Economics Bullshit 101: Co-insurance Clauses

Over the past few years I've been trying to build up my understanding of economics, and along the way I've come across a few things that are apparently standard practice that just seem like bullshit. Since I've just started a course on finance and such, I'm coming across a few more, and I feel like sharing. So here's the first installment of Economics Bullshit 101, Co-insurance.

Co-insurance is a practice that mainly affects insurance policies on big ticket items, like homes. Lets say I have a home that's worth $1,000,000 (sure, it's not going to happen anytime soon, but this is a hypothetical), and insurance to cover that much seems a bit too expensive to me. So, I cut a few corners, and insure the house for up to $800,000. Sure, I'll take a big hit if the house gets totaled, but I live in a pretty safe area and I'm not too worried.

So I've got my insurance, and while it doesn't cover the whole value, I'm feeling pretty safe. But then something bad happens. Nothing too major, but still pricey. All up, the bill comes to $100,000. No big deal, I'm insured up to $800,000, so that's well under my limit, no problemo.

Actually, problemo. Here's where the co-insurance clause kicks in. What it says is that when I said I wanted $800,000 worth of coverage on a $1,000,000 house, what I meant was that I wanted coverage of 80% on any damage. This means that when I put in my claim on the $100,000 worth of damage, they go "Fine, sure, $100,000 damage, 80% of that is $80,000, here's your cheque, have a nice day" and I look bamboozled and wonder where the hell the other $20,000 is. And I'm willing to bet they work that bit out before factoring in your excess, so there's another hunk of cash you don't get back.

Now, sure, I knew I was underinsured, but if I have coverage for up to amount X, and I claim for an amount Y that is less than X, I expect to get amount Y back from the insurers, regardless of whether amount Z, the value of the property insured, is greater or less than amount X. That's why I pay the insurer amount W every month.

So today's lesson is, like I guess many of these will be, read the god damn contract and make sure you understand it. And be sure you can afford the insurance if you buy a house.

The Financial Crisis Explained

Well, more properly, the sub-prime mortgage crisis explained.

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You've just got to feel sorry for them.

The latest group to be suffering due to the declining US dollar has just been revealed: the Catholic Church. Apparently, of all the countries in the world, America is the largest overall donor to the Catholic Church, and due to the fall in the value of the US dollar against the Euro, these donations aren't quite what they used to be (although America still donated almost ten times as much as number 2 Italy. Interestingly, South Korea is number 8). In fact, the church actually made a loss of about 9 million euros in 2007.

Now, I don't think the Catholic church is really going to suffer from this. They are indeed the masters of playing the long game (how many other organizations except for the Illuminati have such a long track record?), and I'm pretty sure they've got enough saved up to last them through this dip in income. They won't exactly be mortgaging the Sistine Chapel or anything to make ends meet.

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Hoisted upon their own petard

Most readers will no doubt be aware of what has been dubbed the sub-prime mortgage crisis. It seems a few years ago, a bunch of American financial institutions while seeking new ways to make money decided that it might be a good idea to give home loans to individuals with less than stellar credit histories. Now a lot of those individuals wanted to get a home loan, but couldn't afford the interest rates the banks would offer them. So, the banks, wanting to make a deal said, OK, we'll give you a cheap interest rate for the first few years then. The more astute individuals asked, but what happens when the interest goes back up. I still won't be able to pay the loan. To which the banks replied, No worries. The value of the home will go up, and you'll improve your credit history by paying off the mortgage, so before the interest rates go back up you can refinance. At which point many signed on the dotted line, and all were happy.

Well, almost everybody. Because the banks realised, hey, we've got a lot of loans with a high risk of default and we still haven't made that much money yet because we're giving them cheap interest for a few years, and we need cash to make more deals. What can we do?

We can sell our interest in the mortgages. Someone else gives us a bunch of cash now, and we give them a slow trickle of cash as people pay off their mortgages.

Great. Let's do it.

Oh, no one wants to buy these. How about a package deal? We give them 9 safe mortgages and 1 risky one as a bunch.

That worked. And so it went. Banks got into loan deals, wanted to get rid of the risk and sold off their interests in the loans. Some went bust and their loans were bought by other companies. There has all round been a lot of moving around bits and pieces so no one was stuck with the hot potato of a bad loan.

Recently, this caught up with a lot of people. The cheap interest rate periods were finishing, house prices hadn't risen, refinancing was as easy as people had been told, and foreclosures abounded.

Except for one man. One bulwark against the mighty tide of foreclosures. The man who had a secret that allowed him to stand against those who would take his home from him. And no, it was not pay in time.

The thing that makes Joe Lents stand apart from the crowd is this. No one seems to own his mortgage. He hasn't made a payment on his $1.5 million loan since 2002. Companies have tried to foreclose on him several times. And all he does is say "Prove it's you I owe the money to". And it works. In all the financial shenanigans and wheeling and dealing, something got lost along the way. In trying to hide themselves from the risk, the banks have hid themselves from the rights to collect on the debt.

And it looks like Joe is not alone. Judges aren't being so lenient about the matter any more, and more debtors are forcing their creditors to put up or shut up.

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