Moral Hazard and Mortgages

A post on Moral Hazard and the banking sector. Moral hazard is a particualar problem for Central Banks and governments at the moment. The government don’t want banks to go bankrupt, but, the concern is that bailing out banks will encourage banks to make bad decisions in the future.

In the US, the Federal Reserve have had to support 2 of the biggest mortgage companies Freddie Mac and Fannie Mae. Fannie mae and Freddie Mac are mortgage companies who mainly buy or guarantee mortgages offered by other banks. Together, the two firms own or guarantee about $5.3 trillion (£2.7 trillion) worth of home loans – about half the outstanding mortgages in the US. That is about 25 times as big as the Rock’s obligations, and twice the size of the UK economy. It is widely agreed that they cannot be allowed to go bankrupt.