Diversification involves investing in different products across various asset classes in order to reduce portfolio risk while maximizing the expected return. Although optimal portfolio diversification seems quite easy to achieve thanks to the wide variety of loan products available nowadays, it’s very important to consider a series of aspects in order to select the right loan products for your credit union’s portfolio and avoid the pitfalls of over diversification.
Currently, manufactured home lending delivers one of the most lucrative diversification strategies you can use to broaden your loan portfolio and reduce its overall volatility. Here are a few reasons why you should add manufactured home lending to your portfolio.
Manufactured Home Loans Can Mitigate Concentration Risks
In general, concentration risks are specific to portfolios that include complex investments. But these risks could also arise from unbalanced distributions of loan products across specific asset classes. While a concentrated portfolio allows a credit union to focus on a more manageable number of products, investing in manufactured home loans could offer your portfolio more stability than owning different assets in the same asset class. Even though diversification typically requires spending more time and effort in order to monitor results and rebalance assets, adding low-risk, high-yield products, like manufactured home loans, could help you counterbalance some of the losses that may result from other loans that may perform poorly during specific economic events.
The main reason why manufactured home loans provide some lucrative investments is that they tend to experience an increase in origination volumes even during economic events that adversely impact other asset classes, such as conventional home loans, auto loans, and credit card lending. While economic uncertainty and safety concerns keep homeowners and tenants in their current homes, most of the people financially affected by the pandemic are looking for more affordable housing alternatives, such as manufactured homes. Also, social distancing and lockdown measures have convinced many people to give up city living and move to manufactured homes with backyards, which are often located in suburban or rural areas. Based on the latest housing market and economic trends, manufactured home loan origination volumes will continue to increase in the coming months and years.
Manufactured Home Loans Allow Credit Unions to Attract New Members
Before the pandemic, affordable homes for sale and rent were already in short supply across the country. As a result, home prices and rents have increased steadily over the years. Last year, about half of renter households spent more than 30% of their income on rent. As millions of Americans face financial insecurity due to the pandemic, most of them are looking for affordable housing options that could help them reduce their housing costs. As a result, the number of potential borrowers looking for manufactured home financing has increased substantially over the past few months.
Considering these aspects, a credit union should ensure that its loan portfolio includes products that focus on the needs of current and potential borrowers. By simply opting for manufactured home loans, not only will you diversify your portfolio across a new asset class that belongs to a completely different, highly lucrative industry, but you’ll also attract higher numbers of potential borrowers. Adding manufactured home lending to your portfolio, which already includes loan products spread across different asset classes, could also help you ensure that your credit union isn’t exposed to asset classes that have a high positive correlation.
Manufactured Home Loans Allow for Time-Frame Diversification
Just as it’s prudent to diversify your portfolio over a wide range of asset classes and markets, it also makes sense to add loan products that generate income on a short-, medium-, and long-term basis. If your loan portfolio contains loan products that have either very long or very short repayment terms, including manufactured home loans into the mix is a great strategy to get new products with different maturity dates.
Manufactured home loans are divided into two main categories: chattel loans and conventional manufactured home loans with land. As the maturity dates of these loans range from several years to as long as 25 years, they can help you reduce the risk of having a loan portfolio too concentrated over a specific time frame. As you’ll have different types of manufactured home loans maturing at different points in time, your credit union has a greater chance of getting a steady, even growing, stream of income over time.
When it comes to portfolio diversification strategies, factors like the overall risk tolerance of your loan portfolio, financial means, investment goals, and the level of investment experience play a decisive role in developing the most appropriate asset mix for your credit union. If you cannot decide whether manufactured home lending represents a lucrative diversification strategy for your organization, our financial experts are ready to answer any questions you may have!