Tucson By Choice!: November 2007

Moral Hazard; The Bank Made Me Do It!

 I don't leave cash on my desk at the office.  You don't leave your keys in the car at the grocery store.  It creates a temptation for someone to make off with something of value that doesn't belong to them.

The term for creating such a temptation is Moral Hazard.  The risk in Moral Hazard is that someone will succumb to that temptation, with a result that's not desireable.  "The devil made me do it!"

That's what happened in the subprime debacle.  "Hey, it's not my fault.  They told me that even the banks called it a Liar's Loan."

Look for Moral Hazard to be the defense de jour in foreclosure proceedings that will be contested in the courts.

Does that sound ridiculous?  Do you think it flies in the face of personal responsibility?  Precedent exists in law, when an action deliberatley taken encourages the very risk-taking that one seeks to avoid.  Like leaving cash on your desk at the office, or leaving your car running and unlocked while you're in the grocery store.

Prediction by Mike in Tucson:  Rates will go back up soon. 

 Until this morning, the only Mervyn King I'd ever heard of is that Brit on the right--world champion at darts. 

There's another Briton named Mervyn King.  He's a Bank of England Governor.  Reporter John Fraher for Bloomberg did an article today on Governor Mervyn King, who predicts a second round of credit tightening unrelated to US subprime foreclosures, but directly related to Moral Hazard and the risk associated with it.  In short, the banks balance sheets are about to take a nose dive, tightening credit and driving credit costs higher. 

Don't get too comfortable with the current low rates. 

That's the opinion of this Tucson, Arizona mortgage lender.

Mike in Tucson

EDIT:  See related post by Active Rain's Mike Mueller on Lenderama:  Bad Loan Officer Collateral Damage

content copyright Michael Jones
photo courtesy Wikipedia

Mike Jones (Tucson Mortgage Company, LLC): Loan Officer in Tucson, Pima County, Arizona

Comment balloon 29 commentsMike Jones • November 29 2007 07:19AM
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