) is conducting a survey of the commercial mortgage industry to assess and quantify the methods by which firms transfer information to each other, but one point is clear: Significant sums of money have been spent on applying technological innovation to the process of financing income-producing properties, and it appears that this is continuing unabated. Any presumption that the real estate finance industry is in some way averse to technological innovation should be discarded.
Technology and innovation will always be an important facet of differentiation among firms in a market. But it is also a rising tide that lifts all boats. Depending on their trading partners' capabilities, innovators can either flourish or be stifled. A firm can use technology to tremendous benefit within the enterprise, but without the capability to extend these benefits beyond the enterprise, their potential impact is not achieved.
It is at this critical link — the interchange of information between firms — that MBA plays a fundamental role in the industry. It is possible for firms to develop individual formats to exchange information with each other, but the operational efficiencies of an electronic operating environment are quickly overwhelmed by the cost and complexity of maintaining multiple proprietary interfaces. Data standards provide a solution to this problem.
Data standards provide the basis from which information received electronically from a trading partner can be processed unambiguously and securely. They allow information to be processed seamlessly throughout the entire mortgage value chain, reducing the need for manual re-entry of information from one system to the next. They also provide the path for moving toward the paperless transaction. For the commercial mortgage industry, these standards are developed by the Mortgage Industry Standards Maintenance Organization (MISMO), a non-profit subsidiary of MBA.
MISMO establishes a formal framework that firms can use when they send information back and forth to each other. At their core, data standards are simply an agreement to use a particular set of data points to electronically transmit information. They're built on a framework that consists of three key components: a set of protocols for specifically sending or receiving data; a technical framework for building these protocols; and a comprehensive listing of the specific data points used by all the protocols. Together, the components of this framework provide the building blocks for efficient data transfer.
The scope of MISMO's standards goes beyond information transfer and into the arena of completely electronic transactions. MISMO is the hub of activity for electronic mortgages (eMortgages). While it may sound far-fetched that the mortgage, a paper-based document, can ever be converted into a completely valid and legally-enforceable electronic file that is electronically executed with digital signatures, the reality is that the industry has already embarked on just this path.
It is estimated that thousands of electronic mortgages have already been closed in the residential industry. MISMO's commercial effort is leveraging this success to develop solutions that meet the specialized needs of the commercial industry.
As the commercial real estate finance industry faces new regulatory and compliance obligations, MISMO takes on heightened importance for executives. Ultimately, MISMO reduces costs, streamlines processes, improves accuracy, increases data transparency and boosts investor confidence in mortgages as an asset class.
Daniel Szparaga is senior director in the Commercial/Multifamily Business Group of MBA. He is also vice president of MISMO. Contact him at this address: dszparaga@mortgagebankers.org. For more information on MISMO, log on to www.mismo.org