Mortgage risk factors and mitigating factors

Most analysts emphasize it’s not the national market that is a bubble. The risks are primarily local. How does your market area measure up? Risk factors *A high and sustained rate of home price appreciation *A decline in employment *A significant share of investor activity driven by “flipping” or speculative investment *A significant share of condo sales relative to total sales *An unusually large portion of interest only mortgages, option ARMs or other product that exposes borrowers to potentially substantial payment shocks *An unusually large portion of stated income, low documentation or other products, perhaps combined with other product features in order to maximize purchase power Mitigating factors *A healthy economy: strong consumer spending, steady job gains, strong income growth and low interest rates *Growing household net worth: household wealth has been growing at a healthy pace as asset appreciation has exceeded debt growth *A strong, well-capitalized banking sector and well-functioning and liquid financial markets *Widespread securitization, which leads to greater liquidity and dispersion of risk through the financial system *Alignment of incentives: the borrower, the lender and the investor all lose when a borrower defaults on his mortgage; this alignment of incentives limits the extent of problems caused by any potential downturn *Widespread implementation of technology, which increases efficiency throughout the system *Effective regulatory oversight Source: Mortgage Bankers Association