An End to Relevancy: Credit Reporting & Risk Management in CRE Transactions

I can well remember the advent of the modern credit reporting industry and the promise of ending commercial loan and investment losses that to this day remains an unfulfilled goal.  Like perfect love we are told our salvation is just around the corner if we just spend a little bit more.  What the proponents of the credit reporting and credit risk management industry did not take into account was the evolution of technology that creates the opportunity for real-time market event reporting.

Real-time market event reporting provides the logical alternative solution to the inherent shortcomings of credit risk management practices that focus on subjective decision-making criteria in light of data pertaining to the conditions and events that would drive detrimental credit outcomes.  In short: you now have the choice of addressing the cause or the effect, which makes better sense to you?

Credit risk has the following key component drivers:

  • Management Execution Risk.  The risk management will take actions or fail to take actions that have the result of placing the investment at risk for loss; and
  • Technology Risk.  The risk that innovations and/or advances in technology will create new and/or additional forms of competition for the existing business in a way the business is not prepared to address, thus resulting in the potential for investment loss risk to occur; and
  • Asset Obsolescence Risk.  The risk that results from the impact of technology risk to the utilization value of the income-producing capital assets of the business (i.e.: the future value of the property operating business) that creates a reduction in the future income stream capture opportunity owing to those assets, thus resulting in a potential investment loss.

Management execution risk mitigation requires access to information in order to effectively manage.  This access includes both the latest market forecast data we utilize to identify potential market disruption events that could otherwise lead to poor decision-making, as well as information regarding the results of operations that allow us to proactively intercede and notify the parties when decisions create unwanted outcomes and require remediation.

Technology risk mitigation requires the latest market forecast data to effectively manage and is tied directly to execution risk mitigation in the same way.  The INVIZEN program focuses on a zone of up to 24 months in advance on a forward-looking, rolling basis to provide information on potential events that could result in future loss that have to be addressed.

Asset obsolescence risk is controllable only by controlling the exposure resulting from execution risk and technology risk, thus everything comes back to the idea of real-time reporting data being used to create the potential for better outcomes.  Credit risk management currently focuses on analytics that try to predict which investments may go bad based upon investments that have already gone bad, thus potentially throwing out an entire barrel of apples because one has gone bad.  Learn more by visiting with an INVIZEN representative today.

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