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...