Subprime Mortgage Crisis And Ethics Essay

1754 words - 8 pages

Introduction

Within the subprime mortgage loan system which involved a relationship with brokers, lenders, and potential homeowners, many seemingly unethical practices were forged in the name of American families and individuals attaining part of the “American Dream” of owning a home. While this may neither have been the direct fault of neither party, each engaged in less than moral actions that played a part in the subprime mortgage crisis. Thus, the problem to be investigated is whether or not these ethical violations ultimately led to the fall of the subprime market by causing a catastrophic domino effect on all stakeholders involved. The article Subprime Loans- The Under-the-Radar ...view middle of the document...

Instead, the brokers acted against their implied moral obligations to do the right thing regardless of these incentives (Cardunite, 2011).

Next, the brokers also let their self-interest guide them in decision making. The brokers worked tirelessly to process a vast amount of applications, in some cases falsifying information to get approval, because they were interest in the huge commissions that could be gained. The more applications they processed, the more money they made and this seemingly became a catalyst for their actions. Non-approvals resulted in no commissions and this meant that brokers had to get as much approvals as possible, by whatever means possible, to satisfy their self-interest. In addition, the higher the amount of the loans approved, the more commissions brokers made. Thus, they encouraged some applicants to take out higher loans to gain higher commissions. According to an article in the Global Journal of Business Research, “prudence and ethics were pushed aside as greed overcame good judgment” (Lewis, V., Kay, K., Kelso, C., Larson, J., 2010, p. 1).

Consequently, the media has likened the fall of the subprime mortgage market to that of the house of cards. This meaning that the entire idea behind the market was not strong and ultimately led to its fall. Thus, the isolation of individual ethical choice played an important role in this fall. Each party involved in the market whether broker, lender, investor, or mortgage holder made choices that were relative to their self-interests, disregarding what would be beneficial for the whole. As a result, the “house of cards” tumbled down. Had each participant in the chain remained true to their moral obligations, whether implied or explicitly stated, the fall would have been altogether avoided.

The effects of Incentives on lenders and Potential Borrowers

The subprime loans were fraught with many incentives that enticed both lenders and borrowers to enter into agreements that went against rational or good ethical judgment. Because of its structure, lenders were able to attain huge profits from subprime loans in a short amount of time. These short-term profits caused lenders to make unethical decisions such as approving loans to unqualified applicants, in some cases without proof of collateral security. Moreover, the incentives overthrew rational thought of the lenders and thus became the motivating factor behind loan approvals.
Incentives also provided lenders a means for inputting many underlying costs and fees into loan agreements that many potential homeowners were seemingly unaware of. According to Jennings (2010), lenders had built in high closing and appraisal costs and other fees that resulted in equity stripping; then in return, these same lenders would engage in flipping by refinancing loans with promises of lowered payments and rates, or some other tangible benefit (p. 435). Next, lenders would then package the loans with high refinancing costs, thereby...

Other Papers Like Subprime Mortgage Crisis and Ethics

What Role Did the Accounting Profession Play in the Recent Subprime Mortgage Crisis?

642 words - 3 pages What role did the accounting profession play in the recent subprime mortgage crisis? What could they have done differently? In all businesses, accounting is the backbone that holds them together. In stating this, the demise of the subprime mortgage industry lies within the bad practices of mortgage companies, banks and financial institutions. Allowing the lending of billions of dollars to non-credit worthy individuals was a disaster waiting to

Subprime Crisis and Fair Value Accounting

940 words - 4 pages SUBPRIME CRISIS AND FAIR VALUE ACCOUNTING 1. Fair-value accounting is defined by FAS 157 as "a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date". It is also called mark-to-market accounting when market prices are used to determine fair value. Critics have blamed this method of accounting to be 70% responsible for the subprime crisis

Effective Ethics and Crisis Management

1962 words - 8 pages to work on any improvements that would be necessary to make the next crisis move smoother. The company should follow up with the public to make sure they are comfortable with the resolution. They should also thank everyone who was involved. In my research I found the following Rational Model for Managing Crisis: There are good and bad examples on how companies have effective ethics and crisis management. The bad examples of companies

Subprime Lending

1315 words - 6 pages mortgages. Subprime wrap up The subprime mortgage crisis, popularly known as the “mortgage mess” or “mortgage meltdown,” came to the public’s attention when a steep rise in home foreclosures in 2006 spiraled seemingly out of control in 2007, triggering a national financial crisis that went global within the year. Consumer spending is down, the housing market has plummeted, foreclosure numbers continue to rise and the stock market has been shaken

