During this time of “are we or are we not in a recession,” banks and credit unions should be focusing on actions that can generate revenue and mitigate potential risks. It’s the job of the institution’s management to discover, monitor, and control any concentration risks while keeping interest rates and liquidity risks in mind. Concentrating on building a diverse portfolio is crucial to achieving both goals and was recommended by the National Credit Union Administration (NCUA) following the 2008 financial crisis (PDF download). In order to properly diversify, a financial institution should pay special attention to the purchased loans’ risk exposures to ensure they are a different asset class than the loans in the institution’s current portfolio. To help prevent a case of history repeating itself (in case we are smack dab in the middle of a recession), here are a couple of ways financial institutions can better prepare themselves for whatever happens next.
A Whole Solution
Interest rates are up, and so are home values. Homeowners are taking advantage of their newfound home equities and turning that extra cash into home improvements, swimming pools, college tuitions, and more thanks to the increasingly popular second mortgage. However, homeowners aren’t the only ones able to benefit from second mortgages. Financial institutions can increase revenue by taking similar advantages of the higher interest rates.
High-volume loan originators often sell off whole loans in the secondary market to institutional portfolio managers and agencies to reduce risks and clear their balance sheets. You may think these buying opportunities are only for the big names in the industry, but with the right tools, the financial institution next door can easily capitalize on them too.
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