FannieMae announced its latest Credit Insurance Risk Transfer (CIRT) pool and the markets have responded with more liquidity. Good news, right? The idea behind CIRT is to spread the risk of failure around so that nobody gets pummeled when losses occurred – except those who took the risk. In essence, this is FannieMae’s attempt to, “pick up the clean end of the turd”, in an effort to stem the impact of poor risk management and mitigation practices that would otherwise create the conditions precedent to a bursting CRE bubble in the future. Yet it may not work as the market will still reach saturation and the impact will be felt at any even greater level of acuity.
Any insurance expert will be happy to tell you that someone will be happy to help insulate you from the consequences of your decisions for an even greater fee. The reality remains that spreading risk across a greater base of risk-takers is no substitute for preventing the risk from occurring in the first place. CRE transactions require proactive risk management and proactive risk mitigation measures that follow the transactions over the course of the full term of the investment holding period. Valuation, feasibility analysis of market opportunity, underwriting analyses and due diligence reviews that are limited to the pre-closing funding period are just not going to cut the mustard. In today’s world there is going to be no substitute for continuous, real-time monitoring of the risks that can contribute to future asset obsolescence and result in greater investment loss severity risk.
You can’t stick the hose in the south end of the animal and claim you watered it. Decisions still have consequences.