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Cumberland County – Mortgage Risk

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Mortgage risk is a critical concept in the financial and real estate sectors, as it directly impacts lenders, borrowers, and the broader economy. It refers to the potential that a borrower may default on their mortgage obligations, leading to financial losses for lenders and disruptions in the housing market. Understanding and managing mortgage risk is essential for maintaining financial stability, ensuring access to housing, and preventing systemic crises like the 2008 financial meltdown.

  1. Impact on Lenders and Financial Institutions For lenders, such as banks and mortgage companies, mortgage risk is a primary concern because mortgages represent a significant portion of their loan portfolios. When borrowers default, lenders face losses on the principal and interest payments they expected to receive. In severe cases, widespread defaults can lead to liquidity issues, forcing lenders to sell assets at a loss or seek emergency funding. This was evident during the 2008 financial crisis, where subprime mortgage defaults triggered a chain reaction, causing major financial institutions to collapse or require government bailouts.

    To mitigate these risks, lenders assess borrowers' creditworthiness through factors like credit scores, income stability, and debt-to-income ratios. However, even with rigorous underwriting standards, external factors such as economic downturns, job losses, or declining property values can increase mortgage risk. Therefore, lenders must balance risk management with the need to provide accessible mortgage financing.

  2. Impact on Borrowers For borrowers, mortgage risk is tied to their ability to repay the loan over the long term. Taking on a mortgage is often the largest financial commitment individuals make, and defaulting can have severe consequences, including foreclosure, damage to credit scores, and loss of equity. High mortgage risk can also limit access to affordable housing, as lenders may tighten lending standards or charge higher interest rates to compensate for increased risk.

    Borrowers must carefully evaluate their financial situation before committing to a mortgage. This includes considering potential changes in income, interest rate fluctuations (for adjustable-rate mortgages), and the stability of the housing market. Failure to account for these factors can lead to financial distress and exacerbate mortgage risk.

  3. Impact on the Broader Economy Mortgage risk has far-reaching implications for the economy. The housing market is a key driver of economic activity, influencing construction, retail, and financial services. When mortgage risk is high, it can lead to a decline in home prices, reduced consumer spending, and slower economic growth. For example, during the 2008 crisis, the collapse of the housing market contributed to a global recession, with millions of people losing their homes and jobs.

    Governments and regulators play a crucial role in managing systemic mortgage risk. Policies such as stress testing for banks, setting capital requirements, and promoting affordable housing programs help mitigate risks. Additionally, central banks may adjust interest rates to influence borrowing costs and stabilize the housing market.

  4. Role of Mortgage-Backed Securities (MBS) Mortgage risk is also tied to the securitization of mortgages into mortgage-backed securities (MBS). These financial instruments allow lenders to sell mortgages to investors, transferring the associated risks. However, if the underlying mortgages are high-risk or poorly underwritten, MBS can become toxic assets, as seen in 2008. Proper risk assessment and transparency in MBS markets are essential to prevent such crises.

  5. Long-Term Stability and Access to Housing Managing mortgage risk is vital for ensuring long-term stability in the housing market. By balancing risk and accessibility, lenders can provide sustainable financing options while protecting themselves from losses. For borrowers, understanding mortgage risk helps them make informed decisions and avoid financial hardship. For the economy, effective risk management supports growth and prevents crises.

In conclusion, mortgage risk is a multifaceted issue that affects lenders, borrowers, and the economy. Its importance lies in its potential to cause significant financial losses, disrupt the housing market, and trigger broader economic instability. By addressing mortgage risk through prudent lending practices, regulatory oversight, and informed decision-making, stakeholders can promote a stable and accessible housing market.

