Regulation AB, Servicers and MISMO

The SEC wants transparency. Frankly, most Americans are looking for more transparency in commercial real estate financing.

I suppose I fall in the camp of simply wanting to see that those who are involved have substantial "skin in the game." Without that I can't see how prudent and long term decisions are made. Whether or not this is a way to get to that point, I'm not really sure...

To achieve some of this transparency the SEC is proposing changes to Regulation AB or "Reg AB" as most call it, regarding asset backed securities. A large part of the burden will fall on the primary and master servicers as they have the responsibility of collecting and reporting data. Historically this has been done through the IRP or Investor Reporting Package (Microsoft Excel format).

Moving forward XML will be favored instead of Excel and there will be some costs associated with that transition (though I think this has been blown WAY out of proportion - it is not millions at the end of the day). The Master servicers may mandate XML of the primaries and this is viewed as a burden to the primaries. One way to get over this is to provide a "reader" that can interface, read and convert XML to/from the historical Excel template that has been used.

Really this all comes down to the loan docs that specify how data should be provided. Attorney's of the world unite!

Use MISMO In-House

Usually when we have a discussion about MISMO we talk about how the standard will be useful for firms that want to bring efficiency to their inter-company operations. We should not forget that "intra" company operations could also benefit. Further, if you put MISMO to use within your 4 walls then when an external party wants to connect electronically with you, you are already familiar with the standard and should be mostly ready to go (minus maybe some security and additional authentication protocols).

Many firms have legacy systems that continue to operate either because a similar system simply does not exist or because the switching costs are (perceived to be) too high. Using the MISMO XML standard for connecting new and old and new and new systems makes sense and will better prepare you for the future.

Not only will you be ready if an external party wants to exchange information, but you will find that the robust nature of the MISMO standard will not break when against thousands of different data configurations. This will save your firm money and make life easier for you tech team.

If your tech team is not aware of MISMO standards....Let them know!

MISMO is NOT a Database

There still seems to be confusion about what the cMISMO standard will bring to the industry. MISMO is NOT about building (pun intended) a huge database of information where all property information will reside and that all people will "read and write to". I continue to be a little surprised that this notion remains in some people's minds.

The MISMO XML based standard is simply about sharing information between systems in a standardized way. Ultimately this will bring efficiency, innovation and additional confidence for real estate as an asset class.

Say I'm a loan servicing firm and I want to bring on all this information from the originator of the loans so that I can service them properly. The MISMO standard does two things here. First it gets away from Excel which is simply a spreadsheet and not conducive to lots of complex related data (terms, borrower information, etc.). Second, even if you wanted to use Excel or other spreadsheet you'd want all the originator firms you deal with to only use one format for the Excel file so you were not "reinventing the wheel each time."

The MISMO standard specifies what we will call a data field when we share it (ie. We are all going to use the term PropertyAcreage) and where in the overall structure or schema you will find it (ie. PropertyAcreage is a field that will be located....Deal->Collateral->Property).

Finally, let me say that this does NOT mean that within our own systems we need to use the term PropertyAcreage. It just means that when I publish information for you to consume, I will call it PropertyAcreage. Then when you receive it you will know where to find it and what it is called in the data file that was sent. You can then put it in your database and call it whatever you want (PropAcreage, Acreage, Prop_Acreage ....).

The sooner we all get on the same page as to what MISMO is and what MISMO is not, the sooner we can all start talking about the benefits and how the industry can evolve to be better, stronger and bigger.

* "commercial MISMO" as opposed to residential MISMO standards. Residential MISMO standards have been in place since the late 1990s. The cMISMO designation is often used to clarify the difference.

Why Care About (DATA) Standards?

We don't consider how much standards play a role in our lives. They are truly everywhere. People who study standard break them into 3 or 4 groups - I offer a four part compartmentalization below:

1. Compatibility/Interface Standards (networks) - These sorts of standard enable ready entry into a market for compatible products or to join a communications network. (eg. TCP/IP, Bluetooth, WiFI)
2. Minimum Quality/Quality - Creates confidence amongst buyers that products and services will be fit for purpose. This group includes health and safety and environmental standards. (eg. OSHA, FDA, USDA)
3. Variety Reduction - Conformity to a standard reduces the number of different product offerings but enlarges the market, reducing production and distribution costs for suppliers and search and testing cost for buyers. (eg. Nuts and bolts and socket sets)
4. Information Standards - Facilitates trade and market development, codifies knowledge enabling dissemination and take up. Transaction and search costs are lower and markets work more efficiently. (eg. See below)

If we take #4 and expand upon it we can find numerous standard at play. Here are a number of them:

• Electronic Data Interchange (EDI) – Credit card and PayPal communication
• OpenTravel – Travel related services: American, Hilton, Hertz, Expedia….
• iCalendar – Calendar events used by Google, Microsoft….
• vCard – Electronic business cards
• Electronic Heath Records (EHR) – Hospitals, Labs, Doctors, Patients
• Interagency Group (IAG) – E-ZPass electronic toll systems in 14 states
• OpenDocument – Google Docs, Microsoft Office, Lotus, WordPerfect
• MISMO – Real estate: Originators, Servicers, Brokers, Attorneys, Borrowers

I promised yesterday I'd speak about why people should care.

Often we hear about how standards bring efficiency, accuracy, lower business risk and these are all GOOD things. But let me offer that innovation and the opportunity that standards create are the truly GREAT reasons to care.

William Sellers in 1870 thought there should be a standard for the nut and bolt (after about 50+ years of an industry floundering). Major industry and the government agreed and through those published standards we got the industrial revolution, the assembly line and unforeseen economic growth.

Consider in 1973 DARPA put together standards for TCP/IP protocols and then in 1989 the HTML standard language was released. I doubt that DARPA or even Tim Berners-Lee could have imagined what the internet is today. AND keep in mind that devices like the iPhone would be nothing without the internet.

We should care about standards because they create new baselines for us to advance forward as societies. We may not know what will come but we should be in some agreement that history has proven that standards grow industries and economies.

MBA Commercial/Multifamily Servicing and Technology Conference

Today I'm departing from the MBA Commercial/Multifamily Servicing and Technology Conference in NYC with more optimism regarding data standards within commercial real estate than I have had in the past 8 years of participation.

First I should probably answer the questions:

1. Why did I get involved in the first place?

2. Why do I, and why should others still care today?

Quite candidly, the reason I got involved in the first place was because of the platform we were building for environmental (ESA) and engineering (PCA) reports for commercial real estate. Like others, we saw huge inefficiencies in the process of authoring, managing and reviewing these types of reports. We saw data standards as helping us make our product and our company real.

Today, the vision is MUCH bigger. I care because I want to see the pie grow and know that the opportunity that data standards will bring will be amazing (it will be fun and interesting and I LIKE fun and interesting). Mark Linne (Appraisal World) often references Thomas Friedman in his presentations who stated in his book The World is Flat that data standards in real estate can be the next big thing. When someone says a trillion dollars of opportunity, I pay attention (and in this case I believe it).

Real estate is a real asset. Land is being created and destroyed at similar rates in nature. We can't create more in any size-able quantities. It is a finite and valuable asset. Knowing more about this finite asset will give us insights and create opportunities that we have not even considered. Tomorrow, I'll give some indications of why I believe this.