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12:35 PM
Christine Barry, Analyst, Celent Communications
Christine Barry, Analyst, Celent Communications
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Opportunities Exist for New Technologies in the Commercial Mortgage Space

Celent predicts rapid growth in the use of advanced integration and automation capabilities in commercial mortgage lending.

The commercial mortgage industry is in need of a facelift. Technology continues to be under-utilized and most decisions are made through the use of glorified Excel spreadsheets. While the complexity and often unique nature of these transactions limit the perceived potential for high levels of business process automation, there are several areas in which lenders could improve communication, data integrity, and overall efficiency. In doing so, costs would be reduced and the customer experience improved.

Better integration of both staff and data is necessary. Most individuals involved in the origination process continue to work in silos and very few institutions have central repositories in which all data is stored for easy retrieval. The use of faxes and/or phones to contact third parties, such as appraisers and insurers, continues to lead to backlogs. Greater automation is needed, coupled with more flexible solutions to allow lenders to not only integrate all their data, but also to have the tools to create a more standardized process that enables more complex modeling capabilities with multiple variables. Next-generation solutions are beginning to offer these capabilities, but several opportunities for further advancement still exist.

While only a small number of these advanced next-generation solutions have been deployed to-date, lenders are under increasing pressure to cut costs and are slowly recognizing the insufficiency of their existing systems. As commercial mortgage origination volumes continue to rise, the level of urgency for more advanced technologies and capabilities will strengthen, causing penetration rates to increase. Today only approximately 45% of large banks have advanced integration and automation capabilities within their commercial mortgage origination process, while they exist at only 20% and 7% of mid-size and small banks. Celent predicts that those penetration rates will rise to 70%, 25%, and 12% respectively by the end of 2006.

The following factors will drive these higher penetration rates:

Outdated solutions.

The financial services industry as a whole is under great pressure to operate more efficiently and cut costs. Many are recognizing the importance of technology in achieving this goal. Those technology initiatives that will be the highest priorities for banks over the next few years will be those that promise the greatest return on investment as well as those which are most needed to preserve critical business lines. The corporate side of the bank has been given extra attention lately as its technology typically lags that found on the retail side, therefore creating a higher level of urgency for replacement. In addition, greater fee-based revenues are typically earned from business customers, making corporate banking product lines particularly important. This is especially true of the commercial mortgage space, where technology is particularly outdated and there is little to no automation of business processes. For many, the time has come to remove manual processes and place greater amounts of information in the hands of lenders in order to better serve this important client base. More demanding customers from both a timing and level of service perspective are also creating a need to replace outdated solutions with newer, more efficient ones with greater functionalities.

New regulations and the need for compliance.

The Basel Accords are driving an overall trend within the financial services industry toward greater risk management. In addition, stricter demands are being placed on banks to comply with new regulations and to better track their customer data. Next generation solutions make the retrieval of necessary data a lot easier and have more robust tracking capabilities, making their deployment far more attractive.

Larger portfolios and greater focus on portfolio management.

The average size of a commercial mortgages has grown from approximately $6 million to $10 million since 1998. Transaction sizes are expected to continue growing, as is the overall number of commercial mortgage originations. In fact, Celent projects that commercial mortgage volumes will rise 34% over the next three years. As a result, lenders will be faced with larger portfolios. Also leading to larger portfolios is the continued consolidation within the industry. As lenders increasingly merge, so too do their mortgage portfolios. As portfolios grow, lenders will need better tools to help them manage their portfolios to prevent too much exposure to any one borrower. Most of the solutions in place today do not offer the necessary capabilities for effective management.

New customer-centric strategies.

As the banking industry evolves and competition becomes more intense, many banks have adopted new strategies to prevent customer attrition. Many are now taking more of a customer-centric approach as opposed to the transaction-based ones of the past. These new strategies must be supported by new solutions that take a similar approach. Next generation mortgage solutions integrate data from disparate solutions, thereby providing a more consistent and complete customer view, resulting in more informed relationship managers and better service.

Increased activities in the secondary market.

The final driver for greater adoption of more advanced solutions in the commercial mortgage origination industry is the increased activity in the secondary market. As lenders increasingly pool their mortgages into Commercial Mortgage Backed Securities there will be a greater need to easily access information. The central repositories created by today-s next generation solutions make retrieval of the necessary information much more efficient.


Very few banks today have achieved high levels of automation and integration in their commercial mortgage processes. Going forward, however, it will be necessary for banks of all sizes to deploy next-generation technologies in order to remain competitive and continue to effectively manage their portfolios as origination volumes rise. These solutions will not only help lenders to better serve their customers by providing them with integrated and consistent information, but will also help to shorten the origination process, cut costs, and make sales in the secondary market more efficient. Unlike the residential market, which is likely to see a fall in volumes over the next few months, commercial mortgage volumes will continue to rise as the economy shows more signs of recovery. Lenders must deploy the necessary technologies now in order to prepare themselves for the higher volumes to come. Commercial mortgages are often the highest earning assets at a bank and therefore too important a product line to subject to inefficiencies and data inconsistency.

Christine Barry is an analyst in the banking group at Celent Communications, a financial services research and advisory company headquartered in Boston, Massachusetts. Christine may be contacted at [email protected]

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