The Pros And Cons Of Portfolio Theory

Analysis and evaluation stage is a single channel, interest rate multi channel, loan terms single channel, and final issuing a multichannel. (Exhibit A)The current structure of the analysis and evaluation stage does not maximize staff time effectively and as a consequence creates a bottleneck in the process. With the single channel structure loan applications are unevenly distributed among teams and create higher idle time for teams with less volume of loan applications to process. Utilization among regions varies greatly between 73% - 95%. The following observation of the current structure was achieved using the MMK model (See exhibit B):

The banking industry has undergone major upheaval in recent years, largely due to the lingering recessionary environment and increased regulatory environment. Many banks have failed in the face of such tough environmental conditions. These conditions

As competition increased between savings and loans, banks, and credit unions, banks were eager to attract loan applicants in order to increase revenue and compete with other financial institutions. Jack S. Light, the author of Increasing Competition between Financial Institutions, said in his book that “commercial banks are diversifying their assets toward higher percentages of mortgages and consumer loans, and thrift institutions are seeking authority to diversify their loan structures. Moreover, mounting pressures are working toward, and have partially succeeded in, changing the authority of thrifts to include third-party payment accounts similar to commercial bank demand deposits.” (Light) Because of this eagerness to bring in new clients, they were willing to give out loans without checking into the financial stability of the borrower or the business that was requesting the loan. Unfortunately since the banks didn 't look into their clients’ financials adequately, many clients defaulted on their loans because they could not afford the payments, especially when balloon payments started.

Asymmetric information in lending is a huge risk. When there is misinformation from a lender to a borrower, this can cause a few different problems to arise; for example misinformation about job security or credit history from a borrower to a lender can result in late or missed payments, fraudulent spending of the money lent or the lending amount to be turned as bad debt. Specialization is a tool used for risk management. Specialization in lending helps reduce risk by gathering valuable and accurate information about the borrower. It

Since the onset of the financial crisis 2008, the sovereign debt crisis in western economies and the new financial regulation with Basel III coming up, the financial industry faces the challenge of reinventing itself. The ring-fence for Commercial and Investment Banking, and new economic and regulatory capital requirements will determine the kinds of products banks will be able to distribute. It will have a huge impact in the Investment Banking business, which will suffer tough regulation and supervisory procedures. At the same time, credit risk models will be reviewed because they have failed to predict the crisis of 2008. The current financial and economic crisis doesn’t have any precedent in the past.

Portfolio and project management are similar and sometimes thought of as being one another. Between the project and portfolio management the goals and the intended strategic action is similar. The process between the portfolio management includes and involves the resources that list a process, which includes the evaluation, selection, and prioritization. Portfolio management and strategic management assist with the organizations missions and goals. These lay out the objective in the continuous planning and monitoring that assist with reaching the goals.

• Credit underwriting: Evaluating underwriting practices on new or renewed loans for easing in structure and terms. Reviews will focus on new products, areas of highest growth, or portfolios that represent concentrations. Examiners will continue to assess banks’ efforts to mitigate risk for home equity lines of credit approaching end-of-draw

Every borrower and every loan is different. A guideline that is working well for one borrower may not fit another borrower. However, there are certain aspects that are standard for every borrower. There is an old saying that goes like this: "If your portfolio does not have one foreclosure, you are not accepting enough risk." So even if the borrower has met all guidelines of the loan program he or she has applied to, the mortgage underwriter will still assess it carefully and will exercise caution. It is important for the underwriter to review a loan application from all points of view otherwise the banks may turn down a loan. If a loan application shows high risk from one point of view, but shows low risk overall, there is a chance that the loan may be

UNIVERSITY OF ILLINOIS AT CHICAGO Liautaud Graduate School of Business Department of Finance Professor Hsiu-lang Chen 1 Practice Problem I

The company’s incentive system also encouraged brokers and sales representatives to move borrowers into the subprime category, even if their financial position meant that they belonged higher up the loan spectrum. Brokers who peddled subprime loans received commissions of 0.50 percent of the loan’s value, versus 0.20 percent on loans one step up the quality ladder. For years, a software system in Countrywide’s subprime unit, sales representatives used to calculate the loan type that a borrower qualified for, did not allow the input of a borrower’s cash reserves (Morgenson, 2007).

At our organization, one of our goals was to fully implement the Ferguson model for analyzing credit risk. The Ferguson model was to be implemented organization-wide in the wake of the 2008 crisis. It is a form of "rationing that does not rely on asymmetric information or an exogenous constraint on the supply of loanable funds" (Ferguson & Peters 1997). Credit rationing is analyzed in terms of "a portfolio effect (such as diversification or a regulatory cost) that is not directly related to the creditworthiness of individual applicants" (Ferguson & Peters 1997). Macro economic conditions are given greater significance, and the bank will often offer "a pooling loan rate to all borrowers, even when differences in those borrowers' credit risk are observable" (Ferguson & Peters 1997).

“We aim to become a super regional bank. This involves growing our presence in the Asia pacific region and sourcing 25-30% of earnings from our Asia Pacific Europe and America division by 2017, while also being very focused on growth in our core domestic businesses in Australia and New Zealand.”

According to the CAPM model:R_i=α+βR_m+ε, α represent the abnormal return gained by the portfolio. If the market is efficiency, the α has to be zero.

Like all businesses, mortgage companies struggle to achieve a proper balance be- tween “risk” and “return” in their operations. The principal risk historically faced by mortgage lenders is the possibility that their clients will be unable or unwilling to pay the principal and interest on their mortgage loans.

List of abbreviations List of tables Acknowledgements Abstract 1. 2. 3. 4. 5. 6. 7. 8. Introduction Problem statement Objectives and hypothesis of the study Literature review Structure and performance of the financial sector in