Risk in a bank’s mortgage: concentration of customers in a particular geographical area in a single market sector (residential mortgages) is a type credit risk. Not sure why it is a credit risk. Is the reason for credit risk because when the property needs to be sold, property values may be lower in the entire area?
This question is about a bank. The bank's assets are mortgages, ie the future payments from homeowners to repay their loans. So there is a credit risk because the homeowners may not be able to repay. The properties belong to the homeowners and not the bank. Best wishes Mark
I see. I then suppose that the homeowners being in a specific area is a risk because of for example natural disasters example: earthquake. Thanks for the explanation. Earlier, I was thinking that if the homeowners fail to pay their installments, and banks had to sell the house, the risk could be from the value of houses falling in a particular area. Could this also be a concentration risk?
Yes, this would be a concentration risk. I can imagine a situation where a big employer in the area closes down. That might lead to lots of defaults on the mortgages, but also falling house prices. Best wishes Mark
