Moral Hazard

Moral Hazard and the Mortgage Industry

Abstract

In this paper I explore moral hazard and the mortgage industry as one of the main factors contributing to the 2007-2008 financial crisis. The irresponsible actions of bankers and borrowers have led to this outcome. I have identified the repercussions that took place as a result of bankers, lenders and borrowers taking ill-advised risks assuming that others would bear the consequences in the event things did not go as planned. A rudimentary concept suggests that better monitoring may cause a reduction in these types of activities.

Moral Hazard and the Mortgage Industry

Moral Hazard is very important and a lot of times underestimated in the history of the United States greatest market fiascos. The catastrophe that this has caused is, to say the least, outrageous and uncalled for. Moral hazard “occurs whenever a borrower or insured entity (an approved borrower or policyholder, not a mere applicant) engages in behaviors that are not in the best interest of the lender or insurer. (Wright, 2013).” If we learn to better understand it, we will learn that moral hazard is essential to knowing how our economy functions. In this paper I will help to engage you in learning more about moral hazard and how it has affected the mortgage industry.

In our most recent financial crisis in 2007-2008 risky loans were given to homeowners. These risky loans, otherwise known as subprime mortgages were being approved left and right to people who simply did not have the money to back the loans they were taking. The banks were not taking the proper steps to screen applicants thoroughly and if they were, they were overlooking the negatives and approving anyhow knowing it was not in the best interest of the borrower, hence a moral hazard. During this time the banks were making some very reckless and irresponsible decisions in approving many of these loans. They never once thought twice of the consequences that would take place when...