Monitoring Commercial Portfolios: Keeping a Finger on the Pulse of Complex Loans Structures Is a Function of Proactive Asset Management

By Tribble, Tom; Litter, Mary Ellen | Mortgage Banking, April 1992 | Go to article overview

Monitoring Commercial Portfolios: Keeping a Finger on the Pulse of Complex Loans Structures Is a Function of Proactive Asset Management


Tribble, Tom, Litter, Mary Ellen, Mortgage Banking


Keeping a finger on the pulse of complex loans structures is a function of proactive asset management.

Lenders across the country today are setting their sights on high-quality asset management. Wariness about the quality of portfolios and the growing complexity of the loans comprise them have spurred lenders to separate asset management from other functions within the servicing department.

As it pertains to loan portfolios, asset management is a unique challenge. Essentially, asset management is loan management on both the individual asset and the portfolio. It demands ongoing monitoring of property operations and physical condition, on-site management practices, the market and the borrower. Shifting the focus to asset management has developed from a concern over the strength and health of loan portfolios and from the recognition that the complexity of today's real estate loans require more specialized attention than has traditionally been associated with loan servicing.

In an interview that appeared in the November issue of Mortgage Banking (See "Bill Seidman's Roundup," by Skip Kaltenheuser, p. 43), William Seidman, former chairman of the FDIC and the RTC, stated that "...while supply-siders point out that the 1980s were one of the most prosperous periods in our history, it was also the greatest debt binge we've had since the 1920s... As a result of the 1980s' excesses, far too many people and institutions are in debt, at levels that are going to cause a lot of failures. The ratio of ability to pay to the demands of principle and interest are the worst they've been in a long time...." This statement is supported by numerous examples of defaulted loans, loan restructurings and workouts, foreclosures and bankruptcies.

As a result, the focus of most lenders and lender-related servicers today is on examining existing portfolios and analyzing each asset on an ongoing basis, coupled with a proactive management philosophy.

Take Freddie Mac, for example. The secondary market agency slowed production of new multifamily loans to almost a standstill during 1991 and delayed the start-up of its new multifamily lending program so it could evaluate the strength and performance of its existing portfolio. In-house resources, such as underwriting staff worked with asset-management and servicing staff in order to understand the factors affecting the underperforming loans. Freddie Mac also called upon the expertise of outside consultants. These consultants used a portfolio-evaluation technique known as collateral risk evaluation methodology (CREM) to provide Freddie Mac's management with an understanding of its portfolio. Interestingly, the results of the CREM analysis showed that Freddie Mac's existing portfolio was actually stronger than it was perceived to be. As a result of the analysis, Freddie Mac's stock underwent a significant increase in 1991.

Signs of the times

It used to be, when monitoring a portfolio, that much attention was given to payment status. Recently, this indicator has been supplanted by an emphasis on keeping payments current and the impending issue of refinancing at maturity. During the past five years, we have not seen significant inflation, which used to make up for poor loan performance. The current down cycle in the country's real estate economy has caused an increase in the number of foreclosures - the vast extent of which was not anticipated - which has investors questioning production and servicing processes and placing greater emphasis on the existing portfolio strength and performance.

Thus, it is only by taking the time to obtain an accurate picture of an existing portfolio that production goals can be established with some level of confidence. For the first time, many lenders are peering over their shoulders to see exactly what they are adding to their portfolios through their production groups. Without observant, attentive loan management, a lender can't really know what's in the portfolio, let alone if there is something wrong with it. …

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