A perspective on mortgage arrears and negative equity

[monagt]

MORAL HAZARD SMORAL HAZARD: Why the Moral Hazard Argument is Dumb!

Isn’t it funny how the Bankers, Civil Servants, Accountants, Auditors, Politicians who caused the current financial crisis are the ones arguing against the necessary steps to stop the bleeding?

Moral hazard, while real sometimes and in some places, is vastly overrated as an effect.
Granted, it’s seductive in the same way that risk homeostasis is — the notion that, for example, people drive faster and take more risks because they have seatbelts — but like risk homeostasis, moral hazard is vastly over-diagnosed.

People don’t project five years into the future and say, “Leverage up, boys and girls. We’ll either make a lot of money now, or be bailed out later.”

Real people in real situations don’t think that way. Matter of fact, if anything, they’re short-sighted in that regard to a fault.

http://www.cato.org/pubs/journal/cj29n1/cj29n1-12.pdf See below for an extract.

The Nature of Moral Hazard
A moral hazard is where one party is responsible for the interests of another, but has an incentive to put his or her own interests first: the standard example is a worker with an incentive to shirk on the job. Financial examples include the following:
• I might sell you a financial product (e.g., a mortgage) knowing that it is not in your interests to buy it.
• I might pay myself excessive bonuses out of funds that I am managing on your behalf; or
• I might take risks that you then have to bear.
Moral hazards such as these are a pervasive and inevitable feature of the financial system and of the economy more generally. Dealing with them—by which I mean, keeping them under reasonable con- trol—is one of the principal tasks of institutional design.

My question who failed who!

 

[Mrs Vimes]

The IT had some details the day after the original letter was published. The mortgage was originally 130K, taken out in 2003. He worked in the public sector for 10 years until 2 years ago. The IT also published an accompanying piece by Conor Pope which basically said that your priorities would need to be askew if you prioritised full mortgage repayment over feeding your family. I can understand that he wouldn't want to lose his house with so much paid off and perhaps unlikely to be in negative equity - but interest only on 80K would be less than 350 per month so I don't know why he wouldn't explore options like that - or, as mentioned, the mortgage interest supplement route.

It did seem like a bizarre letter - the IT says they don't publish anonymous letters but the Indo story seems to be based on the IT story which is surprising as it shouldn't haven't been difficult to track him down and talk directly.

The IT also said in its piece the day after that he was getting 188 per week and that he had a wife and 2 children.

He was surely entitled to increase in welfare payment for his dependants.

He apparently chose to make full mortgage repayments as a matter of pride or something but I can't see how a person could let their children go so hungry they're eating cardboard rather than fill in the dependants section of the social welfare application.

The story really doesn't sound true, or at least not the whole truth.

 

[orka]

Further detail from the IT on what the letter writer should be entitled to - which he has either omitted to mention or, for some reason, didn't apply for: As well as the €188 per week plus €280 per month childrens' allowance which he said was the sole income, he would also be entitled to €125 per week spouse/partner benefit plus €30 per week for each dependent child - so an extra €185 on top of his €188 per week. The IT also calculated his mortgage interest supplement at c. €400 per month if applicable. Plus back to school allowances, medical card etc.

 

[Sunny]

Further detail from the IT on what the letter writer should be entitled to - which he has either omitted to mention or, for some reason, didn't apply for: As well as the €188 per week plus €280 per month childrens' allowance which he said was the sole income, he would also be entitled to €125 per week spouse/partner benefit plus €30 per week for each dependent child - so an extra €185 on top of his €188 per week. The IT also calculated his mortgage interest supplement at c. €400 per month if applicable. Plus back to school allowances, medical card etc.

And yet the IT editorial still had a go at blaming the Government! This new editor needs to get his act together.