Banking Regulation

1154 words - 5 pages important parts. Banks offered easy access to money before the mortgage crisis emerged. Borrowers got into high risk mortgages such as option-ARMs, and they qualified for mortgages with little or no documentation. Even people with bad credit could qualify as subprime borrowers. Fraud on the part of homebuyers and mortgage brokers helped make the mortgage crisis more serious. Mortgage applications were not checked for accuracy as well as they should

Reflective Paper

650 words - 3 pages forced many lenders out of business, beginning with the heavily subprime lenders. Abstract Conceptualization During the Interpretation stage (84), The “Perceivers” did not understand the immoral and unethical behavior of the Mortgage Company or their contributions to the Housing Crisis. In fact their predatory practices continue to be reinforced, by Government backed loan and bailouts. I find it rather ironic that investment firms

Lehman Brothers

1469 words - 6 pages led to the collapse such as their valuation problems, misrepresentation of their financials, complex structure of the firm, managerial issues with low ethical standard. Additionally their failure could be attributed to subprime mortgage crisis, greedy and reckless traders, and credit rating agencies and deregulation. Weak ethical standards and code of conduct at Lehman brothers is considered to another critical factor that led to its collapse

The Big Short

1325 words - 6 pages allowing the credit default swaps on subprime mortgage bonds, CDO’s, and the eventual collapse of the subprime market. Following the subprime mortgage crisis, the Department of the Treasury released a new regulatory plan, The Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure, which is referred to as “the Paulson Plan.” The Paulson Plan was completed in March 2008 and consisted of a series of short-term and

Mortgage Crisis

517 words - 3 pages The mortgage crisis began in the early 2000’s when homes were increasing in value. Interest rates on mortgages were also low during that time. People thought it was a sure investment to buy a home with the low rates and increasing values. People simply thought the values would never stop going up. During this time people with bad credit could also qualify as subprime borrowers; in addition to this, there was people who also took on high risk

Government vs. Subprime Mortgage

1485 words - 6 pages been 70 years since the last depression until the Second Depression (The Great Recession) hit for America in 2007 from a mortgage loan called subprime. The following will explain the background of the subprime loans. How the government had to intervene with subprime loan. Lastly, the policies taken place with primes and different programs. The Subprime loans beginnings started in 1992, where Congress wanted to affordable housing, work on plan

Banking Ethics

3850 words - 16 pages ethics, banking profits, Goldman Sachs, subprime crisis JEL Classification Codes: A13, B25, B26, D63 The bailout of the banks violates the legitimacy of markets, the ethos that profit represents the reward for success, loss the punishment for failure. The outrage over bailouts combined with insulating people from the effects of the crisis has fostered an anti-interventionist reaction and a resurgence of neoliberalism. Insulating people from the

Related Essays

Subprime Mortgage Crisis Essay

762 words - 4 pages Outline * Introduction The subprime mortgage crisis is a series of events and conditions that lead to the 2008 global financial crisis, which has caused the worst recession since Great Depression. The subprime crisis has made the five biggest investment banks become history and reduced thousands of American citizens begging on the street corners without a place to lay their heads. There is a proverb in China, “One can cope with the

The Subprime Mortgage Crisis Essay

902 words - 4 pages for ways to invest money; generally the demand was for low-risk investments that would yield a nice return. However, such investment options were not easy to find. This pushed a great amount of money straight into the U.S. mortgage market, thanks to the unique and wonderful (on principle) vehicle – securitization (The Subprime Mortgage Crisis Explained, 2011). After an individual gets a mortgage loan from a broker, the broker sells the mortgage

Subprime Mortgage Crisis Essay

2090 words - 9 pages Introduction Currently the United States is in the midst of the worst global financial crisis of the 2l century, which traced its origins to the sub-prime mortgage disaster that began to unravel in 2007. The shocks of global crisis are devastating: homeowners filed for bankruptcies and faced foreclosures in record high numbers, leading Wall Street firms such as Bear Sterns and Merrill Lynch crumbled under their massive exposure to sub-prime

The Subprime Mortgage Crisis And What To Do About It

2837 words - 12 pages The Subprime Mortgage Crisis and What to Do about It A Review of the Literature The fuse for the subprime financial shock was set early in this decade, following the tech-stock bust, September 11th, and the invasions of Afghanistan and Iraq. The subprime mortgage crisis is a historic turning point in our economy and our culture. The disruption in our credit markets is already of historic proportions and will have important economic impacts