A risk score measures the ratio of debt to income for the average mortgage in the county. A value of 2.5 or less is considered ideal. The risk score for this county is:

3.13

Most common risk score is:

Over 4.8

 
DescriptionObserved Mortgages Under 1.2 1.2 to 1.6 1.6 to 2.0 2.0 to 2.4 2.4 to 2.8 2.8 to 3.2 3.2 to 3.6 3.6 to 4.0 4.0 to 4.4 4.4 to 4.8 Over 4.8

Cumberland County4,533290329435482505503446400335251557
Tennessee (in 000's)5162728394957595650443474
National (in 000's)21,4351,2391,3051,7552,1772,3922,3982,2361,9881,8261,3912,727
Putnam County4,568248258368483515558507447378287519
Roane County4,777260315433633548615529433308233470
Rhea County2,059129156212231271249201177146100187
White County2,006117142200190238259189171157121222
Morgan County1,4151551481651551651591191038759100
Fentress County1,365991161281531581491491168769141
Bledsoe County846809710094102866866553464
Van Buren County4835857635565404531202326
 
Per Cent to Total PopulationAverage
Risk
 

Cumberland County3.136.407.269.6010.6311.1411.109.848.827.395.5412.29
Tennessee3.315.205.467.559.4610.9811.4310.839.698.516.6114.29
National3.235.786.098.1910.1611.1611.1910.439.278.526.4912.72
Putnam County3.225.435.658.0610.5711.2712.2211.109.798.276.2811.36
Roane County3.045.446.599.0613.2511.4712.8711.079.066.454.889.84
Rhea County2.996.277.5810.3011.2213.1612.099.768.607.094.869.08
White County3.115.837.089.979.4711.8612.919.428.527.836.0311.07
Morgan County2.6910.9510.4611.6610.9511.6611.248.417.286.154.177.07
Fentress County3.017.258.509.3811.2111.5810.9210.928.506.375.0510.33
Bledsoe County2.719.4611.4711.8211.1112.0610.178.047.806.504.027.57
Van Buren County2.5712.0111.8013.0411.3913.468.289.326.424.144.765.38
 
Comparisons to State Norms % to Total >= 150% % to Total < 50% 

Cumberland County 123.02132.98127.12112.45101.4997.1190.8591.0686.8783.7385.97
Tennessee 100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00
National 111.17111.53108.48107.40101.6897.9096.3495.70100.1198.1589.03
Putnam County 104.40103.48106.72111.82102.71106.90102.48100.9897.2795.0179.49
Roane County 104.66120.81120.07140.14104.51112.67102.2593.5475.7973.7668.84
Rhea County 120.47138.81136.39118.65119.90105.8390.1488.7183.3573.4463.54
White County 112.15129.69132.07100.17108.09112.9986.9987.9692.0091.2177.43
Morgan County 210.64191.63154.47115.85106.2398.3477.6575.1172.2763.0549.45
Fentress County 139.46155.70124.22118.54105.4595.53100.7987.6974.9276.4472.27
Bledsoe County 181.84210.07156.58117.51109.8488.9674.2280.5076.4260.7752.93
Van Buren County 230.91216.22172.79120.43122.6072.4886.0366.2348.6772.0137.66
 
Comparisons to National Norms % to Total >= 150% % to Total < 50% 

Cumberland County 110.66119.23117.18104.7099.8299.1994.3095.1586.7785.3196.57
Tennessee 89.9689.6692.1893.1198.35102.14103.80104.5099.89101.89112.32
National 100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00100.00
Putnam County 93.9192.7898.37104.12101.01109.19106.37105.5297.1696.8089.29
Roane County 94.15108.33110.69130.48102.78115.08106.1397.7475.7175.1577.32
Rhea County 108.37124.46125.73110.47117.93108.1093.5692.7083.2674.8371.38
White County 100.89116.29121.7593.27106.30115.4190.3091.9291.9092.9386.97
Morgan County 189.48171.82142.39107.86104.48100.4480.6078.4972.1964.2455.54
Fentress County 125.46139.61114.51110.37103.7197.58104.6291.6474.8477.8881.18
Bledsoe County 163.57188.36144.34109.41108.0290.8777.0384.1376.3361.9259.45
Van Buren County 207.72193.87159.28112.13120.5874.0389.2969.2148.6273.3742.31


Sources: STI: PopStats