Due to the stimulus packages designed to help families during the pandemic, credit unions have seen a steep increase in deposits. But higher volumes of deposits bring on a new challenge; namely, finding new investment opportunities that allow credit unions to deploy their excess liquidity into higher earning assets.
Besides investing in loan products that align with your financial goals, it’s important to consider your long- and short-term capital needs in order to decide whether you should allocate more money into products with shorter or longer maturities. In this regard, manufactured home loans, which have various amortization schedules that can accommodate different priorities, provide some of the best products for portfolio diversification.
Manufactured Home Lending and Capital Preservation
In addition to having different maturity dates, manufactured home loans allow you to develop a portfolio diversification strategy focused on capital preservation. Similar to other niche fixed-income investments, such as government and corporate bonds, manufactured home loans carry lower risks compared to other types of assets. That’s because niche fixed-income assets are generally less sensitive to macroeconomic risks, including economic downturns. What’s more, teaming up with a trustworthy financial company with plenty of experience in the manufactured home lending industry can help you further reduce the potential risks associated with manufactured home lending.
Manufactured home loans are often smaller than standard home loans. As the borrowers purchasing manufactured homes need to make smaller monthly payments compared to the typical payments on conventional mortgages, manufactured home loans carry a lower risk of default, even during an economic slowdown. As a result, these products allow you to protect the original capital invested and even improve your profit margin. By preserving your capital and revenue, you’ll have sufficient funds in order to continue to offer different types of loans.
Adding manufactured home loans to your portfolio can also help your organization maintain sufficient liquidity. Just as other fixed-income assets pay fixed interest or dividends, manufactured home loans will bring your credit union a set level of cash flow, resulting from the interest and principal payments made by borrowers each month. Your credit union will receive the full principal amount once each loan reaches its maturity date.
One disadvantage of investing in fixed-income assets is that they’re subject to specific risks, including credit and liquidity risks. While credit risk reflects the possibility of loss due to a borrower defaulting on a loan, liquidity risk occurs when a credit union doesn’t have or fails to attract enough funds in order to meet its financial obligations.
Manufactured Home Loans Can Help You Control Liquidity Risks
One of the biggest challenges facing credit unions nowadays is investing in new products while generating enough liquidity in order to efficiently support their daily operations. To minimize liquidity risks, your organization should accurately measure, prudently manage, and carefully plan funding and liquidity demands, based on an accurate assessment of liquidity levels. Failure to adequately address liquidity problems can have negative consequences for any financial institution, regardless of its capital and profitability levels.
For an accurate assessment of current and potential liquidity problems, your portfolio diversification strategy should incorporate different stress tests with detailed breakdowns of the potential risks. Reviewing these risks on a regular basis will allow you to better adjust your portfolio strategy to the constantly changing economic environment. With adequate diversification and liquidity levels, you’ll be able to ride out uncertain economic times and achieve your long-term portfolio goals.
Furthermore, investing in manufactured home loans can help you partially control liquidity risks in three steps. First, the maturity dates of manufactured home loans are spread across various time frames. As a result, they generate income on a regular basis. Second, manufactured home loans allow you to create a diversification synergy between deposits and loan commitments, as long as liquidity demands from borrowers aren’t highly correlated with the demand for liquidity from depositors. Because your credit union becomes an intermediary that serves borrowers as well as depositors, you no longer need to hold high levels of liquidity in order to meet expected and contingent liquidity demands. Third, teaming up with an experienced manufactured home lender could help you create an asset allocation strategy that will generate consistent short- and long-term returns. That’s because an experienced manufactured home lender will help you attract higher numbers of prime borrowers with a low risk of default.
As volatility tends to increase under specific market conditions, liquidity can evaporate for short periods of time. But if you’re searching for investment opportunities that are outside traditional benchmarks, you can find different low-correlated assets, such as manufactured home loans, which are characterized by attractive returns and low risk, even during times of economic uncertainty.