Commercial real estate (CRE) credit risk management has been a challenge for the industry, and with more than $500 billion in CRE loan and investment losses expected worldwide this year, the problem hasn’t been resolvable with FICO scoring and the other credit risk management analytics tools that have been routinely deployed. Obviously, something is wrong with the way things have been done and the banking industry and regulators appear to be stymied for a solution. Perhaps we would be better served by understanding what credit risk management is supposed to do for us.
Credit risk is really a misnomer. What we are really concerned about is the fundamental question of whether or not the sponsor can be reasonably expected to manage the ongoing execution risk and mitigate execution risk loss events or not. The problem with credit underwriting is that it attempts to project future business management decision-making based upon the historical evidence. This process relies completely upon subjective decision-making criteria and the result has been a continuing tragic failure. It fails because Rational Choice dictates that all market participants will act in their own self-interest at all times and in all circumstances. This means that what has happened in the past regarding human decision-making has no bearing on what will happen in the future. Furthermore, the process fails to address the elephant in the room: what would happen if the sponsor (or any other employee, for that matter) were to be removed from the deal for some reason. Would the next person be able to pick up where the sponsor left off and continue to conduct operations seamlessly or would there be an extended period of time of chaos logically resulting in losses to investors and/or the lender? Credit risk underwriting fundamentally fails to address the most important issue we face in underwriting every day: what of real-time execution risk management and loss mitigation? In the end we have to admit the obvious: “skin in the game” won’t change the loss risk outcome, experience won’t change that outcome, reputation won’t change that outcome, and cross-collateralization won’t change that outcome (otherwise; we wouldn’t have the prospect of over $500 billion in losses to potentially deal with this year worldwide on CRE investments.
Now comes the revolution the finance and banking industries have been waiting and wishing for – an end-to-end solution that starts with underwriting before the loan or investment is funded and then follows through the entire holding period (or term or the loan) that effectively prevents bankruptcies and foreclosure events from becoming materially-significant credit risk management issues. This means the spread between the spread can now expand – and with that profits – because the risk profile can be changed dramatically with a whole new tool.
It’s called the INVIZEN IT Real-Time Status (or RTS) Asset Care Protection Program and it focuses on the credit risk management paradigm in a unique way that, while seeming obvious, is the key to realizing lower loss severity risk and higher overall portfolio returns at a very affordable cost basis.
RTS focuses on giving the investor and lender what they have always wanted but couldn’t have – the luxury of having their investment or loan re-underwritten each month of the holding period against term default risk, maturity default risk and technical default risk on an affordable basis. RTS can do this because it operates in a proactive real-time environment, so the time it used to take to underwrite and the cost it used to take to underwrite are no longer the impediments to realizing sound credit risk management outcomes.
Find out more about what RTS can do for you. Talk to an INVIZEN representative today at 832.663.9634.