Federated Hermes has released a report by Vincent Nobel, head of asset-based lending, examining how real estate credit underwriting can better assess risk beyond traditional financial metrics. The report argues that commonly used measures such as loan-to-value ratios, debt yield and interest coverage ratios, while useful, can present an incomplete picture of risk when evaluated in isolation.
According to the report, real estate assets vary widely in their underlying risk profiles, requiring a broader analytical approach. Nobel outlines how his team incorporates abductive reasoning into the underwriting process alongside conventional credit analysis, including the use of structured “pre-mortem” exercises to evaluate how potential future scenarios could affect an investment.
The report also discusses the limitations of widely used metrics, the influence of Goodhart’s Law on credit decision-making and the role emerging tools such as large language models may play in
