Real Estate Portfolio Analysis

Situation

  • A leading national commercial multifamily lender/servicer engaged ConvergentRisk’s risk management group to assess a portfolio acquisition of over 2,000 commercial multifamily loans.
  • Our charge was threefold:
    1. Assess the current level of insurance loan compliance.
    2. Quantify the magnitude of catastrophic casualty risk to the firm from the perils of flood, earthquake, and hurricane.
    3. Recommend solutions in the form of retention, transfer, or avoidance.

Challenges

  • Operating under tight time constraints, a risk modeling team was assembled and performed a compliance audit of current loans in the pool.
  • Detailed data was captured and digitized to build a state-of-the-art probabilistic computer model. This allowed the team to assess the geographic distribution of assets and to quantify likely loss outcomes that could occur due to a major earthquake, flood, or hurricane.

Results

  • Our team’s report to management identified a number of areas that presented compliance risks to the buyer, allowing the buyer to negotiate substantially less stringent compliance obligations, as well as a loss escrow for the pool from the seller, significantly reducing the execution risk as well as saving the buyer hundreds of thousands of dollars annually in servicing expenses from the lower compliance burden.
  • In addition, the catastrophic analysis identified previously unknown proximity aggregation and loss sensitivity risk adding negotiating leverage due to potential loss from an earthquake event (both to the collateral and buyer’s balance sheet, as much of the loss would have been non-recourse).
  • As a direct result of ConvergentRisk’s analysis, significantly more favorable terms were negotiated, which reduced the potential net mortgage impairment cost to the buyer by up to $500,000 annually.