One of the presumed takeaways from the 2008 financial crash was the need for lenders, if they are wise, to have a firm grasp of the fixed income assets they originate and service. A US firm that specializes in this area talks to this publication.

One of the lessons that was (hopefully) learned from the sub-prime mortgage crash was that lenders needed more incentive pressure to monitor the loans they lent out. With the supposed benefits of modern technology, there are surely fewer excuses for credit investors not to have deep detail at their fingertips.

The Palisades Group, an alternative asset manager in the US residential credit market, sources construction and property rehabilitation loans through a national network of lending partners. Its investment personnel review each asset before buying it and oversees all post-acquisition credit and risk management activities. It is a labor-intensive job. But the value-add of all that work is considerable, particularly as rising interest rates affect forms of real estate, the firm has told Family Wealth Report. 

“We take a high-touch approach to credit risk management,” Jack Macdowell, Palisades' chief investment officer, said.

The potential opportunities are huge: US residential real estate is a $13 trillion market, he said. That figure compares to a $10.3 trillion corporate bond market and estimated $1.5 trillion private credit market.

This market produces new loans to the order of $2 to $4+ trillion per year.

With interest rates rising to curb inflation, the shift inevitably revives memories of what happened in the run up to the financial crash of 2008, such as the implosion of the sub-prime mortgage market in the US and its knock-on impact around the world. Real estate investment remains a major asset allocation item for wealth managers. Within the family offices space, for example, there's been a trend of more direct investment into property, both commercial and residential, in recent years. This throws up the question of what resources firms can draw on to do the deep due diligence and monitoring necessary to manage risks.

Shining a light
With some parts of the mortgage-backed securities (MBS) market, there’s limited information available to end investors about the underlying assets. Palisades is about shining a light on these assets, he continued. 

“We want to add value by going one layer deeper [than the norm] by buying and owning these loans themselves. This is complete transparency. It allows us to make real-time decisions that influence performance of the underlying investment at the loan, borrower, and property level,” he said.

Founded in 2012, Palisades, which since that year has managed $25 billion of loans and real estate, invests in, and actively manages, residential loans and real estate-related strategies. It runs a mix of residential loans and real estate with a notional balance of about $10.1 billion, with underlying properties located in the US, Europe and Latin America.