moral hazard
There's an interesting opinion piece in the NY Times today which notes the existence of a plan created by the US government to help people with their mortgages. The details include the following:
Under the program, the government will insure up to $300 billion in new, more affordable loans for troubled borrowers. For the insurance to kick in, however, lenders must first voluntarily refinance the delinquent mortgages by reducing the loan balances to 90 percent of the home’s current market value.
Now, this is one of those plans that I could see people feeling kinda ooky about. Should I, a homeowner who is not in any trouble, get into trouble so my loan balance will be reduced? I recognize this is a crazy question, but from an economic standpoint it makes perfect sense. My debt level exists in two places at once, depending on my behaviour. So how should I, logically, behave?Of course, this only applies to people who have a loan that is more than 90% of their house's value, but that's pretty much anyone who bought in the last (long period of time).
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