Values of commercial real estate assets have declined amid the dearth of commercial mortgage-backed securities issuance. The result has been a large increase in delinquencies, defaults and credit impaired commercial real estate assets, garnering negative attention from regulators and shareholders and pressuring earnings. Commercial real estate exposure is jeopardizing the viability of many institutions.
Banks are required to hold capital and establish reserves against their commercial real estate assets based on risk ratings.
The recent decline in values and credit performance has required institutions to increase precious capital and endure losses against current period earnings.
Improving commercial real estate risk ratings can significantly reduce capital requirements and improve financial performance. However, as many institutions are burdened with the challenges of managing their deteriorating portfolios, and resolving a high volume of nonperforming assets, they also must report an unprecedented amount of information on their commercial real estate portfolios.
In addition, increased regulatory scrutiny, the implementation of Basel II standards and financial reform legislation have created a much higher demand for commercial real estate credit performance information.
The establishment of credit risk ratings and loss reserves is a particularly management-intensive and manual process. Many institutions rely on a combination of internal resources, consultants and spreadsheets to manage their immediate needs.
This can be a time-consuming and expensive stopgap solution. Thus, the right technology can be a critical tool for enabling commercial real estate debt risk management solutions.
Commercial real estate loans are secured by complex and varied collateral. Each commercial real estate property is unique, and its performance is dependent on the borrower's expertise and proficiency in leasing and managing the property, as well as market conditions and the economic environment.
In general, commercial real estate is highly leveraged, and is sensitive to interest rates and the availability of financing. Acquisition, development and construction loans have additional risks associated with market, budget and borrower performance. Additionally, loans secured by owner occupied properties have risks associated with the underlying business involved.
The major challenge is to collect, analyze and synthesize commercial real estate data into usable information.
Many bank loan systems provide the platform for the servicing, administration and accounting for a wide variety of loan products. These systems do not support the breadth and depth of information required to effectively manage commercial real estate debt. Collateral, borrower, valuation, servicing and asset management data typically reside on multiple systems, and much of the data is contained in physical files. The information is collected as part of the loan origination, underwriting and closing processes, but is not updated or maintained systematically.
The technology is invaluable to the integration of financial and performance data on properties, markets, tenants, borrowers and guarantors. Integrated systems can aggregate loan, collateral, borrower and market data and provide the ability to use business intelligence to deliver actionable information to decision makers.
These systems can improve the efficiency, productivity and capabilities for commercial real estate debt risk management. Comprehensive loan management technology platforms can provide life of the loan functionality, where data is captured at loan origination and underwriting, and is maintained on a regular basis through maturity and payoff. Updated information supports asset and portfolio management, credit review and management and regulatory reporting.
The quality of loan administration and borrower customer service can also be significantly improved.
