Operating in the digital dark ages could be destroying the already dwindling profitability of commercial mortgage lenders, according to a survey by Ernst & Young.

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 loan originations worth $25.6 billion in 2000.

Commercial mortgage lenders across the board are struggling with increased competition, as well as highly-volatile and declining capital markets. Unfortunately, many are also struggling with outdated processes and technologies.

"For years, observers have wondered if the data-intensive commercial mortgage lending business is as efficient as it could be," said Joseph Rubin, director of the real estate advisory group's financial services practice.

According to the study, the answer to that question is a resounding 'no.' However, moves are underway to make the Web a key part of commercial mortgage loan transactions, thus reducing administrative costs, increasing profitability -- and perhaps reducing consumer expenses.

Commercial mortgage lending is data-intensive, and that data must be shared 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.

"We found that most of the technology investments of the major lenders have focused on building underwriting systems, and little attention has been paid to the origination and closing processes. As a result, there is little technology used to facilitate the movement of data through the many steps of making a loan," Rubin said.

Examples of inefficiency were widely found in the study. For example, one of the participants admitted to manually keying data into 11 different systems from loan origination to servicing, and only one of the 10 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," Rubin said.

Lenders believe that the most important operating benchmark for their businesses is profitability per loan. Yet most don't have any idea what their operations cost, so they are clueless as to the margin for individual transactions.

"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," Rubin said. "Lenders now have an ideal opportunity to enhance both their profitability and competitiveness through process improvement enhanced by these new solutions."

According to the Mortgage Bankers Association of America, Web-enabled commercial mortgage lending and trading exceeded $2 billion in volume during the first half of 2001.

Lenders across the country are teaming up with technology firms to figure out ways to integrate the Web into their loan process. In many cases, the resulting solutions are a combination of off-the-shelf software and customized coding.

It works just like most other online transactions. Either the borrower or loan broker submits loan application information and documents online. This information can then be automatically moved into the lender's existing technology systems, thus eliminating the need for time-consuming -- and often error-prone -- manual data entry.

To spur on development in this new technical arena, a group called the Mortgage Industry Standards Maintenance Organization (MISMO) is currently developing standards for commercial mortgage transactions conducted online. The group is headed up by the Mortgage Bankers Association of America and the Commercial Mortgage Securities Association.

MISMO hopes to send out its first release this year. It will include a data dictionary with more than 700 data elements.

Of course, much of the push for adoption of Internet technologies is coming from the high-tech firms who would scoop up lenders as clients. But if the Ernst & Young study is any indication of the state of the industry, lenders would do well to invest in these systems now, rather than continue to waste dollars on processes from the punch-card era.

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