What is the Process of Portfolio Evaluation?

portfolioThe process of portfolio evaluation is a project that requires planning and execution. It is a normal process for financial institution to evaluate a potential borrower completely to ensure the borrower can pay the financial business in the x amount of time agreed upon. Furthermore, individual loans are compared against various risk factors such as credit scores, historical trends, and even employment figures to determine if previously creditworthy loans may now be risky. From there, the portfolio as a whole is evaluated to determine its overall risk and corrective action steps are recommended.

You are ready to buy a house and needs to take out a loan. There are things to consider when a borrower approaches a lender and apply for a loan. To better understand the borrower's financial stability, lenders evaluate their loan portfolios to gain a deeper understanding of the risks inherent in each loan as well as how those various risks affect the portfolio as a whole. A loan portfolio consists of the financial history of the borrower. For example, it will show the total number of loans lend to a borrower in an institution. A portfolio evaluation is a crucial risk management process. But what’s involved in the portfolio evaluation process? Here’s a quick look at what’s involved in portfolio evaluations.

Launching a Portfolio Evaluation Project-As with other projects that must be managed, portfolio assessments can be thought of as projects with a project manager who is responsible for the portfolio evaluation, stakeholders, and project deliverables (i.e., loan products that will be analyzed). It is important for evaluators to research and ensure the credibility of the borrower before approving a loan.

Project Planning-Before any project is executed, it is carefully planned. In the case of a portfolio evaluation, planning involves identifying which tools such as credit scores, historical trends, automated valuation models, or property valuations will be used and which product lines (such as first mortgages, reverse mortgages, HELOCs, or the entire portfolio) to study. In addition, goals and objectives should be identified during the planning stages if not previously identified. Knowing the lender’s risk tolerance and desired goals allows you to measure the results of your analysis against those goals and objectives. It allows you to know if the loan portfolio is exposed to too much risk, or too little.

Executing the Project-Using various analytical tools such as loan risk management software, you’ll now begin actually evaluating loans within the loan portfolio to determine which loans may be at risk of prepayment, default, or foreclosure. After conducting the initial analysis and identifying risky loans, lenders then determine which actions to take to minimize and manage risk (Source: LoanLogics loan risk management). Nowadays, it is easier for loan or mortgage advisors to calculate the amount of risk of a potential borrower because of the advancement of technology and creation of software tools. Loan risk management software can help the advisor easily create graphs, charts and spreadsheets to visualize potential risk and analyze data.

Frank Shields is an expert in the loan and mortgage industry helping clients manages their loan portfolio. He has gathered resources from LoanLogics website to write this blog. Feel free to visit,, for more information.

If you have any questions, please ask below!