Since the financial crisis of 2007, loan portfolio management methodologies have undergone a tremendous transformation, partly due to a series of new rules and regulations such as the regulatory framework set forth by the CSBS.
Nowadays, leading industry influencers argue that loan portfolio and risk management is going to experience even more sweeping changes in the next few years. Whether we refer to new regulations, advances in technology or macroeconomic shocks, a financial institution that provides manufactured home financing must be prepared for any of these changes if it wants to be successful.
One of the few things a small bank or a credit union can do to thrive during the upcoming period of fundamental transformation is put portfolio risk management at the center of its strategy. Below are three tips a financial institution can implement in order to gain more control over its manufactured home loan portfolio and mitigate the risks associated.
Tip #1: Understanding the Correlation among Different Risk Factors
The OCC has recently defined eight risks that can negatively affect the financial health of a lender. These are as follows:
- Credit risk, which results from the inability of borrowers to cover their financial obligations;
- Interest rate risk, which relates to interest rate fluctuations;
- Price risk, which may occur when a financial institution fails to optimize pricing for loans to ensure adequate compensation for the risk taken;
- Liquidity risk, resulting from lack of cash and potentially preventing financial institutions from meeting their payment obligations;
- Operational risk, which often arises from inadequate internal processes or unforeseen external events;
- Compliance risk, which represents non-compliance with internal risk management practices or with industry regulations;
- Strategic risk, as a result of mistakes made when defining the strategy of a financial institution;
- Reputation risk, which relates to loss resulting from damages to a financial institution’s image and public standing.
Getting a thorough understanding of all these risks and how they interrelate with each other will enable you to identify, analyze and address manufactured home financing risk exposures more accurately.
Two other measures you can implement to eliminate the inherent risks relating to manufactured home financing and better align your strategic objectives with specific borrower segments involve a careful review of your manufactured home loan portfolio and the development of a sound asset allocation strategy, according to Bankrate.
Tip #2: Examining Your Credit-Granting Process
For a financial institution that provides manufactured home financing, maintaining an efficient and balanced applicant screening and approval process represents the second line of defense against loan portfolio risk.
However, it’s equally important to implement a series of risk management measures after manufactured home loans have been made, as risk can increase with loan products that are improperly structured or inadequately monitored.
What’s more, financial institutions should consider credit risk management in relation to individual loans as well as to each asset class and the entire manufactured home loan portfolio.
Tip #3: Detecting the Risk of Early Default
Taking notice after borrowers are past due or their risk ratings have deteriorated substantially may be too late to prevent them from defaulting on their loans.
Rather, a bank or a credit union should implement effective credit-monitoring practices and early-warning systems that can help them identify risky borrowers several months before they face serious problems and reach delinquent status.
Financial experts conventionally subscribe to the view that good credit-monitoring practices can put any financial institution in a much better position in relation to potential loan portfolio risks.
As manufactured home loan portfolios and internal credit management vary greatly among financial institutions, there is no one-size-fits-all solution to managing portfolio risk.
However, teaming up with the right partner, like Triad Financial Services, will give you access to the proper processes your institution needs in order to efficiently track loan portfolio operations, from loan origination to maturity, increase regulatory scrutiny and reduce capital demand. Get in touch with our friendly advisors at (800)-522-2013 Ext.1287 to learn more about our manufactured home loan products and services.