Inside the world of business

Moral hazard moves centre stage in mortgage defaults

Moral hazard is becoming the known unknown of the Irish mortgage market. In its latest review of Irish RMBS (residential mortgage backed securities), credit rating agency Moody’s argues that uncertainty over the full extent of the losses in the mortgages underlying the bonds remains “as a result of the growing effect of moral hazard”.

The agency’s view is that negative equity is starting to displace unemployment as the key driver of mortgage default. Unemployment has by and large stabilised, they argue, while “higher LTV (loan-to-value) loans which we estimate are now in negative equity have a default rate of 21.7 per cent, 1.7 times the rate observed for loans not in negative equity”.

What they can’t really get a handle on is the extent to which people in negative equity are defaulting because they have no money or just because they can.

“Without the strictest of controls in place, moral hazard will drive default rates even higher and increase losses on Irish mortgage loans. The current dearth of repossession and the recently proposed personal insolvency legislation is starting to result in higher defaults due to moral hazard,” Moody’s claims. It believes people in negative equity are more likely to default even when they have the financial capacity to pay because they stand to benefit most from the legislation.

That said, the agency candidly admits that the banks don’t necessarily share their puritanical views. “We spoke to a number of servicers to get their views on current market trends. They had mixed opinions on the effect of moral hazard on default levels to date,” they explain. “We received estimates from only negligible levels up to as much as 40 per cent of current arrears are attributable to borrowers who are not truly unable to pay.”

It would appear that one bank’s strategic defaulter is another bank’s struggling home owner.

Arts Council claims gaming sector benefits from Irish creative culture

US multinational gaming company Electronic Arts (EA) is to create 300 new jobs as part of an expansion of its Galway operations, with the new workers providing “multilingual international customer support and services” for its major games titles.

It’s good news, though not particularly surprising given IDA Ireland’s courting of the gaming sector. What was slightly unusual was the statement from the chairwoman of the Arts Council, Pat Moylan, welcoming the announcement of the jobs.

“The creative industries hold a real dividend for Ireland,” Ms Moylan said.

They may be largely customer support jobs for games such as FIFA Football and the Sims, but this was enough for the council to modestly note that the gaming industry “directly benefits from the creative culture of the Irish”.

This reaching out to the gaming and software sectors is a new development for the Arts Council and, with the threat of a great quango cull still lingering, it seems intended as a marker in the ongoing campaign for it to prove its worth.

It makes a change anyway from press releases about the Venice Art Biennale and updates on the membership of the Aosdána.

Moylan has claimed before that “too narrow a view is taken of investment in Ireland”, with funding for the creative industries taking a back seat compared to “roads or physical infrastructure”.

Investment in the arts pays many times over, she has said, quoting figures on job numbers and taxes.

Obviously, it would be to the Arts Council’s advantage if every gaming sector job, no matter how technical the role, can be counted in the creative industries tally.

Irish Life reveals slow Glo take-up

IRISH LIFE’S first set of results since it parted ways with Permanent TSB give a glimpse into its new role in the health insurance market.

After making its feelings clear about getting a slice of the health insurance action when it was rumoured to have thrown its hat in the ring for Quinn Healthcare – which eventually became Laya Healthcare after a management buy-out – Irish Life made a surprise entry into the health insurance market this year when it emerged as a backer of new player Glo Healthcare.

Irish Life has a 49 per cent stake in Glo, Ireland’s newest health insurer, which launched in July, headed by former Aviva executives Jim Dowdall, Stephen Loughman and Oliver Tattan.

Yesterday the insurer gave us one of the first insights into the company’s performance, revealing that Glo has signed up 5,000 customers to date.

Considering that 2.123 million people held health insurance at the end of June according to the most recent data from the Health Insurance Authority, it’s hardly a major coup.

It’s early days, however, and with most people due to renew their health insurance policies at the beginning of the year, opportunities beckon.

The ascent of Aviva, the third-largest insurer, in the healthcare market – it increased its market share from 13.7 per cent to 17.7 per cent in the year to June – shows that it’s anybody’s game.

Nonetheless, the State, through its ownership of Irish Life, now finds itself in the curious position of owning part of another health insurance company.

Just how potential buyers of Irish Life will feel about acquiring a slice of a new health insurance company is another question, though opportunities for cross-selling of its retail products are an obvious plus.

Irish Life yesterday referred to opportunities to sell GloHealth’s products to its customer base.

With a sale of Irish Life off the table for the forseeable future, the insurance group will have plenty of time to help its health insurance partner get up and running, before it needs to worry about convincing a potential buyer of its worth.


The Central Statistics Office publishes figures for Irish economic growth in the second quarter of 2012

Quote of the day

We should publish the minutes of the ECB council meetings . . . and not, as has been the practice to date, after 30 years - Finnish central banker Erkki Liikanen

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